The Fuse

Do Automotive Dealers Want to Sell Electric Cars?

by Paul Ruiz | @pmruiz | April 03, 2015

For many consumers, car shopping can be difficult. Between vehicle trade-ins, loan approvals, and auto price negotiations, the process of actually buying a car can be long and stressful. Consumers hope that along the way, enthusiastic auto salesmen will be there to answer questions.

Unfortunately, things can get a little trickier when shopping for an electric vehicle (EV). In fact, Consumer Reports has found that auto dealers not only lack knowledge about EVs, but in many cases have actively led consumers away from buying them.

The magazine deployed secret shoppers to 85 dealerships across four states and asked auto sales staff to answer general questions about plug-in vehicles (PEVs) and their EV stock. At 13 of the dealerships visited, secret shoppers were outright discouraged from buying an EV, and at an additional 35, salespeople recommended gasoline-powered vehicles instead. The knowledge level of sales staff, as well as the number of EVs on the lot, were found to have a significant impact on consumer interest in purchasing an electric vehicle.

Only 15 of the 85 auto dealers had 10 or more EVs in stock. Explanations varied widely for why this was the case. Most said that plug-in electric vehicles were “very popular or sold out.” Others said there was a “lack of consumer interest,” or “nobody buys them.” Some sales staff pointed out that automakers do not build many plug-in vehicles, or said that EV technology is too new.

Consumer Reports has found that auto dealers not only lack knowledge about EVs, but in many cases have actively steered consumers away from buying them.

In general, most of the responses varied depending on automaker investment in PEV technology. Dealers for Chevrolet—whose parent company, General Motors, was an early mover in the electric vehicle space with both the EV1 and Volt, and is currently building a long-range battery for its upcoming Bolt EV—tended to be much better-informed than dealers at Honda and Toyota—automakers which are less bullish on electric vehicle technology.

This important finding raised several questions about the relationship between consumers and auto dealers. How much influence do retail salespeople have over consumer purchasing decisions? Does the dealer’s substantive knowledge of plug-in electric vehicle technology correspond with customer satisfaction? And is there a relationship between satisfaction and the consumer’s willingness to buy an EV?

Researchers at the University of California, Davis conducted an important study to explore these questions. Principal investigators Eric Cahill, Jamie Davies-Shawhyde, and Thomas Turrentine combined consumer data provided by market research firm J.D. Power and Associates with semi-structured interviews. Across the board, dealers received low marks from PEV buyers on every aspect of the auto sales process, including the sales staff, the negotiation process, product delivery, and overall satisfaction. A 100-point gap separated PEV buyers from the highest-rated conventional vehicle segment, with the one exception being Tesla Motors.

Dealers received low marks from PEV buyers on every aspect of the auto sales process.

The luxury electric automaker earned industry-high marks, in part because it trims steps from its sales process and adds substantive expertise on plug-in technology. According to the report, nearly 83 percent of California PEV buyers are dissatisfied with their dealership purchase experience. By cutting down on price negotiations, paperwork, and waiting—all aspects most consumers dislike about the auto shopping process—Tesla saves the average buyer nearly two hours of time. This improved consumer satisfaction comes in spite of the fact that its delivery times run 47 percent longer than conventional vehicles and 57 percent longer than PEVs (Figure, below).

selecting your vehicle

Dealers worry about short and long-term profit margins

Many dealers interviewed by the researchers said that they believe PEVs lower their profit margins, both at the time of sale and in long-run service and maintenance costs. However, they appear to be misinformed. By examining 2013 Power Information Network data, the researchers concluded that in seven out of ten models over the study period, gross profits were actually higher than the equivalent averages for conventional vehicles by size category (e.g., midsize and compact). This means that, in terms of average gross profit margins, dealers “not only make money on PEVs, they make more money than [they do on] many conventional vehicles.”

So, why are dealerships holding back on EVs?

Potential EV buyers require much greater interaction and often have more questions than shoppers seeking traditional vehicles.

First, traditional commission structures don’t account for the additional educational efforts associated with plug-in vehicle sales. Potential EV buyers require much more interaction and often have many more questions (regarding home and workplace charging, public incentives, and more) than shoppers seeking traditional vehicles. Most of the time, sales staff are inadequately compensated through a small flat rate bonus, which can be as low as $150-$200 per sale. More often, PEVs are sold or leased to informed and creditworthy consumers—further limiting the dealership’s opportunity to earn additional revenue from financing, and reducing the potential commission for the dealership and sales staff. Furthering this impact, the dealers also say that EV owners typically trade-in less frequently, and sometimes forego buying optional charging equipment.

In short, dealers foresee fewer revenue opportunities from sales of plug-ins, which discourages them from pushing the product.

The franchise-model obstacle

Further obstacles are presented by the dealer franchise model. In the United States, vehicles are sold and serviced by locally franchised auto dealers. Like any business, auto dealers work to cover their expenses by selling cars, services, and repairs at a margin. Widespread adoption of electric vehicles is not necessarily supportive of this system.

Most auto dealer income comes from servicing—the replacement of car parts and repairs—and not new vehicle sales. Penske Automotive Group, which runs 236 dealerships in the U.S. and U.K., operates at a 57 percent gross profit margin for services and parts, and an eight percent margin for new sales. Industry giants Group 1 Automotive, Inc., Lithia, Inc., and Automation, Inc. each earn between 44 and 63 percent of their gross profits on servicing.

A challenge exists, however, because studies on the maintenance costs of EVs consistently show that electric cars are cheaper to service and repair. A 2012 study by the Institute of Automobile Economics found EV maintenance costs to be 35 percent lower than gasoline or diesel-powered cars. Thus, it’s possible that automotive dealers who rely on service income see widespread EV adoption as a threat to their business model.

EVs also present higher opportunity costs for dealers. Any vehicle that is sitting on a dealership lot costs the dealer both time and finite physical lot space. From the auto retailer’s perspective, the costs associated with that time and space often outweigh the benefits of selling EVs over gasoline-powered vehicles. Sometimes it comes down to this simple equation: Narrower margins + high opportunity costs = the difficulty of selling EVs.

Dealer innovators break the mold

According to the study from U.C. Davis, “Dealer innovators” are the exception. Diverging far from their peers, these engaged retailers not only embrace EVs, but also find ways of enhancing the technology’s appeal to consumers. Many dealerships have at least one tech-savvy person on staff—an EV specialist who is familiar with the product. These sales representatives and dealers not only see the value of electrification, but they are particularly adept at communicating the value of the technology.

Dealer innovators know how to sell EVs. They can discuss vehicle pricing in terms of total monthly cost, and can factor in savings due to leasing, government incentives, and reduced gasoline costs. They also know to place complementary items, like Level 2 stations, and high-occupancy vehicle (HOV) lane stickers, on the showroom floor adjacent to the vehicles. Many are adept at online marketing, and some volunteer their time at corporate and neighborhood ride-and-drive events to draw in curious potential buyers.

Affixing an HOV sticker to the car, assisting with tax forms, and offering consultations are value-added services that dealers can implement to improve customer satisfaction and EV sales.

What is known from these innovators—and the dealers, by contrast, that don’t exercise such practices—is that dealers represent an important link in the driver education chain. According to the report, there is a significant gap between PEV buyer satisfaction and conventional vehicle buyer satisfaction—one that Tesla has not only bridged, but significantly improved upon by offering more EV-specific support. The evidence suggests that retailers can market PEVs in a way that not only boosts customer satisfaction scores, but also lifts the marketability of EVs in a way that appeals to potential consumers. Affixing an HOV sticker to the car, assisting in the preparation of tax credit or HOV forms, and offering consultations with knowledgeable salespeople are all highly desired, value-added services that dealers could implement to improve profit margins.

Selling more plug-in vehicles will require more than just clever marketing and product placement. Public incentives will have to be better aligned with sales practices to bring more dealers into the fold. “Uncertainty over the continuing availability of public incentives such as the federal tax credit, state rebate, and HOV lane access programs, and differences in eligibility for these programs from consumer to consumer deters some dealers from marketing these benefits to consumers,” researchers Cahill and Davies conclude in a separate policy brief.

One concerning example of poor sales communication: Dealers expose themselves to legal liability for misstatements regarding the portion of the federal tax credit that consumers are eligible to claim, something that consumers do not know until taxes have been filed. Some will use carefully worded statements, but many avoid discussing this important tax credit altogether.

It’s unclear why dealer innovators are not as concerned as their contemporaries are about loss of income from servicing or financing. Further study could help answer this question—and help change the attitudes of dealers who fear a disrupted status quo.