BMW: A tough fight ahead to win back luxury crown

BMW made the best of a lousy 2022 by managing production and supply chain challenges better than its traditional luxury segment rivals, Mercedes-Benz and Lexus.

A key weapon in BMW's arsenal is the automaker's 7 million-square-foot factory near Spartanburg, S.C., which pumps out hot-selling crossovers. The export hub was prioritized during the pandemic and ensuing semiconductor shortage.

BMW National Dealer Forum Chairman David Sloane credited the assembly plant — BMW's largest — for the German automaker's ability to quickly get critical crossovers to dealership lots.

"Having local production has been a massive advantage for BMW throughout this pandemic," said Sloane, president of Sloane Automotive Group in suburban Philadelphia.

But that was not enough for BMW to defend its luxury sales crown from electric vehicle juggernaut Tesla, which outsold BMW by an estimated 158,612 vehicles in 2022.

For BMW, reclaiming the crown this year will be complicated, as interest rates surge and inflation bites.

Dealer profitability is at risk of eroding amid softening customer demand and rising days' supply of vehicles.

BMW will "need to return to the market with incentives on the cars that are not selling," Sloane said. "But hopefully, discounting never goes back to [pre-pandemic] levels."

Sloane, 37, spoke with Staff Reporter Urvaksh Karkaria about the vehicles, challenges and opportunities BMW dealers should expect in 2023. Here are edited excerpts.

Q: What's on the BMW National Dealer Forum agenda in 2023?

A: We want more consistency in allocations across the dealer network. Due to production constraints, there have been a lot of peaks and valleys in the supply of certain products. We're collaborating with BMW to ensure all dealers have the ability to sell the full line of products.

BMW dealers are also concerned about customer loyalty, especially leasing.

We're losing a big part of our leasing portfolio every month, where people are buying their cars out and not getting into a new lease. That defection rate is concerning. Our lease penetration is down dramatically — 30-plus points versus pre-pandemic levels in 2019. People are going into longer-term financing because they are payment buyers. We are afraid that the sales cycle is changing, and three years from now, we're not going to have these customers signing up for new leases.

We are pushing BMW and BMW Financial Services to prioritize leasing and put the most compelling offers on the market. The No. 1 goal should be to retain our lease customers.

That's how we will ensure that sales cycle every three years, and it's how, hopefully, we can get lease payments down relative to the finance payments. It's an investment in the long-term future success of the brand rather than a near-term expense.

Why are lease defections increasing?

It's a function of higher interest rates and reduced factory sales support. Those things are leading to lease payments being higher.

People are payment buyers. If the payment is $800 a month for a 60-month finance and $780 for a lease, people will buy that car.

Our business is built on leasing and the three-year sales cycle. As well as selling a car every three years, we're getting a good one-owner local trade-in. Used-car acquisition is a considerable challenge, and having those customers return and bringing us those off-lease cars is critical in keeping more BMWs in the dealer network.

What are some headwinds for BMW dealers in 2023?

Rising interest rates will continue to affect the used-car market. When interest rates were low, people could buy a 2-year-old car at the original MSRP and still get a payment that was less than a new car. But with interest rates doubling or more, those payments have gone up.

Managing supply and demand will be challenging in 2023 as shortages ease and production capacity increases. Maintaining the right balance will be necessary.

What can BMW do to help dealers sell cars amid rising interest rates?

We will need support from the OEM through discounted interest rates on new-car loans and leases.

Spending money in an environment where the days' supply is low is hard. But when you're losing this many customers every month from your lease portfolio, you can look at it like an expense, or you can look at it like an investment into the future to keep people in the brand. In the end, it will cost more money to conquer these customers than it will cost today to keep them loyal.

How are dealers coping with inventory constraints?

Inventories are improving, but we're selling into the pipeline. There is more availability in certain product lines, such as the X5 and the crossovers built in Spartanburg.

Days' supply [in late 2022] was 12 to 15, compared with five to 10 days [in 2021] and 40 to 60 days pre-pandemic. BMW is targeting around a 15 days' supply of cars for [2023]. Dealers don't want to return to a 45-plus days' supply.

Having cars on the ground for impulse buyers and for people to test drive is important. But business is much better for us when the demand is greater than the supply. It means the factory has to spend less on incentives and dealers have to discount [the vehicles] less.

Are used-car market conditions causing dealers to revise their acquisition strategies?

Used-car acquisition is more challenging, with fewer cars returning to us off-lease. So dealers are doubling down on other channels — auctions, street purchases and getting existing customers to upgrade to a new vehicle.

It's been harder to find deals at auction in recent years. You've had the Carvanas and Vrooms of the world in the auction lanes, driving prices up. But with those companies running into issues, auction prices could come down.

What is BMW advising dealers about vehicle markups?

BMW hasn't been overly loud about it. They're pushing dealers to keep turn rates high. They've made it known that markups are not a good customer experience and that dealers should take a longer-term view on this.

Unlike some competitors going all-in on EVs, BMW is sticking with combustion engines for the foreseeable future. Do you agree with that strategy?

The transition to electric vehicles will be an evolution. Public charging infrastructure still has a long way to go. I don't know that [battery-electric vehicles] work for every consumer in every part of the U.S.

You want to give the customer choices. BMW will have a wide range of powertrains, including combustion engines, plug-in hybrids, BEVs and maybe even hydrogen down the road.

The diversified powertrain strategy means BMW doesn't have to gamble on one technology. It's expensive to go in one direction if it proves wrong and does not appeal to many customers.

BMW's electric models see robust demand. Are you surprised at the pace of adoption?

The consumer demand for the BMW i4 and iX has been great. The products check the boxes in terms of price, range and driving performance.

BMW's decision to adopt a familiar styling with its EVs resonates with customers. The i4 looks like the 4 Series, and the i7 looks like a 7 Series.

You've got loyal customers who like BMW's design language. People want the choice of a zero-emission powertrain without sacrificing styling.

Will dealer margins be different for BMW's electric models?

The dealer margin is the same on a gas and an electric car. There's been no discussion otherwise.

The brand needs a profitable dealer network to invest in facilities and employee training. There needs to be an incentive for dealers to sell electric cars, so it would be shortsighted to cut the dealer margin on products that BMW needs to do well in the market.

How does BMW retake the top spot from Tesla in the U.S. luxury sales race this year?

We're selling everything we get, so it comes down to just getting product to dealers.

The Model 3 sedan and Model Y crossover drive Tesla's sales. There's demand in the midsize sedan and SUV electric segment.

It's a segment where legacy OEMs are just starting to compete. So as more product comes into the market and production ramps up, it'll become more and more of a conversation.

We will see more significant EV growth this year with the addition of the i5 electric sedan. The Neue Klasse electric platform arriving in 2025 will allow BMW to introduce more competitively priced BEVs.

That's also when we'll see significant driving range increases.

What niche does the new XM flagship crossover fill?

The XM is a halo car that has incredible performance and luxury appointments. It'll bring new buyers who might otherwise not have considered a BMW. The XM competes with high-performance luxury SUVs, such as the Lamborghini Urus, the Bentley Bentayga and the Porsche Cayenne GT. There's a lot of competition in that area.

BMW's direction with the XM design is polarizing. But getting people talking about the car with a bold design will attract more people than you lose.

How should dealers be compensated for subscription-based features and performance upgrades that automakers offer via software updates?

We can't fight technology and resist doing things that make for a better customer experience.

But dealers need to be compensated fairly because when those subscription features don't work or when customers have questions, we're the ones on the front lines answering customer questions. The margins on subscription features should be the same, no matter how the customer buys the option.

How will over-the-air service updates affect the fixed ops business?

OTA service updates keep customers out of the dealership. It is a concern because it reduces customer touch points and can hurt retention and loyalty rates. Whenever we talk to the customer, it's an opportunity to build the relationship and present a sales situation if it applies. So metrics on customer retention will have to be looked at if it becomes a big issue.

How will EVs change the fixed ops work force?

Customer-pay business is up more than 10 percent year over year. People are keeping their cars and putting money into them instead of buying new ones.

But electric vehicles could threaten fixed ops profitability as a larger share of the car park transitions to low-maintenance electric vehicles. EVs require more diagnostic service work than maintenance. The concern is how that affects profitability in our parts and service departments.

We are working with BMW on service technician recruitment and training concerning EVs. It's a top priority on the dealer forum.

Does digital retail threaten to make the brick-and-mortar showroom redundant?

There is no doubt customers are doing some of the car-shopping processes online. We're working with BMW to make that digital journey more seamless.

But we're a long way from consumers buying vehicles from their sofas. As cars become more complicated and richer in technology, it will be even more critical to have a place for consumers to kick the tires and consult with a client adviser.