BCG

AUTOMOTIVEINDUSTRY

SteeringUSAutoDealersTowardaPro?tableFuture

By

AmirKolton

andEricJesse

ARTICLEMARCH26,202512MINREAD

Followingaperiodofunprecedentedpro?tsfueledbysupplyshortagesandhighdemand,USautodealershipshave,overthepasttwoyears,facedastarklydi?erentreality.Highinterestrates,

a?ordabilitychallengesforconsumers,areboundinvehiclesupply,andshiingconsumer

preferencesaresqueezingmarginsandforcingdealerstorethinktheirstrategies.Asnew-vehiclepricesdeclineandusedinventorybecomeshardertosource,manydealershipsarefocusingonoperationale?cienciesandnewrevenuestreamstostaycompetitive.

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TounderstandhowstructuralchangesinUS

automotive

retailingareunfolding,BCGsurveyed

morethan160autodealers,fromsmall,independentoutletstolargefranchises.Thislatesteditionofourannualsurvey,conductedinlate2024andearly2025,examineddealers’outlookontheUSautomarketandhowfactorssuchascompetition,a?ordability,shiingdemand,andAIadoptionareshapingtheirbusinesses.Theresearch,combinedwithinsightsfromourworkonmorethan

500automotiveprojectsoverthepastthreeyears,o?ersauniqueperspectiveonhowtheindustryisevolving.

Our?ndingshighlightkeytrendsinnew-andused-vehiclesalesandserviceandparts,aswellas

someemergingopportunities.Thebottomline:dealersareincreasinglyopentousingdata,digitalsolutions,andAI-driventoolstomaximizecorebusinesspro?tabilitywhilediversifyingtheirserviceo?eringstosecurelong-termrevenuegrowth.Incontrasttopastyears,whendealersmayhavehadthe?exibilitytodelaysuchchanges,today’smarketpressuresmeanthatadaptingquicklyisno

longeroptional.

TheEvolvingAutoRetailLandscape

Since2023,theautoretailmarkethasbeencorrecting,promptingdealerstoshitheirfocusfromlong-termconcernsidenti?edinpreviousBCGdealersurveys—suchasthetransitiontoelectric

vehiclesandcompetitionfromOEMs—toabroadersetofimmediatechallenges,includingoptimizingpro?tabilityacrosscorerevenuestreams.

Dealers’marginsareunderpressureasthein?owofnewvehiclesincreaseswhilea?ordability

challengesdampendemand.Risinginventoriesandhigh?oor-planningcostsaresqueezingpro?ts,withpricingpressuresdrivingtransactionpriceslower.Meanwhile,serviceandpartsrevenuesarebecominganincreasinglyimportantpro?tdriverasconsumerskeepvehicleslonger.(SeeExhibit

1.)However,evenwithslowerthanexpectedadoption,EVspresentriskstoaersales—o?ering

fewerroutinemaintenanceopportunitieswhilerequiringgreaterspecialization.Atthesametime,digitalretailcapabilitiesarebecomingcritical,asmoreofthecustomerjourney,particularly

?nancing,movesonline.

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Againstthisbackdrop,dealershipM&Aactivityhasslowedasmarketuncertaintycomplicatesdealmaking.Manydealersseekacquisitionstoimprovethee?ciencyoftheirinvestmentsinnew

capabilitiesthroughincreasedscale.Evenso,transactionvolumeandsizehavedeclinedasbuyersandsellersstruggletoalignonvaluationsandmarketoutlooks.Volumefellfromapproximately

700dealsin2021toapproximately500in2024.Oursurvey?ndingsindicatethatmoredealersarelookingtobuythansell,likelyintensifyingcompetitionforattractiveopportunities.

Asthesedynamicsunfold,dealershipsareprioritizingmarginoptimizationacrossallrevenuestreamstomaintainresilience.

NewVehicles:DecliningDemandSlowsSalesGrowth

New-vehiclesalesgrowthhasslowedsharply,fromapproximately12%in2023toapproximately2%in2024,accordingtoS&PGlobalMobility.Althoughincreasedsupplyplaysarole,a?ordability

remainsamajorconstraint,ashigherinterestratesandrisingmonthlypaymentsarepricingoutlower-creditbuyers.AmongthedealersBCGsurveyed,50%reportedthatinterestratesin2024greatlya?ectedlocaldemand.

Reinforcinga?ordabilityconcerns,dealersnotedthattheaveragecreditscoresofcarbuyershaverisen.Thisiscon?rmedbyExperianresearch,whichfoundthattheaveragecreditscoreroseby11pointsfornew-vehiclebuyersand18pointsforused-vehiclebuyersfrom2022to2024,far

outpacingtheoverallUSaveragecreditscoreincrease.The?nancialstrainisalsoevidentin

delinquencyratesforautoloans,whichclimbed63%fromMarch2021toJune2024,accordingtoFederalReservedata.Tomanagea?ordability,somebuyersareoptingforcashpurchasesor

leasing.

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Inresponse,OEMshavebeenmoredeliberateinmanagingUSvolumes.Theyalsomorethan

doubledincentivesin2023and2024comparedwith2022;accordingtoKelleyBlueBookdata,

incentivesreachedapproximately8%oftheaveragetransactionprice(ATP)inthefourthquarterof

2024.However,thesemeasureshavenotbeensu?cienttoo?setweakeningdemand.Daystosellrosefrom30inearly2023tonearly60in2024,accordingtobothWardsIntelligencedataand

BCG’sdealersurveys,furtherstrainingdealershippro?tability.

Atthesametime,38%ofdealersreportthathigherinterestrateshaveseverelyorsigni?cantly

impacted?oor-planningcosts.Asinventory?nancingbecomesmoreexpensive,dealersface

mountingpressureinanalreadychallengingmarket,makingitevenmorecriticaltoreducedaystosell.

Dealers’desiretoclearrisinginventorieshasputpressureonnew-vehicleprices,withATP

decliningbyapproximately4%fromthethirdquarterof2022tothethirdquarterof2024,

accordingtoNationalAutomobileDealersAssociation(NADA)data.Notably,abouthalfofthisdeclinewasdrivenbyincreaseddiscounts,whiletheotherhalfre?ectsachangingproductmix,suchassellingmorelower-costvehiclesandreducingpremiumfeatures—bothresponsesto

customera?ordabilityheadwinds.

Dealers’abilitytosellabovethemanufacturer’ssuggestedretailprice(MSRP)droppedby

approximately50%in2024comparedwith2023,accordingtodealersurveyresponses.Thismarksasharpreversalfromtheexceptionalpricingpowerthatdealersrecentlyenjoyed.Asaresult,

dealermargins,whichreachedrecordhighstwotothreeyearsago,arenowundersigni?cantstrainasretailersnavigatethechallengeofbalancingvolumeandpro?tabilityinanincreasinglydi?cultmarket.

Theeconomicpressure,coupledwithlowerthanexpecteddemandforEVs,hasresultedin

disappointinggrowthratesforEVsales.(See“EVAdoptionIsSlowasModelsFailtoMeet

CustomerNeeds.”)Toclearinventory,OEMshavehadtoboostincentivesto14%ofATP—twiceashighasfortraditionalvehicles.

EVAdoptionIsSlowasModelsFailtoMeetCustomerNeeds

ThetransitiontoEVsisprogressingmoreslowlythanexpected,primarilybecauseofalackofmodelsthatmeetconsumerexpectationsforprice,range,andsize.

Accordingtoa

BCGcustomersurvey

,38%ofconsumersare"next-waveadopters."

TheseindividualsshareattributeswithcurrentEVownersbutremainhesitant

owingtothemarket’sinabilitytomeettheircriteria,suchasmodelspricedunder$50,000witharangeexceeding350miles.

Withpricesremaininghigh,EVbuyersatnearlytwo-thirdsofsurveyeddealershipsgenerallyhavehigheraverageincomesthannon-EVbuyers.Toaccelerateadoptionamonglower-incomebuyers,dealersbelievethatreducedpurchaseprices—

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throughfewerpremiumfeaturesorincreaseddiscounts—arecritical.(Seetheexhibitbelow.)

Lookingahead,approximately25%ofdealersviewnewEVentrants(suchasTesla,

Lucid,andRivian)assigni?cantthreats.Tocompete,theyneedtocollaboratewith

theirOEMstosecurewell-equipped,attractivelypricedEVs—likelyrequiring

adjustmentstothetraditionalsalesmodel.

Despitethesepressures,morethan70%ofsurveyeddealersexpectvehiclesalesgrowthto

continuein2025,signalingcautiousoptimismamidongoingmarketadjustments.However,dealerpro?tabilitywilllikelyremainunderpressure.

Tosustainpro?tability,dealersmusttakeproactivemeasures.Targetedmarketinginvestmentsareessentialtostimulatedemandinprioritysegmentsandattractbuyersdespitea?ordability

constraints.Atthesametime,leveraginganalytics-drivenorderingwillhelpaligninventorywithactualdemand,reducingexcessstockandmitigatingtheimpactofrising?oor-planningcosts.

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UsedVehicles:Sourcing

ChallengesandPriceErosionSqueezeMargins

Dealersarefacingincreasingchallengesinsourcingusedvehicleswhiledemandhassurged.

Followingadeclinein2023,used-carretailsalesrose10%year-over-yearinthefourthquarterof2024,accordingtovAutodata.However,34%ofsurveyeddealerssaidthesupplyofusedvehicleswasalargeorseverechallengeattheirdealerships,withanadditional42%reportingthatitwasamoderatechallenge.

To?llinventorygaps,dealersarerelyingmoreonauctions,whichraiseacquisitioncosts.Atthe

sametime,theATPforusedvehiclesfellby6%during2023and2024,accordingtoNADAdata.

Thecombinationofhigheracquisitioncostsanddecliningretailpricesissqueezingdealer

pro?tability.Mostsurveyeddealersanticipatethat2025willseeanincreaseintrade-invaluesandcasho?ersforusedvehicles,increasingsourcingcompetition.

Toremaincompetitiveintheused-vehiclemarket,dealersmustsecurehigh-qualitytrade-insto

mitigaterisingacquisitioncosts.AI-driventoolsareunlockingsigni?cantvalue,helpingdealershipsoptimizelocaldemandandsupply,re?nepricingstrategies(forbothvehicleacquisitionsand

sales),andmakesmarterpurchasingdecisions.Byleveragingdata-driveninsights,dealerscan

betternavigatesupplyconstraintsandprotectmarginsinamoreandmorecompetitivelandscape.

ServiceandParts:AnIncreasinglyVitalRoleinGrowthand

Pro?tability

USconsumersarekeepingtheirvehicleslonger,andthistrendislikelytopersist.Theaverageagehasincreasedfrom12.5to12.6yearsacrossallvehiclesandfrom13.6to14yearsforpassenger

cars.Asaresult,evenasnew-andused-vehiclesalesfaceheadwinds,serviceremainsacriticalandgrowingareafordealerships.Amongsurveyeddealers,70%reportedgrowthinservicerevenuesin2024.

Dealershaveastrongcompetitivepositioninserviceandparts,drivenbytheirdirectownershipofthecustomerrelationship,risingwarranty-relatedserviceneeds(bene?tingfranchisedealers),and

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increasingvehiclecomplexity.Indeed,service,repairs,andpartssalesaretheonlycontributionstodealers’grosspro?tsthatareconsistentlygrowing.

However,thisrevenuestreamfaceschallengesasEVadoptiondisruptstraditionalservicemodels.Forexample,batteryEVsgenerate

about20%lessaermarketpartsspending

thancomparablefossilfuelcars.Long-termsuccesswillrequirethee?ectivescalingofoperations,asrevenueper

vehicleshistowardeithersimple,high-frequencyservicesliketirereplacementorcomplex,infrequentproceduressuchascalibrationandEVbatteryreplacement.

Tonavigatetheseshis,dealersmustleveragetheirexistingknowledgeofcustomers.Whilethird-partyserviceprovidersmustbuildnetworksandearncustomertrustfromscratch,dealershipsarealreadypositionedtodeepencustomerloyalty.Capitalizingonthisedgerequiresmodernizingtheirserviceoperationsandadaptingtoevolvingvehicletechnologies.EstablishingEVservice

capabilitiesandscalingnetworksacrossdealerships—similartotheapproachusedbycollision

centers—willbeessential.Atthesametime,enhancingconnectivityandpersonalizationthroughdigitalscheduling,AI-poweredchats,andtextmessagereminderswillimproveretentionandthe

customerexperience

whilepotentiallyreducingoperatingexpenses.End-to-endautomationacross

serviceoperations

willfurtherstreamlineprocesses,reducecosts,anddrivee?ciency.

NewOpportunities:DiversifyingRevenuesandEmbracingAIandDigitalRetailtoStrengthenCoreBusinesses

Toadapttoshiingpro?tpoolsandevolvingcustomerpreferences,dealersareactivelyexploringnewopportunitiesoutsidetheircorebusinesses.Emergingrevenuestreams—suchasEVchargingand?eetandmobileservicing—aregainingtractionasdealershipsseektodiversifytheiro?erings.(SeeExhibit2.)

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However,noclearindustry-widepriorityhasemerged,re?ectinganongoingexperimentationphaseasdealersevaluatewhichavenuesbestalignwiththeiroperationsandcustomerneeds.Thepushforinnovationisdrivenbytheimperativetocaptureadditionalvalueinachangingmarketwhile

addressinggrowingdemandsfor?exibilityandsustainability.

Atthesametime,dealersareembracingAIanddigitalretailtodrivetop-linegrowthandboostthebottomlinefortheircorebusinesses.Increasingly,theyareexploringAIadoptiontoenhance

e?ciencyandpro?tability,withmorethan80%ofsurveyeddealersde?nitelyplanningtoinvestinAIinthenexttwoyears.(SeeExhibit3.)Althoughnearly50%arepreparedtoinvestsigni?cantly,another35%saidtheypreferamorecautious,moderateinvestmentapproach.

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Dealers’concernsaboutdatasecurity(heightenedbyindustry-relatedcyberincidentsin2024),alongwithexpertisegaps,uncertainreturnoninvestment,andhighmaintenancecosts,couldimpedeadoptionofAI.Inaddition,manydealersremainunsureaboutwhichAIusecaseswilldeliverthemostvalue.

Stakeholdereducationandawarenessaboutthebene?tsofAIarecrucialtounlockingits

potential.ManydealersbelievethatclearinsightsintoAI’spracticalapplications—suchas

inventorymanagement,customerpersonalization,andoperationale?ciency—areneededtoaccelerateadoptionanddrivedirectinvestment.

DealerswillneedsupporttoovercomethebarriersandscaleAIsolutionse?ectively.WhilemanyrecognizeAI’spotentialtoassistinnavigatingmarketheadwinds,successwillrequireanaction-basedtest-and-learnapproach.Inrecentprojects,BCGcollaboratedwithdealerstodevelop

AI

toolsthat,forexample,helpedtocon?gurevehiclesthatsellupto30%fasterandtooptimizethepricingofusedandnewvehicles,improvingmarginsbymorethan5%.

Theshitodigitalretailcontinuestoreshapetheindustry,withdealersexpectingsigni?cant

growthinonlineactivitiesthrough2030acrossthecustomerjourney.(SeeExhibit4.)Oursurveyalsofoundthatapproximately80%ofdealerleadsarenowgeneratedonline,underscoringthe

needforintegrationbetweendigitalandphysicaltouchpoints.Whileactivitieslikeschedulingtestdrivesandcreditpre-approvalsareincreasinglycompletedonline,?nalizingcontractsand

customizingvehiclespeci?cationsarestillconductedmainlyatthedealership.

A

BCGstudyofcustomerreviews

foundthat“easeandconvenience”isahigherpriorityformanybuyersthan?nancing,salessupport,orservice.Thisunderscorestheneedfordealerstodeliveraseamlessexperienceacrosschannelstomeetcustomerexpectations.

Recognizingthepro?tabilityofdigital,techgiantsareenteringthespace.Forexample,Amazon’se-dealershipenablesone-clickcarpurchases.Dealersgainanew

digitalsales

channel,while

Amazoncapturesmarketingrevenueandtheabilitytosteerhigh-margin?nancingrevenue

withouttheneedfor?oorplan?nancing,deliverylogistics,andserviceobligations.Asmoretech

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companiesdevelopdigitalplatformsforvehiclesalesand?nancing,dealershipsrisklosing?nancerevenuesunlesstheyenhancetheirowndigitalretailcapabilities.

Tostaycompetitive,dealersmustsimplifyanddigitizetheend-to-endpurchaseexperiencefor

bothnew-andused-vehiclepurchases.Thismeansintegratingdigitalcreditapprovals,streamliningloanprocesses,andensuringfrictionlesstransactionsacrosschannels.Byembracingautomation,AI-driven?nancingmodels,anduser-friendlydigitalplatforms,dealershipscanprotectandexpandtheirrevenuestreamsinanincreasinglydigital-?rstmarket.

NavigatingtheRoadAhead

Dealersfacegrowingchallengesthatareexpectedtopersistinthecomingyears.Torespond

e?ectively,theymustadoptboldstrategiesandbepreparedtoadjusttheirtraditionaloperatingmodelsandthetypesandsourcesoftheirtalent.

LeveragingAIanddata-driventoolswillbeessentialforoptimizinginventorymanagement,

reducingdaystosell,enhancingdynamicpricingstrategies,andimprovingcustomertargetingandconversion.Itwillalsodriveoperationale?ciencyacrossthedealershipvaluestream.

Revampingdigitalplatformsandcustomerjourneysiscriticaltodeliveringaseamlessexperienceacrossdigitalandphysicalchannels,therebystrengtheningcustomerloyaltythroughconvenience.Additionally,dealershipsmustbuildcapabilitiestosupportAIadoption,prepareforEVintegration,andadapttoemergingtechnologies.Atthesametime,theymuststrategicallygrowtheirfootprintandexpandtheirserviceo?erings,bothorganicallyandthroughM&A.Theseactionsareessentialtonavigatingcurrentchallengesanddrivingsustainablegrowth.

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