Building on record Kia sales will be a challenge

Kia America set a U.S. record last year, selling 782,451 new vehicles, an increase of 13 percent over 2022.

James Morrell, chairman of the Kia Dealer Advisory Council and co-owner of two Destination Kia stores in upstate New York, said the brand expects to sell even more vehicles this year.

Kia is projecting 5 to 6 percent growth, Morrell said, but the marketplace will be different in 2024.

The selling environment — higher sticker prices coupled with high interest rates — makes it difficult for consumers to purchase new vehicles. And with inventory recovered across the industry, Morrell said competition to conquest and retain customers will be fierce and will require getting back to the basics of selling cars and negotiating.

"We've never lived through this, but we also never lived through the last three years, which was a golden time in the industry for retailers. We have to remember what it was like in 2018 and execute the same way," he said.

Something else new for Kia: the three-row EV9. The electric vehicle is not only the first of its kind in the segment, but it's the most expensive vehicle the brand has ever sold, with sticker prices from $55,000 to $80,000.

As Kia adds more EVs to its portfolio and pushes deeper into the growing segment, education is now at the forefront of what Morrell does as a dealer. There are a lot of considerations many consumers haven't taken into account when purchasing an EV, he said.

Morrell, 50, spoke with Staff Reporter Carly Schaffner about the steep learning curve for EVs, vehicle affordability and digital sales. Here are edited excerpts.

Q: What were the highlights for Kia dealers in 2023?

A: The constant introduction of new Kia models, the increase in sales volume and the increased perception and consideration of the brand.

Were there any pain points or challenges?

Like everybody, we're transitioning to alternate energy vehicles like plug-in hybrids and EVs. Adapting sales processes and education was a bit of a pain point. Also, in the last three to four months of the year, there was a massive compression of margins coupled with a considerable drop in used-vehicle value. And that with the high interest rates made it a lot more challenging to satisfy consumers.

What kind of EV education are you providing consumers?

There is a lot of education dealers have to walk through with consumers on charging solutions and range. Like what to expect during highway driving. Dealers in the Northeast and Midwest also have been wrestling with the effects of cold weather. Taking longer trips requires additional planning. And people that travel back and forth from New York City, the heavier weight of the EVs puts a limitation on parking in certain garages. Because of all these additional considerations, many people who think they want an EV end up leaving in a plug-in hybrid or hybrid.

Dealers also have found advertising costs of EVs to be considerably higher than ICE models because you're almost educating the market — there's not a built-in market, though it's slowly growing.

Any other key takeaways from last year?

The return to business as usual. The last two or three years we effectively went into an order-taker type model. The whole period we had during the pandemic when demand vastly exceeded supply is gone. Now there's a lot more choice. We need to go back to the block-and-tackling basics of what it means to be in the car business and to sell cars.

What will be the big topics at the NADA Show among Kia dealers?

The transition to this new portfolio of products and how that affects dealers and our profitability and the best way to navigate through that in partnership with the brand. Dealers also will want to know about Kia's plan for incentives.

Has Kia discussed any increase in incentives for 2024?

Last year, Kia had record sales and the lowest incentives in history, so I would imagine it was a good combination for Kia as far as profits in the U.S. Kia has indicated to us that it expects to grow volume in 2024 by 5 to 6 percent, and there's no question Kia is considering what to do to maintain their level of volume and increase it going forward.

Kia and Hyundai probably did a better job than anyone keeping production up during the pandemic, and as a result, they were able to conquest a lot of market share. Now that production has returned to the other manufacturers, particularly Honda and Toyota, it's going to be a much more competitive market to conquest and retain customers.

What is Kia predicting for margins on new and used vehicles for the next year? Has there been any restructuring?

Kia is under the assumption that the margins will remain strong, but dealers might take a more pessimistic view. Kia has done restructuring to transfer some margin from ICE vehicles to the new portfolio of EVs. Historically for dealers, the margin has been slimmer on EVs than on ICE vehicles. According to most dealers and in my experience, we are transacting the current EV mix, not inclusive of the EV9, at a transaction price substantially below MSRP.

Does selling below sticker price have anything to do with Kia's ineligibility for the federal EV tax credit?

I don't think so because at this point, hardly anybody has eligibility for the tax credit. Even if Kia did have eligibility, the income component of the [Inflation Reduction Act] prohibits most EV buyers from being qualified. A lot of manufacturers have shifted to leasing EVs because everyone gets the $7,500, but there's a considerable amount of risk. As EVs go on — and as Tesla or BYD in China continue to lower prices — pricing could go down instead of up, and the effect that has on residuals is terrible. Lower residuals will cause the manufacturer to take substantial losses on their lease return, so that's definitely a concern for everybody.

What does Kia's new-vehicle inventory look like, and what is the expectation for days' supply for this year? Are any models in tight supply?

Across the board, Kia is targeting somewhere in a neighborhood of a 30 days' supply. I think it'll be challenging to get there based on what I see on the market. In my store, I'm up to a four-month supply. I'm also in the Northeast, and we go through a seasonality period.

There's a bit more demand than supply for Sportage hybrid, but about 10,000 more are coming into the country this year. Telluride and Carnival historically have always had a low days' supply, although both have been climbing because more production was generated.

We're reaching the point where either supply equals demand or supply exceeds demand on those models.

How are higher interest rates affecting the sale and financing of new and used vehicles?

It's a compounding effect because interest rates, whether it's a lease or a purchase, are at the highest point that they've been in the last 20 years. During the pandemic, consumers were accustomed to getting 2.9 or 3.9 percent interest [and] are now looking at a 6.9 to 10.9 percent interest — in the best-case scenario. The impact that's had on payments is tremendous.

During the pandemic, we had low interest rates and super high trade-in values, and a lot of consumers had equity. And at the start of the pandemic, there were still incentives. Now there are zero to no incentives — which I think will change — and interest rates are high. Those high rates have reduced the value of used vehicles [when they have to sit on the lot] because it's more expensive to buy the same car. The used-car value drop over the last three to four months has been so substantial that many consumers now have inequity, and that rolls over into their next purchase, which wasn't the case two to three years ago. It's been a massive change.

Is Kia doing anything to help dealers stay competitive in the high interest rate environment?

Kia has very small and targeted incentives. They have been and will always be a follower as far as incentives go. To the extent that other manufacturers have explored low [annual percentage rates], Kia really has not. Kia just introduced a few low APRs, but they are primarily on EV6 and the Niro EV. Kia, like all other manufacturers, is running into a situation where the days' supply of certain EV models is climbing.

How do these elements affect business operations?

Retaining personnel will be the hard part. Some salespeople might not be able to adapt to the new environment. If you get a percentage of gross profit, and the gross profit declines dramatically, then so does your commission. That means you need to sell more cars. Dealers also need to sell more cars to make the same amount of money, or we need to cut expenses. What retention will be like going forward is a worry for everybody.

What about the heavy focus on digital sales — will that help mitigate some of the issue, or is a human still needed to execute the sale?

Mostly what we see is people using the digital retailing tool as an advanced payment calculator, and they end up in a chat functionality or transitioning to a phone call to walk through exactly how it works. You need a human behind all that.

There was a shift to digital retailing when it was easy and everyone could get a 1 or 2.9 percent rate. But over the last six months, we've seen consumers negotiating for a better deal, and you can't negotiate it through a digital retailing tool.

Has Kia made changes in requirements with its digital retailing tool?

Kia mandated transparent pricing on all websites on every car inclusive of everything, whether it's dealer-installed options or document fees. They've also provided a digital retailing tool that will appear on kia.com that will launch soon. Dealers can utilize six different digital retailing providers on their own website, and Kia's provider will scrape the information from the dealer's website to provide a digital retailing solution or availability on kia.com.

Hyundai has announced it will work with Amazon to eventually sell cars on the platform. Has Kia said anything about working with the retail giant once Hyundai is able to pilot the model?

I haven't seen or heard anything from Kia in that respect, and in my experience, Amazon never does anything for nothing. The margins on vehicles are so narrow, I don't know where the money would come from to satisfy Amazon. I don't see how it's a sustainable business model for Hyundai Motor Group or for their dealers. The only way it would be is if Amazon did it for free. And from what I understand, that is not the case.

What is the most anticipated product launch in 2024?

The EV9 just hit everybody's lots in December. In February, Kia will start to push that car. It's Kia's most high-tech and expensive vehicle, and it's an EV. It's nice to have a three-row [crossover]. We'll also be getting the new Sorento, which looks good. It will have more separation from the Telluride, something Kia was always challenged with because they occupy the same space. And down the road, we'll have a replacement for the Forte and another EV sedan that will have a hatchback.

What is missing from the lineup?

Dealers love pickup trucks, particularly if in the South or Southwest, but the ICE pickup truck [segment] has been hard to get into because the domestics have such a lock on it. The only one that's been successful is Toyota with the Tacoma. I don't see Kia playing in that space, but since Kia is getting into the EV space, an EV pickup truck would be nice. Maybe that will happen in 2026.

In terms of sport utilities, Americans, in general, want something bigger every year. Is there a business case for customers that look at Telluride, but then buy Tahoes, Suburbans, Grand Highlanders or Grand Wagoneers? Is that feasible with the way fuel economy regulations are, or is that a fool's errand?

I'm also curious to see the impact of the purpose-built vehicles Kia showed at CES. The skateboard [chassis that allows multiple configurations] and can be adapted for fleet and business customers — that's certainly a segment we've never played in.