Editor’s Note: This article was originally published in the September/October edition of Dealer magazine
In today’s volatile economic environment, car dealers face numerous uncertainties that can significantly impact their business operations, profitability, and long-term strategy.
Scenario planning is a powerful tool that can help dealerships navigate these challenges by preparing for various future possibilities. This approach allows dealers to proactively adapt to changing conditions, ensuring resilience and agility in the face of unknowns such as the upcoming presidential election, potential estate tax changes, and the push towards electric vehicles (EVs).
What is Scenario Planning?
Scenario planning involves developing multiple plausible future scenarios based on various uncertainties and creating strategic plans for each one. It helps businesses anticipate potential challenges and opportunities, ensuring they are better prepared for different outcomes. For car dealerships, this means thinking through the implications of different economic, regulatory, and market conditions and deciding on actions that align with these scenarios.
Why is Scenario Planning Important for Car Dealers?
Given the current market dynamics, scenario planning is crucial specifically for car dealerships because of the following reasons:
- Uncertainty Around Estate Taxes: With potential changes to estate tax laws following the 2024 presidential election, the current estate tax exemption could revert to the lower 2017 levels of $5.6 million per person indexed for inflation after Dec. 31, 2025. This would increase the tax burden on many dealership owners, potentially affecting succession plans and the financial health of their businesses. Scenario planning helps dealers prepare for these changes by evaluating their estate planning strategies and considering alternative approaches to mitigate tax impacts.
- Push for Electric Vehicles (EVs): Regulatory changes and government mandates are driving a shift towards electric vehicles, but consumer demand for EVs is still developing. Nearly 4,000 car dealers have expressed concerns about the pace of the Biden administration’s EV mandates, citing a surplus of unsold EVs piling up on lots. Scenario planning allows dealers to explore various pathways to align with these changes, whether that means preparing for a rapid transition to EVs or advocating for a slower, more manageable shift.
- Evolving Market Conditions: Economic pressures, such as rising inflation and interest rates, supply chain disruptions, changing consumer behavior, and the threat of digital attacks all create an unpredictable business environment. By using scenario planning, dealers can identify which factors are most likely to affect their operations and develop strategies to mitigate risks or capitalize on emerging opportunities.
Applying Scenario Planning to Dealership Operations
Here are practical examples of how car dealers can use scenario planning to align their strategies with evolving contingencies:
1. Preparing for Estate Tax Changes
- Review Current Estate Planning: Dealers should assess their current estate plans to determine how they would be impacted by potential tax changes. For example, they could explore using tools like Spousal Lifetime Access Trusts (SLATs) to maximize their current exemptions and minimize future estate taxes.
- Create Contingency Succession Plans: Develop multiple succession scenarios that account for different tax rates and estate planning laws. This could involve restructuring ownership, transferring assets, or implementing buy-sell agreements to ensure smooth transitions and avoid unexpected tax burdens.
2. Navigating the Shift to Electric Vehicles (EVs)
- Flexible Inventory Strategies: Dealers can use scenario planning to determine how much of their inventory should consist of traditional internal combustion engine vehicles versus electric vehicles. They might also create strategies to manage excess inventory, such as offering special financing for EV purchases or partnering with charging networks to add value to EV sales.
- Staff Training and Infrastructure Investment: Develop multiple scenarios for investing in EV infrastructure and training programs. For instance, a dealership might prepare a plan to invest heavily in charging stations and staff education if EV demand spikes, while also having a fallback plan to limit investment if consumer adoption remains slow.
3. Mitigating Economic Pressures and Financing Challenges
- Adjust Pricing and Incentives: Scenario planning can help dealers model the impact of different pricing strategies under various economic conditions. They could prepare for a scenario where inflation continues to rise by offering more affordable financing options or increasing the inventory of lower-cost vehicles.
- Diversify Revenue Streams: Consider diversifying into related businesses such as car rentals, fleet management, aftermarket services, or reinsurance. This can help stabilize revenue if core vehicle sales are negatively affected by economic conditions.
4. Leveraging Technological Advancements and Changing Consumer Behavior
- Invest in Digital Tools: Develop scenarios that involve investing in digital sales platforms, online customer engagement tools, and digital security to protect the business from bad actors. This could include creating virtual showrooms, enhancing digital marketing strategies, and implementing contactless sales processes to meet the changing preferences of consumers.
- Hybrid Sales Models: Plan for various scenarios where in-person and online sales channels are balanced differently based on consumer behavior trends. For example, a dealership could develop a hybrid sales model that combines virtual consultations with in-person test drives to cater to a wide range of customer preferences.
By implementing scenario planning, car dealers can better navigate the uncertainties of today’s and tomorrow’s market. This approach allows them to proactively manage risks, capitalize on opportunities, and ensure business continuity regardless of what the future holds. In an era of unpredictability, having a flexible, forward-thinking strategy is key to sustaining success and securing the future of the dealership.
By considering these scenarios, dealerships can not only survive but thrive in a rapidly changing world.
