Every so often, a piece of industry analysis lands that cuts through the noise. The McKinsey work on dealer fixed-cost absorption does precisely that: it shines a spotlight on a structural issue that has been building quietly in the background for years, and which now sits at the heart of the profitability challenge facing UK and European dealer groups. The headline is simple but profound — after five years of volatility, cost inflation and margin normalisation, the strongest determinant of dealer resilience is no longer new-car throughput, but the ability to run parts and service operations at scale, with discipline and a genuine technological advantage. 

For someone like me who has studied the industry for nearly 25 years, it is not the “what” that is surprising, but the “how fast” the economics are changing.

A Profit Engine Hiding in Plain Sight

Service operations have always carried the highest structural margins in the dealership model — typically 45–55%, according to the analysis.  Unlike vehicle sales, they are counter-cyclical, volume-resilient and supported by a growing car parc. Yet despite these fundamentals, the report shows that most large groups have made little to no progress in fixed-cost absorption since 2020. The median public group sits around 59%, flat for years.

Contrast that with best-in-class operators achieving 80–100% absorption, and you can immediately see the scale of the opportunity gap (page 4 visual). These aren’t marginal gains — a single percentage point improvement delivers $20–40 million of incremental gross profit for a large public group.  Scale that to the UK market and you understand why investors, lenders and consolidators have become more forensic about service operations than at any point in the past decade.

The Three Structural Challenges Dealers Can’t Ignore

The report identifies three frictions that explain the widening divergence between top performers and the median:

1. Retention falls off a cliff after year three
   The data on page 5 shows it sharply: dealer share of service spend drops from 52–61% in year one to 25% by year eight, and continues to fall into the low teens thereafter. The decline is predictable, but the lack of intervention is not. Many groups still have no coherent retention engine beyond warranty-period capture. In a world where BEVs reduce routine service needs, holding on to customers for as long as possible becomes existential.
2. Technician shortages are now a structural supply constraint
   The US data shows 67,800 technician openings per year through 2033 — a trend mirrored in the UK.  This is not simply a recruitment problem; it is a capacity problem. A dealer can put unlimited marketing firepower into the top of the funnel, but if the workshop cannot absorb demand, every investment above that line is wasted.
3. Margin compression in vehicle sales is accelerating
   As supply normalises and rates remain elevated, the “super-cycle” margins of 2021–2022 have disappeared. Dealers are now back to fundamentals. BEVs add a further twist: fewer routine services but more complex repair work, requiring capital investment, training and new workflow design. This asymmetry will widen — and only those with predictive, data-rich service operations will extract value.

Rewiring the Service Model: What Best-in-Class Dealers Do Differently

The most valuable part of the report — and the most aligned to my own thesis at Cambria Private Capital — is the framework for what separates the winners:

1. Personalisation at scale powered by connected data and gen AI

The strongest operators are already combining CRM data, vehicle telemetry and digital behavioural insights to target customers with precision, raising conversion rates by c.20% (page 6).  This moves the model from reactive service to proactive lifecycle management.

2. A flexible labour model that treats technicians as a scarce asset

Three- and four-day working weeks, multi-shift operations and deep partnerships with technical colleges are no longer “nice to haves”; they are strategic moats. It mirrors what I am seeing across our own portfolio — talent pipelines are becoming as important as vehicle pipelines.

3. Paperless, frictionless, end-to-end service journeys

The work on digital self-service, photo- and video-based upsells, and real-time approvals isn’t new — but uptake is still surprisingly low. The best shops inspect every car within 30–60 minutes (page 8), unlocking same-day authorisations, higher revenue per RO, and better technician utilisation. 

4. Predictive parts management

Understanding which vehicles are booked for the coming week and dynamically matching inventory to the projected RO mix reduces downtime and lowers capital tied up in slow-moving parts. This is precisely where AI-enabled automotive SaaS is heading — and why we continue to focus so heavily on workflow automation and service-side intelligence in our CPC thesis.

What This Means for UK Dealer Groups and Investors

For dealer principals, the message is unambiguous: fixed-cost absorption is no longer a back-office metric. It is a strategic differentiator, a capital allocator and a valuation driver. As consolidation accelerates, buyer appetite will increasingly depend on service-side profitability, technician throughput, and the maturity of the tech stack behind them.

For investors, this data reinforces our own posture: the next wave of value creation in automotive retail will come not from the scale of doors, but from the scale of operational intelligence. The groups that win will be those that can rewire their service operations around data, automation and customer lifetime economics.

And for the wider industry, this report is yet another reminder that the automotive sector continues to evolve faster than many expect — and that the winners are those already adapting today. Have a great week!