A future beyond brick and mortar: Disruption in automotive retail

| Report
As customer expectations evolve and cost pressures rise, automotive retail strategies must also change rapidly.

Automotive retail is changing with unprecedented speed and magnitude, driven by shifting customer expectations, new mobility offerings, and technological disruptions, such as digitization, vehicle connectivity, and electrification. The COVID-19 pandemic has further accelerated that transformation, encouraging consumers to adopt digitally enabled car buying and online sales models. On the business side, COVID-19 has increased the cost consciousness of OEMs and dealers, who are now making decisions about further outlet consolidation, leaner retail formats, direct customer access, and alternative sales models.

To gain insight into the changing landscape, we surveyed car buyers in multiple countries and even shadowed some during the purchase process. We also interviewed industry stakeholders and conducted extensive research on the electric-vehicle market (see sidebar, “Researching the automotive-retail industry”). We consolidated the findings in the report A future beyond brick and mortar—disruptive change ahead in automotive retail.

The current landscape for automotive retail

The McKinsey car-buyer survey indicated that new-car purchase intent in the United States is still 20 percent below prepandemic levels. Although Asia and Europe have mostly recovered from their lows in April and May 2020, purchase intent in those areas remain around 10 percent lower than it was before the pandemic.

Of the respondents who did intend to purchase a new vehicle, more than half indicate that they would delay their purchase for at least another four months. Economic reasons, such as reduced income, had the greatest influence on decisions to delay car purchases and were cited by around 55 to 60 percent of respondents across countries. That was followed by health concerns—for instance, a lack of safe test-drive options—which were cited by around 25 to 35 percent of respondents. Approximately 10 to 15 percent are holding back as they awaited subsidies and discounts to support their purchase.

The primary sales channel that consumers plan to use while shopping had a significant influence on purchase intent. For consumers in the United States who will mainly use online channels, purchase intent only dropped by two percentage points. By contrast, purchase intent for consumers who plan to conduct their buying journey offline and buy in person dropped by more than eight percentage points. That demonstrates that digital channels are becoming much more critical, although offline sales remain important (Exhibit 1). OEMs and dealers around the world recognize the trend and have significantly increased their use of remote-sales tools and online sales channels. They will likely continue to do so in the coming months.

Digital channels in the automotive-purchase experience are becoming more important.

Even before the COVID-19 crisis, industry stakeholders had long discussed overhauling the automotive-sales model, and our survey results show a few reasons why they felt the need for change:

  • Across all regions and customer groups, only 1 percent of respondents are fully satisfied with their overall car-buying experience.
  • Of the surveyed automotive executives, 88 percent expect that some dealer groups will not survive the upcoming disruptions related to innovative mobility concepts, digitized retail formats, and new market entrants.
  • OEMs must spend up to 30 percent of potential gross revenue on vehicle distribution, which includes the wholesale, structural, and tactical costs of retail.

Importantly, fewer than 50 percent of survey respondents believe that dealer salespeople can give them all the information they need (Exhibit 2). A total of 70 percent view the presence of a physical car as the main reason for their visit to a dealership, and most state that they would prefer to finance and pay for a car digitally.

The role and business model of the dealership needs to change.

The road ahead for automotive retail

Given the extreme changes underway, the future of automotive retail has understandably become a top agenda item in many boardrooms. Multiple OEMs have recently announced structural moves, notable for their accelerated speed and clarity, for sales models. In the full report, we try to provide a perspective on the changes ahead, focusing on three key issues that are top priorities for automotive OEMs and dealers:

  • Why is the traditional automotive-retail model so severely under pressure at present, and what do OEMs and dealers need to know about the changing customer preferences and technological megatrends affecting the automotive-retail space?
  • What compelling future retail-model options can help OEMs and dealers stay ahead, and which capabilities and changes will they require?
  • How can individual OEMs and dealers effectively start their transformation journey toward a robust and future-proof retail model?

We distilled three key findings about the future of automotive retail and strategies that will help OEMs and dealers stay ahead of the disruptive changes and serve all customer groups.

First, we found that the traditional automotive-retail model is under severe pressure because of evolving customer preferences, OEMs and dealers must take heed of these changes and address several persistent pain points along the car-buying journey to remain competitive. In tandem, OEMs and dealers must keep pace with digitization and ACES (autonomous-driving, connectivity, electrification, and shared-mobility) trends.

There are four major groups of car buyers globally, each with very different behaviors that result in a variety of customer journeys and potential touchpoints that are useful to automotive retailers. We analyzed those four groups across China, Germany, and the United States and observed major differences in their preference for innovation or status quo during the car-buying journey:

  • Hybrid customers. Members of this group approach dealers for information and testing, but they also use of online sources, such as OEM and dealership websites and car-comparison portals.
  • Online-savvy modernists. These customers want a fast and easy car-buying process and consult six to eight different touchpoints along their journeys.
  • Online-focused information seekers. Buyers in this group focus on online sources during the information-seeking phase, but they consult with dealers throughout the car-buying process.
  • Dealer-trusting traditionalists. These customers view the dealer as both their key source of information and a partner during the car-buying process.

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Our second major finding was that OEMs and their retail partners must develop a more diverse set of strategies that diverge from the current retail model to an unprecedented extent. The full report describes five different models that they could follow in their future retail strategies:

  • OEMs building on the work of entrepreneurial dealers
  • dealers serving as execution agents while OEMs remain in control of new-car sales
  • OEMs fostering competition while dealers are exchangeable execution providers
  • OEMs owning the retail approach
  • OEMs handing over responsibilities to importers

We strongly believe that a combination of two or more of the methods may be best for any given OEM or dealer, since they should take a region-by-region and brand-by-brand approach to a future retail strategy. After all, automotive markets significantly differ in maturity regarding ACES trends, legislation for direct sales, and affinity for online sales. Those factors determine not only the speed but also the direction of retail change. In addition, OEMs’ market positions differ strongly by region, as do the competitive ecosystems.

Auto and mobility consumer survey

How consumers’ behavior in car buying and mobility is changing amid COVID-19

Finally, OEMs and dealers must prepare quickly for the transformation of automotive retail, given the magnitude of the shifts and the amount of time required to implement changes across retail networks, which involve long-term partnerships and investments. They should start with five no-regrets moves to prepare for and master ambitious future challenges—such as big data and advanced analytics—over the medium to long term:

  • defining strategic focus areas and creating alignment within the organization
  • investigating direct and online sales models
  • considering transaction-price steering as a true game changer
  • defining measures and leaner formats to reduce retail costs
  • building the necessary capabilities and adapting the organization
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