For auto retailers, 2025 should return us to a fully normalized market for the first time since COVID-19 disrupted the playing field. All indications are that auto retailers should be happy with where the industry will land, with profits almost doubling since 2019. Although we’re beyond the Golden Age for auto retailing when shortages of both new and used vehicles drove prices and margins into the stratosphere, the new normal, with a reset at a higher level of earnings, is a great ending to the pandemic journey.
The return to more favorable and stable conditions means auto retailers can focus on implementing growth strategies and building value. As you put together a game plan for the coming year, consider how the following industry trends could impact your business. Here’s what we see coming in 2025:
1. Strong consumer demand further elevates.
Consumers are feeling positive about major purchases. Vehicle affordability should improve as interest rates fall, converting pent-up demand into strong sales over the next few years. Millennials and Gen Z are entering their prime years for buying cars and trucks, surpassing the baby boomers as drivers of demand. While prices for new and used cars have risen by 30% over the past seven years, real wages have risen as well. Consumers are adjusting to current vehicle prices, with some able to afford new vehicles and others gravitating toward the used car market. We’ve already seen a marked increase in sales of new and used cars, and fleet sales have grown even faster.
2. Strength in the used car market offers good news for dealers.
Consumers are especially interested in buying late-model-used cars and trucks, keeping these values high. Higher new car prices combine with the rising insurance premiums for more expensive vehicles to nudge more buyers toward the used vehicle market. The combination of vehicle sales, financing or protection products, and service generated by a well-performing used vehicle program will provide strong support for dealer profitability in the coming year.
3. Pricing transparency benefits buyers and dealers alike.
The spike in digital shopping and purchasing has catalyzed the longer-term shift toward more transparent pricing. Retailers have tried to make it easier for customers to see exactly what a vehicle will cost them and how it will fit within their budget. That transparency applies to used car trade-ins as well; with a better understanding of the value of their current vehicle, consumers know in advance how much they can contribute towards a new car purchase. These policies build trust in the buying process, which bolsters consumer relationships. Clearer and more precise, “no-haggle” pricing also helps dealers consistently protect their margins.
EV sales will continue to grow, albeit not at the pace some predicted a few years ago. Currently, buyers of commercial vehicles (e.g., Amazon vans) are the fastest adopters of EVs. Over time we expect this trend to drive down EV prices, which will encourage more widespread adoption. Hybrid vehicles, including plug-in hybrids, are a popular alternative that helps bridge the move to fully electrified vehicles, which we expect to represent 40% of the market within the next five to 10 years. Continued headwinds to EV adoption include lagging development of charging infrastructure, consumer anxiety around trip planning due to battery range, and subpar battery performance in cold climates and disaster situations (e.g., floods, hurricanes, and evacuation scenarios). The used car market for EVs has been marginal at best, but some 70% of EV buyers report plans to purchase another one. In fact, 92% of EV owners in a recent survey by Global EV Alliance said they would never own another internal combustion vehicle.Disclosure 1
5. Service business rises as a robust center of profit and cash flow.
Service businesses are driving profitability and boosting cash flow to a greater degree than many people anticipated. It’s true that vehicles are better built than they were just ten to 15 years ago—and last longer—but they still need service and parts throughout their extended lifespans. Contrary to expectations, EVs are contributing to added profitability due to higher average costs for service visits
