BMW dealers: Charged up to take EV fight to Tesla

BMW last year defended its U.S. luxury sales crown for the third consecutive year.

It wasn't easy. The German automaker fended off a serious challenge from a surging Tesla while also navigating the industrywide supply chain shortage more deftly than its conventional rivals Mercedes-Benz and Lexus.

"Day supply throughout 2021 was in the low teens," BMW National Dealer Forum Chairman David Sloane told Automotive News. "There was never much ground stock at any point in the year."

That required BMW dealers to start preselling into the pipeline.

"We might not have an X5 or an X3 on the ground, but we have several in our order bank," said Sloane, president of Sloane Automotive Group in suburban Philadelphia. "Trying to sell that to a customer without them even being able to see or test drive a car right was a challenge."

But Sloane credits BMW for managing the chip shortage better than some competitors.

BMW had the right quantities of semiconductors committed early on for 2021, BMW's global sales chief Pieter Nota said in January.

"We have entered into a direct agreement with chipmakers to secure several million semiconductors per year," Nota said.

Meanwhile, the factory did a good job keeping dealers informed about inventory headed their way.

"We can't sell a 5 Series if we don't know whether it will arrive in six weeks or 12 weeks," Sloane said. "When push came to shove, they were able to get us the cars better than other brands."

Sloane, 36, spoke with Staff Reporter Urvaksh Karkaria about the vehicles, challenges and opportunities BMW dealers should expect this year. Here are edited excerpts.

Q: What are the top issues on the dealer forum's agenda in 2022?

A: The evolving role of the dealer as the digital journey becomes more central and desired by the consumer.

We want the local dealer in their market to be prioritized when it comes to online sales leads.

Encouraging the customer to engage initially with their local BMW center will ultimately make it a better experience for them. We don't want a customer to have to travel 100 miles to get the car they want.

Even if the local dealer doesn't have a model in stock, they can trade with other dealers for the car, or order the vehicle the customer is looking for.

How is the inventory crunch affecting other dealership operations?

Supply chain shortages last year causes difficulty in getting stock orders to the dealers, so that put a strain on our service departments. The limited supply of new vehicles also put pressure on service loaner fleets. Our loaner fleets have been depleted of new cars.

Every new unit is being sold to a customer, which is a very healthy business model.

BMW made a recent change at the request of the forum and now is allowing dealers to add late-model, pre-owned vehicles into their service fleets.

We have to continue to creatively work together to ensure the cost burden of maintaining these fleets does not shift solely to the dealers.

How are BMW dealerships performing from a profitability standpoint?

2021 was a record year for both BMW and its dealer partners. Return on sales last year was more than 4 percent, significantly higher than the 2 percent levels pre-pandemic.

How sustainable are current vehicle margins and profitability levels as inventory levels improve?

The X factor this year, the thing that you can't project, is consumer demand. Greater supply will drive down the margins, but not if demand continues to outpace supply.

We're continuing to see pent-up customer demand. January was a very strong start to the year — BMW outperformed sales projections. Until dealers build a ground stock, which doesn't seem to be happening, robust margin growth should continue.

Tesla nearly caught up to BMW in the U.S. luxury sales race last year. How does BMW stay ahead?

BMW is bringing electric competition to Tesla this year with the iX crossover and i4 fastback. BMW did a great job getting the pricing and driving range on these models right for the market. It's exactly what we were asking for.

We've been talking about Tesla for a long time and focusing on their gains in market share. Now we're going to be able to compete with them.

The extent to which consumers will adopt EVs is not completely understood. But government mandates and things like that are forcing the hand of manufacturers. Making sure that we embrace EVs and have a good strategy to roll them out is going to be important.

How concerned are you about rising inflation this year and its effect on dealer margins?

If interest rates climb, it could hurt demand. If cars start backing up on our lots and interest rates start to rise quickly, then obviously that's going to increase our floorplan expenses and cost of doing business.

Some automakers, buoyed by improved profitability in the past year, have warned they won't return to the days of high volumes. Do you believe that?

Manufacturers make money selling cars to dealers, so we'll see if they can maintain the volume discipline when factories are once again at full volume. I think we can maintain market share and margins without having a 70 days' supply on the ground like we used to.

What are BMW dealers doing to grow their used-vehicle business to offset the scarcity of new cars?

Acquisition is tough because auction prices are high. Dealers are buying every off-lease car that comes back to the store. We're also focused on throughput in our fixed operations and our service departments.

Have factory incentives changed given the inventory shortages?

Supplies are tight, so there's no need for price adjustments to sell the cars. People are buying at MSRP. As long as inventory is limited and demand stays strong, it's good for dealers and automakers — we can make our margin and they don't have to spend money on incentives.

Are dealers generally sticking to sticker price or are they adding market adjustments?

Customers have a long memory. In these times, we have to make sure that we're taking care of our local customers and we're not doing anything to damage the dealership's brand as well as BMW's.

Everybody can run their businesses the way they see fit, but I think you have to be aware of how short-term profit can affect long-term relationships. Price-gouging the customer is not going to be a good business model in the long term.

What is BMW telling dealers about pricing and markups?

BMW is not getting involved in this conversation. This is a decision that dealers need to make for themselves.

But the focus of BMW retailers last year was on maintaining high turn rates, selling into the pipeline and delivering a great experience to our customers. As a result, we have collectively gained market share in the luxury segment and put a lot of new BMWs in customers' driveways in 2021.

When do you expect production and inventory levels to come back in line with demand?

Inventory is expected to remain tight through the second quarter of 2022.

Figuring out the ideal days' supply that we need on the ground to maintain margin as well as market share is important.

If we can create an environment where production matches, or falls just short of demand, it will be a win for both dealer and automaker.

Is BMW planning to introduce its own branded digital retailing tool, similar to Nissan and other automakers?

No. We have asked for flexibility to use third-party digital tools.

Dealers are agile and adopt tools that show the ability to generate greater sales and a better customer experience.

We are still early in the evolution of digital retailing. Customers start the process online but complete the majority of the process at the physical dealership.

How has BMW lease penetration declined during the inventory crunch?

Leasing volume in 2021 was down about 40 percent at my store from pre-pandemic levels as incentive support evaporated. It is a concern because we look for off-lease customers to return to the market for a new vehicle in two to three years.

Is BMW relaxing image standard requirements as digitalization gathers momentum?

BMW's new image program, Retail Next, has been shown to dealers. It's a modern, boutique-like design meant to create a more conversational space rather than a transactional one.

Manufacturers are bringing greater sensibility to their facility upgrade programs. There's more thought and willingness to have conversations with retailers about what makes sense and what doesn't.

With electrification and digitalization transforming the automotive retail landscape, we have to be smart about what we're asking dealers to do. To simply add more expense to the dealer, with no benefit and no justification, that doesn't make sense.

How difficult has hiring and retention been for dealers during the pandemic?

It's hard to hire good people; there's not a ton of candidates that are looking for jobs. It's been especially challenging to hire technicians. A significant number of technicians have either left the brand or the industry.

Electrification will require retraining the current technician work force. BMW is investing in this regard, collaborating with community colleges and military veteran groups to recruit and train the next generation. We need to continue to put resources toward these initiatives and work together to find creative ways to grow our technician work force.