Dealers concerned margins will shrink

As automakers pivot to an all- electric future, many dealers wonder what it means for their wallets.

A number of brands are requiring dealerships that want to sell and service electric vehicles to make costly upgrades with no guarantee of a quick return. Some dealers also are concerned about the long-term effect pricey electric vehicles might have on their margin and how they earn it.

Mercedes-Benz USA boss Dimitris Psillakis has assured dealers that the company's foray into EVs would not affect retailer margins. The German luxury brand is unleashing a fleet of sedans and crossovers under its new EQ subbrand.

"The margin is a performance driver, so it's related to some performance criteria, which will be adjusted to the electric product," Psillakis told Automotive News in April. "But we're not after dealer profitability. We want to offer more products under the same scheme."

The dealer margin issue is a flashpoint in factory-retailer relationships. Automakers risk setting off a powder keg by messing with dealer profitability.

"Manufacturers have zero investment in terms of dollars in the dealer network but control over 90 percent of what happens," said Jeff Aiosa, president of Mercedes- Benz of New London in Connecticut. "And they get to do that through margin."

Margin is also on the minds of Volvo's retailers as the Swedish automaker strives to become an EV-only brand globally by 2030.

Volvo Car USA CEO Anders Gustafsson drew a line in the sand on margins.

Dealers will "absolutely not make less" margin on EV sales compared with combustion engine vehicles, Gustafsson said last month.

"We need to have the dealers on board financially, otherwise they will do whatever they can to sell combustion engines," he said. "We will probably change the model how we calculate things, but they will not earn less."

Despite assurances from the factory, some retailers aren't convinced.

While Mercedes' overall dealer margin percentage on battery-powered models might not change, the ratio of fixed-to-variable margin could be adjusted, Aiosa said.

If the fixed margin component is reduced for EVs, dealers could have more difficulty maintaining the same level of gross profit, said Aiosa, who is also the brand's NADA representative.

"If it's not fixed, it's not guaranteed," Aiosa said. "Mercedes has only said it's not going to change the overall margin percentage. That's where the uneasiness lies."

Volvo National Advisory Board Chairman Ernie Norcross said any reduction in margin needs to be offset by a reduction in dealer expenses elsewhere, such as floorplan and insurance costs.

"All [automakers], because of the extraordinary expense of the BEV and battery technology, have to find savings somewhere," said Norcross, owner of Volvo Cars Memphis in Tennessee. "They always seem to come to us to find the savings."

Automakers' ambitious EV rollout will fizzle if they can't get their retailers behind the new technology.

"If I can make more money on an ICE vehicle, which one am I going to sell?" Norcross said. "To get the network to be enthusiastic about the new electrification strategy, we should be paid as much or more."

Low-maintenance EVs also pose an existential threat to a dealership profit engine: fixed operations. Over-the-air software update capability offered with EVs could give customers fewer reasons to visit service departments.

Parts and service work generates 60 to 80 percent of the gross profit that covers dealership expenses, said Adam Simms, CEO of Price Simms Auto Group, which operates two Volvo stores and a Mercedes store in the Bay Area.

"Any time that gets interrupted, we all get a little nervous," Simms said.

Volvo's Gustafsson conceded that EVs will put pressure on dealership service departments.

"Consumers will pay less for parts but more for labor," Gustafsson said. Increased volume of BEV sales will "mitigate some of the changes" related to parts and service.

Dealers should start rethinking service today to prepare for future EVs, said Jorge Gutierrez, corporate strategist at Bert Ogden Auto Group in Texas.

"Is it going to completely revolutionize the industry? To a certain extent, yes, but we can't forget about the [share] that are still going to be gas cars," he said. "The change will be more on staffing of our dealerships, going from wrenches to a more electrical base. The technician of the future may look different from the technician of today."

Meanwhile, automakers are requiring dealers to make costly investments in charging infrastructure and upgrading equipment to service battery-powered vehicles.

Volvo dealers' investment could range from $50,000 to $300,000 per store.

Ford dealers who sell the Mach-E invested $35,000 to become EV-certified. The certification also will cover the E-Transit, F-150 Lightning and future EVs.

GM has asked all Cadillac dealers and GMC dealers who plan to sell upcoming EVs to invest $200,000 in their facilities on average.

"How many Hummers do you have to sell to make back a quarter of a million? It doesn't pencil," said Justin Gasman, finance director at McCaddon Cadillac-Buick-GMC, in Boulder, Colo. "But if you don't do it, then you're further behind."

BMW is helping to cover the cost of adding charging infrastructure at dealerships. The German automaker, which will launch two BEV models next year, is allocating $30 million from a retailer-funded program that pays for dealer-based initiatives, technology and training. BMW's 349 U.S. dealers pay a flat fee into the Cost Per Vehicle fund on every vehicle they order from the factory.

"There isn't really any out-of-pocket [cost]; that's money that's already in the fund," Shaun Bugbee, BMW of North America executive vice president of operations, said last week. "The fund is to benefit all dealers. All dealers will be participating in electric mobility."

Porsche's 192 U.S. dealers are investing a combined $77 million in building out a retailer-based network of fast chargers to support the automaker's EVs.

Cadillac and GMC have opened reservations for customers to secure a Lyriq, Hummer pickup or Hummer SUV with a $100 deposit. Customers who make reservations will connect with dealerships to finalize the sale when the vehicles are ready for delivery.

For the Hummer Edition 1, priced at nearly $113,000, Gasman thinks a more substantial deposit of $1,000 to $5,000 would be a better benchmark of demand. "Something where there's just some skin in the game," he said.

Many Chevy dealers outside of California have struggled to sell the Bolt EV since it came out in 2016. An electric pickup would be an easier sell in dealer John Hiester's North Carolina market, he said.

"I'd put 30 of them online out here tomorrow and not even think twice about it because there is a demand for it," said Hiester, dealer principal at Hiester Automotive Group.

Hiester is also confident that the Hummer will remain in high demand because of its unique place in the market.

Automakers' EV goals, such as GM's 2035 target to be all-electric, can be jarring, he said. But he's confident dealers will adjust.

"As an industry, we've faced a lot of disruptions. When rental cars came out, everybody said they wouldn't have car dealers anymore because why would people own cars if they could rent?" Hiester said. "The business grew. It didn't shrink. I really think it's going to grow and not shrink with EVs as well."

Michael Martinez contributed to this report.