Dealers' margins squeezed by EV shift, greater consumer protection

The lower-margin business of new car sales has traditionally been supplemented by aftersales, finance and insurance

Dealers are facing a profit-margin squeeze from the double whammy of the transition to EVs threatening their lucrative aftersales business and a legal clampdown curtailing profitable commissions for selling finance and insurance (F&I).

Dealers rely on both aftersales and F&I to generate income to supplement the much lower-margin business of actually selling new cars.

Dealer group Vertu (owner of the Bristol Street Motors brand), for example, generated almost half its profits from aftersales in the six-month period to the end of September, despite that side of the business generating just 9% of its revenue. 

The servicing and parts sales combined generated gross margins of 44%, Vertu said in its most recent company report. Servicing meanwhile achieved a gross margin of 72% – a level even Apple would envy.

Used cars, Vertu’s biggest revenue generator, returned a margin of 7.2% while new cars stood at 7.6%.

“The group's high-margin aftersales operations are a vital contributor to group profitability,” Vertu CFO Karen Anderson said in the report, which goes into more detail than shared by rivals, due to the company’s stock market listing. 

Penske, the owner of UK dealer group Sytner, disclosed that that F&I income totalled £1352 per car on average in the nine months to the end of September.

The figures (which included its bigger US operations) show that F&I generated 3.1% of Penske’s revenue but accounted for a whopping 19% of its overall gross profit. Service and parts meanwhile accounted for half of Penkse’s total gross profit.

Both profit streams are under threat. Keeping the aftersales goldmine amid the shift to simpler EVs will be tough.

Tesla, for example, states on its website that its cars “do not require annual maintenance or regular fluid changes”. It points out that EVs require no oil changes and that brake wear is significantly reduced, due to them having regenerative braking.

“Taking Tesla as an extreme example, you would expect that aftersales should take a dent,” said Steve Young, MD of dealer-focused consultantcy ICDP. “The experience so far is that it hasn't really impacted on aftersales, but logically it should, because the oil change is a decent chunk of cash.”

Many manufacturers have helped out their dealers by stipulating servicing intervals for EVs that mirror those of their ICE equivalents.

Fiat, for example, fixes intervals at 12 months or every 9000 miles for its EVs and recommends going to dealers to “regularly change the battery coolant”. If you don’t hit the service intervals, the car’s warranty becomes invalid.

Others go longer: Volkswagen, for example, stipulates two years for its EVs, with unlimited mileage.

Many dealers now bundle EV servicing into a package deal with monthly payments. Sometimes other elements are bundled in to make the deal look appealing, for example AA membership from MG.

However, customers are starting to ask exactly what they’re getting for their money.

“I just paid £300 for the annual service on our Citroën ë-Dispatch van. They changed the brake pads and fluid after just 8000 miles,” heating engineer Denis Meehan told Autocar. “I guess they’ve got to figure out what to charge for when there's no oil.”

Overcharging consumers can have other dangerous consequences beside denting customer loyalty, as dealers and finance companies are finding out. Following the shock high court ruling that sided with consumers, companies must now either disclose or drop ‘secret’ commissions charged on finance for new or used cars.

Compensation could end up approaching £16 billion, experts have predicted, after the Financial Conduct Authority (FCA) said it would extend the deadline for those wanting to make complaints over historic discretionary commission arrangements (DCAs) that allowed brokers (including dealers) to increase the interest rate on finance deals and pocket the difference.

Earlier this year, the FCA also cracked down on guaranteed asset protection (GAP) insurance from which dealers also took a commission for selling to car buyers.

Some firms were paying out as much as 70% of the value of insurance premiums in commissions, the FCA found.

“I do think that the F&I in general in UK will come under more pressure,” Young said.

F&I and aftersales are essential to dealer profitability at the moment, when muted consumer demand and a requirement to increase EV sales is increasingly forcing dealers to discount cars to hit sales targets. 

The changing landscape is one reason for the rise in ‘super-groups’ like Vertu, which streamline the business to squeeze out more profit in a challenging environment. 

Smaller dealers are increasingly choosing to sell up to the bigger groups as the path to continued success looks harder to picture amid concerns about EVs, staffing, training and a shift to the agency retail model, in which the car maker takes control of the sales process. 

“If you’ve got the vast majority of your wealth tied up in your dealer business and you’ve got uncertainty and potentially big investments up ahead, then that's a powerful incentive to sell,” said Young.

ICDP’s latest top 50 charting the business dealer groups across Europe shows that they now account for 17% of total vehicle sales in the region, up from 10% in 2013.

ICDP predicts the big groups will account for a quarter of all sales by 2030 as consolidation continues. Last year, 1195 dealer outlets changed hands across Europe, up from 825 in 2022.

What was largely a UK phenomenon has spread to continental Europe, while the many of biggest UK groups (including Pendragon, Inchcape and Lookers) have been snapped up by North American groups. 

The big groups can run outlets from efficient back-office operations and stay on top of the latest ways to squeeze profit from what’s often a cyclical business.

Vertu, for example, is axing its Bristol Street Motors and Macklin Motors brands to brand everything Vertu, saving money on marketing costs.

The company has also introduced a pay-later facility for aftersales, giving the chance for cash-strapped owners to spread out the cost of servicing.

During the six months to the end of September, Vertu said 6800 customers used the facility, spending an average £826 each.

“This has aided the increase of average invoice values per customer visit and driven aftersales profitability,” Forrester said in the company report.

Vertu said it had made “considerable investment” in its service technicians and apprentices to “feed further aftersales growth”, too.

The business of selling cars has always required dealers to sell more than just cars to make a success of it. But as consumers ask more questions about the value of these add-ons, we could see the business changing markedly in the next few years.