2024 Automotive Retail Pulse Survey

Accelerating automotive parts & services into the digital age?

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Introduction:?

Over the past six months, we have engaged in numerous one-on-one discussions with executives, senior leaders, and subject matter experts from companies specializing in the automotive aftermarket parts and services sector across Canada.? These have included automotive parts distributors and retailers, service centers, dealer groups, and automotive technology providers. Through our conversations, we heard first-hand about the external forces reshaping the industry, what consumers are demanding based on their experiences in traditional retail, how executives are responding in terms of strategic priorities and investments, and how they are proactively hedging the many risks facing their operations today.??

The insights and feedback we gathered highlight the rapid evolution the industry is undergoing. A common theme in our conversations was the emphasis on changing customers behavior and serving them with convenience on their terms and on their time has accelerated the need for digital transformation and the inherent need to build-out basic capabilities to support an omni-channel experience. Despite the unique aspects of the automotive parts industry that lends itself towards in-person shopping experiences (highest rate of returns in the retail industry1 as well as advice and customer support available in-store), the eCommerce segment of this sector in Canada has continued to grow at a rate of 8.6% annually between 2017 and 20252. Over the same time-period, general eCommerce in Canada grew 12.9% annually3.??

This continued trend shifting customers towards more digital experiences will be further amplified by the rapid development of technology such as Artificial Intelligence (AI) and Machine Learning (ML) & most recently Generative AI (GenAI) as customers come to expect more interactive and personalized shopping experiences. For example, eBay motors has recently launched an AI powered parts and service recommendation engine?. However, these new technologies enabling complex digital shopping experiences require modernized systems and vastly improved data management to be in place. Despite these next generation technologies presenting new opportunities to auto retailers, most executives we spoke with were more concerned with the challenge of balancing large capital expenditures, like system upgrades, with rising operational expenditures. Shifting customer behaviours and expectations throughout the pandemic have led to changing business models. For example, some service centres are exploring the possibility of shifting operations outside urban areas, repurposing physical locations to other high-volume businesses (e.g., car washes), or selling off certain locations altogether.?

The future for automotive retail is both exciting and unnerving. Executives need to think long and hard about serving their customers ever changing needs and their underlying operations to support them given the tumultuous landscape they are operating in. Careful consideration and planning need to go into their technology roadmap and expenditures. Defining how they will differentiate and drive loyalty amongst customers in an increasingly competitive market will be critical, and having a laser focus on cost management while building resiliency into the business will be key.???

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Thank you,?

Darren Plested?

Partner, Deloitte Canada?

National Automotive Sector Leader??

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Marty Weintraub?

Partner, Deloitte Canada?

National Retail Sector Leader?

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Automotive retail is in a transformative state:?

The automotive retail industry is currently undergoing a transformative state due to various factors. The weakened economy, characterized by heightened interest rates, scarce skilled labour force, and lower levels of discretionary spending combined with a scarce supply of new vehicles during COVID, has led consumers to prioritize vehicle maintenance, prevention, and prolonging the use of their vehicles which has been a positive trend for those in the automotive repair retail space, the average age for a vehicle in Canada is now 10.5 years?, compared with 9.7 years in 2017?.?

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While there are several tailwinds for the automotive repair retail sector, respondents to the survey cited a heightened competitive landscape as a major challenge facing the industry. This is driven by the entry of new non-traditional players from big-tech industry and international organizations, particularly those based in the US. These new entrants bring advanced technologies and data-driven approaches to the market that appeal to the growing segment of digitally savvy consumers, posing a formidable challenge to traditional players. In response to this intensifying competition, many respondents have recognized the significance of implementing loyalty programs to enhance customer retention in this fiercely competitive space and already have launched or are in the process of establishing their own. These loyalty programs are designed to incentivize customer retention by offering rewards, discounts, exclusive benefits and a personalized experience. The heightened focus on loyalty programs increases the need for auto retailers to maintain robust Customer Relationship Management systems (CRMs) and network wide customer engagement systems.??

Moreover, the digital transformation of the automotive retail sector is accelerating, with more consumers preferring to research, compare, and even purchase vehicles online. A survey conducted by the US Census Bureau forecasted a significant increase in cars purchased online, with the share of online purchases rising from 2% in 2022 to 15% in 2026?. This and other shifts to digital experiences come as a result of the rising purchasing power of the millennial demographic who expect more digital shopping options, with 70% reportedly preferring to purchase services online?. This trend is forcing traditional brick-and-mortar outlets to enhance their online presence and offer seamless digital experiences to attract and retain customers. The integration of eCommerce platforms, virtual showrooms, and online service scheduling tools is becoming increasingly important in staying competitive in the digital age for the industry.?

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The new-ish automotive retail consumer seeks a frictionless, personalized experience driven by trust and pricing?

The automotive retail industry is witnessing a shift in consumer expectations, with the digitally savvy consumer seeking a seamless, convenient and personalized experience, built on trust and pricing considerations. These consumers desire engagement that is frictionless, along with efficient servicing, targeted marketing, timely promotions, proactive communication, the ability to schedule appointments online, and real-time interactions for service confirmations and upgrades. However, the current service experience often falls short in capturing and cultivating customer loyalty effectively. As a result, trust has become a pivotal factor in influencing consumer decisions, with customers placing great importance on the sticker price, for example last year 77% of Canadians Deloitte surveyed stated they planned on shopping around for the best deals for their holiday shopping. Most executives in our survey identified “superior customer service” as their competitive advantage and a key factor contributing to their success. It is important to recognize that strong customer service has now become a baseline expectation in the industry and retailers must utilize new competitive advantages such as enhancing their online marketing and eCommerce capabilities. Leveraging these capabilities unlocks valuable information through data and analytics, enhancing the customer experience by predicting service needs or providing targeted offers through loyalty programs. Executives in our survey have explored different avenues to set pricing for products and services with dynamic pricing identified as a potential next-generations capability for the industry. Implementing dynamic pricing processes allows for more agile response to competitor pricing strategies, especially as prices become a primary decider for many consumers. However, survey respondents currently lack the capability to implement dynamic pricing. All advanced retail capabilities such as dynamic pricing and robust loyalty programs require a solid baseline of organized and reliable data. Establishing a rigid data ecosystem requires investments in systems, security and personnel. Staying ahead of the curve with investment and focus will help those in this industry unlock capabilities to keep businesses competitive.?

Automotive service centers we spoke with reported roughly 100% customer retention during warranty period, and roughly 60% retention post-warranty, as a result, executives are fixated on increasing post-warranty retention by augmenting online engagement (most appointments are still booked via phone with a consistent trend towards online bookings) and prioritizing operational excellence. By delivering a seamless and personalized experience that empowers customers to engage in a mode of their preference, retailers can build trust and loyalty among their customers, ultimately driving sales and profitability through increased customer retention.?

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Technological advancements and strategic shifts?

The automotive retail industry is experiencing a paradigm shift driven by constant technological advancements, the rise of big data and the emergence of AI/ML, and an evolving competitive landscape. The market remains fragmented, with market share spread across numerous players, heightening competitive pressures from both international and domestic expansions. Newer eComm based entrants in the parts sector (e.g. EbayMotors, Parts Avatar, Amazon, etc.) are leveraging the consumer shift towards digital experiences and are capturing extensive customer data to target the casual consumer. For example, Amazon has grown its parts sales 65% since 2019?. Furthermore, the increasing importance of B2B interactions is driving the need for enhanced interfacing with enterprise systems to streamline operations, improve data flow, and better support complex business relationships. In response, many established organizations are investing significantly in modernizing their Enterprise Resource Planning (ERP) and CRM systems as well as enhancing their eCommerce capabilities.??

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Executives in our survey have identified driving strong service to customers as a focus. In the service space, organizations are investing in systems to improve their omnichannel customer experience with automated booking and digital service interactions. The healthcare industry, pushed by the effects of COVID-19, has successfully adapted to the digital service environment. What started as a necessity for the industry has quickly become the norm as the service provides equitable access to individuals who do not have access to healthcare. In many ways, the automotive service segment contains parallels to the model healthcare has adopted. Automated booking systems allow organizations to optimize in-person service work and workforce management as people with the right skills are assigned to their task. In a network-driven industry like Automotive Retail, it is crucial to know your customers and build intimacy with their needs. An automated booking system satisfies the heightening consumer need for convenience by allowing customers to engage whenever, and however they choose. Additionally, digital service interactions help diagnose and pre-screen potential issues that customers are encountering, providing data that is valuable for future customer interactions. One organization has created a bespoke customer interaction platform for servicing which allows for real time approval of additional services, increasing transparency throughout the process. As a result, the organization has experienced stronger customer retention with the app boosting several relevant customer satisfaction metrics such as their Customer Satisfaction Index (CSI). These investments in technology represent many years of technical debt that auto retailers are now catching up on as they strive to improve their customer experience and efficiency in an increasingly competitive market.?

In addition to technology upgrades, there is a growing emphasis on sustainability and environmental consciousness within the industry. Developing government regulations and mandates in response to the climate crisis will see steady adoption of EVs in the market. Customer demand drives the shift towards a greener alternative to vehicles as the next generation opts for environmentally responsible choices. Automotive retailers should prepare for the upcoming, and largely inevitable change in the industry by building out infrastructure to service this new segment.?

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Hedging future risks with skilled workforce and supply chain resilience?

To mitigate future risks, automotive retailers are focusing intensively on securing skilled technicians, building supply chain resilience, and managing labour and real estate costs proactively. The industry is grappling with a shortage of skilled workers, exacerbated by high turnover rates and a dwindling labour pool, prompting companies to ramp up immigration and international recruitment efforts. Many of the organizations we spoke with highlighted labour challenges as the most critical and pressing challenge they are currently facing, and some have even invested in dedicated resources focused on international recruiting. These shortages are having upward pressure on wages, with some of the service centers we spoke with reporting wage increases of up to 50% over the last 3 years.??

Lessons from the COVID-19 pandemic have underscored the importance of supplier diversification. Retailers are also enhancing their cost management capabilities through advanced demand forecasting, optimized scheduling, and rethinking business models to minimize and diversify their footprint in high-cost urban areas. For example, some organizations we spoke with have considered leveraging their existing footprints to expand into related businesses such as car washes or wheel repair services and have discussed consolidating service locations to lower cost industrial parks. Additionally, the anticipated rise of autonomous vehicles is poised to shift vehicle ownership models towards fleets, impacting consumer-focused service centers and increasing the need to prepare for lower margin, B2B-focused business models.??

The last 5 or so years have seen the acceleration of continued trends of shrinking labour pools and rising costs, what auto retailers choose to invest in over the next 5 years will determine their ability to adapt to this shifting risk landscape.?

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Cautious approach to the EV transition?

Automotive retailers are taking a cautious approach towards the transition to electric vehicles (EVs), observing market developments before overhauling their service models. This impending transition has forced those in the industry to make significant capital investments to prepare in the form of fast chargers, specialized equipment, and specially qualified technicians. Despite these growing investments, only 13% of new vehicles registered in Q2 2024 were BEVs or PHEVs1? and there is a notable shortage of technicians skilled in servicing these vehicles.??

Note: ZEV include all Battery Electric and Plug-In Hybrid Electric Vehicles. Canadian Government Regulations stipulate that by 2026 20% of all new vehicles sold must be ZEVs, 60% by 2030 and 100% by 2035.?

In the future, this skilled labour shortage will only grow, with a forecasted 10K FTE labour shortage in the auto service industry at large over the next 10 years11. On the flip side, the transition to EVs may cause the service model to shift from repair to replace for many of these EVs, compounded with the reduced maintenance requirements for EVs, roughly 40-50% less maintenance expenses than comparable ICE vehicles12, the average Canadian vehicle will likely require less maintenance than in years past. It is yet to be determined how the shift to EVs will impact the already tightly constrained labour market, but what is known is that it will require significant capital investment in both talent and equipment. The average EV tire needs to be replaced up to 20-50% sooner than an ICE vehicle due to the increased weight and torque13, leading to more frequent visits to these service centers for these types of service, highlighting a potential opportunity for service centres in areas more suited towards EVs. Although the transition introduces the risk of highly Original Equipment Manufacturer (OEM) controlled parts and servicing, third party tire service centers will benefit from this change. Retailers are aware that the eventual widespread adoption of EVs will necessitate significant changes to their service models & infrastructure, but for now, they are opting for a patient, observant strategy to navigate this transformative period.?

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Sources??

1. Inman, Danielle. “Retail Returns Increased to $761 Billion in 2021 as a Result of Overall Sales Growth.” NRF, January 25, 2022. https://nrf.com/media-center/press-releases/retail-returns-increased-761-billion-2021-result-overall-sales-growth.?
2. “Canada Automotive Aftermarket, Forecast 2025, Analysis, Outlook.” Frost & Sullivan, December 26, 2018. https://store.frost.com/strategic-analysis-of-the-canadian-automotive-aftermarket-forecast-to-2025.html.?
3. IBISWorld. “E-Commerce & Online Auctions in Canada - Market Research Report (2014-2029).” IBISWorld Industry Reports, July 2024. https://www.ibisworld.com/canada/market-research-reports/e-commerce-online-auctions-industry/.?
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8. Openbay Staff. “Nearly 70% of Millennials Prefer to Acquire Automotive Repair and Maintenance Services Online.” Openbay Overdrive - Your Source for Everything Auto Care, October 28, 2022. https://blog.openbay.com/nearly-70-of-millennials-prefer-to-acquire-automotive-repair-and-maintenance-services-online/#google_vignette.?
9. Droesch, Blake. “Amazon US Ecommerce Sales by Product Category 2023.” EMARKETER, March 24, 2023. https://www.emarketer.com/content/amazon-us-ecommerce-sales-by-product-category-2023.?
10. Government of Canada, Statistics Canada. “New Motor Vehicle Registrations, Second Quarter 2024.” The Daily?-?, September 9, 2024. https://www150.statcan.gc.ca/n1/daily-quotidien/240909/dq240909c-eng.htm.?
11. Powell, Naomi, and Ben Richardson. “Preparing Canada’s Skilled Trades for a Post-Pandemic Economy.” RBC Thought Leadership, September 2021. https://thoughtleadership.rbc.com/wp-content/uploads/Skilled-Trades-Report.pdf.?
12. “Electric Vehicles.” CAA. Accessed September 1, 2024. https://evbuyersguide.caa.ca/content/costs.?
13. Miznazi, Ashley. “New Tires Every 7,000 Miles? Electric Cars Save Gas but Tire Wear Shocks Some Florida Drivers.” Miami Herald, January 30, 2024. https://www.miamiherald.com/news/local/environment/climate-change/article284533695.html.?

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