A robust market for new vehicles
“The fundamentals that drive dealer demand look good. I’m optimistic about 2025,” says Smoke. “There’s pent-up demand that will be moving back into the market because rates will be lower, and consumers will be able to get monthly payments that we haven't seen for a couple of years.”
Consumers should be ready to buy. Skordeles, says, “A long term trend shows that customers are more attuned to the monthly outlay than the absolute price of a car—lower financing costs can help shrink monthly payments. Also, expect to see patient buyers who’ve been educated over the past few years to be willing to wait days—up to a week—to get the specific car they want.”
New vehicles
The new vehicle market increasingly looks like the providence of wealthier consumers. These buyers have the resources to weather price increases and qualify for financing. Buoyed by a rise in the stock market asset value and home appreciation along with a strong labor market, wealthier customers are expected to maintain their new car purchasing activity.
From a volume standpoint, Smoke says, “The market shift towards larger, more expensive SUVs and trucks reduced the buying pool by about 10% from 2019 levels. In 2024, the market recovered 2.5% of that loss but with the days of sub $20,000 new cars long gone, don’t expect to see it much higher.” Even with the pressure on affordability that’s kept annual new vehicle sales under 16 million, the auto retail industry has enjoyed its highest profits ever.
“We should see a year where OEMs are in balance with market demand,” says Smoke. “Inventory levels for most brands—Stellantis and Nissan excepted—are 15-20% below pre-pandemic levels. Those inventory levels should put a floor under pricing while curbing floorplan carrying costs.”
Used cars
Besides its sensitivity to financing rates and vehicle prices, the used car market faces distinct challenges. Inventory remains tight, a consequence of reduced production since COVID, and a decrease in lease maturities, which normally supply much of the certified pre-owned market. Sourcing used vehicles will require more effort along with higher costs to acquire used inventory. In the end, the supply constraints should benefit dealers with price stability and larger margins, especially for high demand brands and models.
Electric vehicles present opportunities and challenges.
“Demand for electrified vehicles (EV) continues to grow, with EVs reaching 8% of new vehicle sales,” says Smoke. “Hybrids look to hit 12% of sales this year, providing customers access to greater fuel efficiency and lower emissions without the range and infrastructure limitations of EVs.” Toyota, for example, has gone fully hybrid on certain models, responding to consumer demand for fuel efficiency with practicality.
Skordeles points out that recent hurricanes in southern states revealed potential vulnerabilities for EVs, such as long waits at charging stations, limited access to power during emergencies, and the danger of fire from batteries exposed to flood waters. While these incidents may be isolated, they have raised consumer awareness of EV limitations in extreme weather scenarios.
While EV concerns may keep ICE vehicles around for quite a while, dealers are promoting hybrid vehicles as a bridge to broader EV adoption. For many two vehicle households, today’s EVs may serve as a shorter-range city car backed up with a hybrid or ICE vehicle for long range trips.
Global events and policies
Given the potential for political shifts and international trade disputes, global trade and sourcing risks remain. “The auto industry is better positioned than in previous years, with a more resilient supply chain that points to North American production increases and diversified sourcing strategies,” says Skordeles. But geopolitical events—such as tensions with China—pose risks, especially concerning semiconductor supply from Taiwan. The industry’s steps to mitigate these risks through reshoring efforts and enhanced supply chain management are still a work in progress.
It's unclear how exactly the new administration’s proposed trade policies, which include tariffs on China-specific and across the board tariffs, will affect auto retailers. Smoke says, “The last time the tariffs were advanced, we had a lot of threats with Europe, Japan, Canada, and Mexico, but everyone backed down and made rational decisions. The last NAFTA renegotiation that led to the United States-Mexico-Canada Agreement (USMCA) ultimately caused minimal disruption to the industry.”
It’s too early to tell whether auto retailers may benefit with additional protection, experience pricing or supply disruptions, or avoid significant impact. “The good news is that after the pandemic and supply disruptions, the industry is better prepared with more resilient sourcing,” adds Smoke. “Another benefit could be urgency in near term demand by consumers worried about higher prices in the future.”
Labor constrains service opportunities.
With a tight labor market, hiring and retaining skilled staff remains challenging. Skordeles says, “Labor market constraints, driven by an aging population, reduced labor participation rates, and slower workforce growth are expected to persist for decades. That’s going to push wages higher and present ongoing expense challenges for businesses.”
Rising wages are driving businesses to seek greater productivity through automation and investments in technology. “AI-driven customer service tools, automated marketing platforms, and scheduling software offer the promise of productivity gains that drive margins and reduce dependence on scarce labor,” says Smoke.
Vehicles on the road today are more complex than ever, with advanced safety features and electronic systems that drive up the cost and frequency of repairs. Consumers are keeping vehicles longer, and as vehicle age increases, so does the demand for maintenance and repair, along with the cost. Dealers have an opportunity to grow their service departments and increase profits.
A tight labor market stands between dealers and those service revenues. Dealers who can attract and retain skilled technicians hold a distinct advantage. Investments in recruiting, training, and pay for productivity systems—not to mention the basics of coaching and worker engagement—set dealers up to access growing service revenues.
Key takeaways for dealers
Smoke and Skordeles recommend several strategies to stay competitive:
1. Remain optimistic for sales growth. The coming year is expected to be the strongest market for new vehicles since 2019, and the best for used vehicles since 2021. Dealers should prepare for increased retail activity.
2. Prepare to work harder to find used inventory. With fewer lease returns entering the market, prepare to adopt proactive sourcing strategies. It's going to take more work to find used cars, but that will also put a floor under prices, benefiting dealers and helping maintain predictable margins.
3. Invest in technology. Rising labor costs and shortages will drive investments in productivity. Dealers should explore technology—with AI at the top of the list—that enhances productivity while supporting their teams in delivering high-quality service.
4. Leverage parts and service: Service and parts revenue will remain a critical profit center as consumers keep older vehicles longer. Increased demand for maintenance and repair, coupled with parts scarcity, should increase revenue from service departments.
5. Pursue F&I opportunities: As buyers of used vehicles seek protection against repair costs, warranties, extended service plans, and other F&I products are likely to see increased consumer interest.
6. Focus on efficiency and scale: To offset operational costs, larger dealer groups will continue to add scale through acquisitions, seeking benefits from shared services and resource efficiency across multiple locations.
