How lean retail helps auto dealers, OEMs navigate the road ahead

The ability to evolve the automotive industry’s sales function will be pivotal in navigating the high-stakes, rapidly shifting market.

In brief

• The lean retail model in the automotive industry focuses on pragmatic changes, leveraging data and technology to enhance operational efficiency.
• OEMs and dealers must collaborate closely, integrating customer and vehicle data to create a cohesive and efficient retail ecosystem.
• Simplifying the digital customer experience and leveraging AI for inventory management are key strategies in the lean retail model.

To start and set the proper context, this is not an article about changing to a direct-to-consumer model, agency construct or any other change that would run up against legal challenges with the franchise laws present across the 50 US states. Rather, this is about evolution within the highly resilient and entrepreneurial model that exists in the US.

As these exceptional circumstances subside, the industry is now focused on sustaining profitability in a rapidly evolving market. A lean retail model is one path the automotive industry could follow in pursuit of this goal.

With the rise of artificial intelligence (AI) and other technologies, original equipment manufacturers (OEMs) and dealers are seeking innovative ways to enhance operations. They need to balance competitive product offerings and cost structures while improving the customer experience. By adopting new formats, fostering collaboration and leveraging technology, the industry can work toward achieving long-term competitiveness, stability — and profitability.

What is a lean retail model?

The lean retail model is not about sweeping overhauls. The focus is instead on pragmatic, incremental changes that are attainable within the current legal and market frameworks, particularly in the United States. It recognizes the necessity of a data-driven approach to streamline operations, reduce costs and, ultimately, improve the financial outlook for all stakeholders involved.

Key aspects of a lean automotive retail model:

Modern connected vehicles generate nearly 25 GB of data per hour, collecting information from more than 100 different data points.¹ This extensive data collection is driven by embedded features, such as geolocation and navigation, companion apps, biometrics, voice recognition, onboard diagnostics and driver assistance. In this context, integrating customer and vehicle data becomes crucial. As OEMs gather comprehensive vehicle data, they are increasingly looking for ways to generate revenue from this data.

Dealers, on the other hand, are the primary point of interaction with customers through which they accumulate valuable customer insights. Bridging this gap can unlock synergies that enhance vehicle sales and service, leading to a more cohesive and efficient retail ecosystem. By leveraging these data points, the holistic brand ecosystem can better understand customer preferences and vehicle performance, enabling personalized services and predictive maintenance, which drive customer satisfaction and loyalty.

The automotive industry has always embraced transformation, from Henry Ford’s franchise model to today’s quest for innovation and efficiency. Now, the industry stands on the brink of another significant shift requiring collaboration, new technologies and a proactive approach. The lean retail model offers a roadmap for OEMs and dealers to navigate this transition, fostering a more sustainable and profitable future for the automotive ecosystem.

OEMs have extensive and valuable data on zero-party, vehicle performance, maintenance schedule and manufacturing details, essential for a holistic view but with key gaps. Dealers directly engage with customers through transactions, creating a complementary set of robust data that is needed to complete this view.

Captive finance companies, although subject to different regulatory restrictions, possess important data on financing and leasing arrangements that can add significant value to the picture already being developed through the recommended dealer and OEM collaboration.

Aligning these parties to contribute to, and benefit from, the OEM-developed CDP can consolidate data, reduce discrepancies and ultimately provide all parties with accurate and actionable customer and vehicle 360 insights.

Once established, this asset is the first step to the lean retail model. It lays the foundation to efficiency across so many large areas of spend in the automotive ecosystem, including advertising spend, which in the US alone is forecast to grow from $12.3 billion in 2024 to $14.6 billion by 2027, according to BIA Advisory Services.²

By leveraging data assets available through a unified CDP, OEMs can reduce their total direct spend. In addition, they can aid dealer partners in being more effective and efficient with their co-op budgets by driving more informed and targeted spend.

Optimizing operations through technology simplification

Moving beyond the disparate data environment, the technology landscape in automotive retail is equally disconnected and cluttered. Just walk the floor of any of the major automotive conferences and it’s easy to see why the digital customer experience lacks connectivity and consistency. Today’s online shopping experience is cluttered with chatbots, forms requesting basic information, dead ends and endless calls to action. Rather than providing a seamless customer experience, most platforms aim to move customers into the sales processes that have dogged the reputation of this industry throughout its history.

This is not to say that customers do not want to engage and move further through the buying process online, because our data says that they do. The latest EY Mobility Consumer Index (MCI) reveals the percentage of consumers who gather information online before buying a new car has risen from 65% in 2022 to 82% in 2024. It also found that the percentage of consumers who get this information from salespeople at the dealership dropped from 53% in 2022 to 43% in 2024. However, when it comes to purchasing a car, the MCI found that 51% prefer to be in the showroom, up from 47% in 2022.

To simplify and improve the online experience, OEMs need to work with dealers not only to drive leading practices across tier 1 and tier 3 websites but also to eliminate the clutter. They need to create new restrictions for what is allowed on tier 3 websites. Key steps to achieve this include limiting choices for website providers, limiting plug-ins and pushing to simplify the number of vendors involved in delivering the digital customer experience.

A residual goal of this consolidation to simplify the experience is also for OEMs to leverage the scale of the whole network to drive cost reductions for their dealers. Building scale and simplifying the complexity of managing multiple vendors can work to create direct savings with vendors. It also has the potential to reduce or eliminate the role of third-party digital marketing managers that add both costs and another layer to complicate the data aggregation.

Ultimately, this effort to simplify is the second key element of lean retail, as it not only aims to take costs out of the ecosystem but also drives simplification of the delivery model for all parties involved.

Providing tools to promote operational flexibility

While much of the focus in automotive retail has been on improving the digital experience, these advancements should not deter improvements in physical operations. Top opportunities within this part of lean retail fall in the areas of vehicle management and in-service delivery for aftersales.

Vehicle distribution and inventory management have been constant targets of efficiency gains, and this is increasingly true as OEMs work to manage through inconsistent demand patterns that have been exacerbated by the EV transition. To help manage this, OEMs must establish continuous improvement initiatives that leverage AI and machine learning to further enhance demand planning capabilities.

To take this capability beyond the traditional application of just managing dealer allocations, OEMs need to work with partners to establish regional distribution hubs. When paired with strategic allocation of key models to dealers, these regional distribution hubs can help to offset the inventory carrying costs of dealers and maintain high levels of vehicle availability across a larger customer base.

Transitioning to aftersales, the topics of mobile service and predictive maintenance are inextricable from the narrative of industry advancements. However, as stand-alone topics, both have proven to be difficult trends to deliver profitably, especially with passenger vehicles. Combining customer and vehicle insights allows OEMs to support dealers in developing new mobile services. These services, enhanced with predictive parts placement, can drive more profitable truck rolls for the mobile service fleet.

Strategic steps toward implementation

Adopting a proactive approach to change means recognizing the need for transformation and actively participating in initiatives that drive innovation. OEMs and dealers can lead the way by investing in venture capital, piloting new technologies and experimenting with novel retail formats. It’s also crucial to consider changes to compensation models and dealership formats, as traditional commission-driven models may no longer align with the goal of exceptional customer experiences. An increasing number of dealers are shifting to a salaried compensation model for their sales associates, aligning incentives with customer needs rather than high-profit deals. This approach, combined with a transparent and customer-centric process where customers work with the same salesperson throughout, can foster meaningful interactions that drive enduring relationships with customers.

Despite potential resistance, the benefits of cost savings, improved customer engagement and streamlined operations make a compelling case for embracing innovation in this process. The future of automotive retail will be shaped by the intersection of collaboration and technology. Successful implementation of these elements can lead to a more efficient, customer-focused and resilient retail model.

A strong working relationship between dealers and OEMs is vital for aligning strategies, sharing insights and addressing market demands effectively. Leveraging robust data analytics and maintaining clear communication can facilitate a smooth transition to a lean retail model, leading to a more resilient and profitable business. By identifying shared goals, embracing change and re-evaluating traditional practices, the industry can move toward sustainable growth and success.

Manisha Samal also contributed to this article.