Parts and service departments have much to offer to dealer groups in terms of profit margins and staying power. Service department margins are typically high, at 45 to 55 percent,¹McKinsey analysis of public US auto dealer groups’ annual reports via Form 10-K from the US Securities and Exchange Commission, 2020–24. and McKinsey analysis shows they are resilient. Despite economic downturns, vehicle owners must repair and service their vehicles, even if they can postpone some services. In addition, the car parc in the United States is growing at about 0.7 percent per annum,²McKinsey analysis; McKinsey Automotive Aftermarket Model as of September 2025. representing an additional four million cars on the road each year.³Spencer Jakab, “Americans’ cars keep getting older—and creakier,” Wall Street Journal, December 6, 2024. In our experience, similar dynamics are at play in multiple vehicle markets, including on- and off-road vehicles, recreational vehicles, boats, and powersports vehicles.

Nonetheless, most dealers have been able to achieve only limited or no performance improvement in their parts and service segments during the past five years. However, with focused improvements, dealer groups could enhance performance in parts and service, improve fixed-cost absorption, and reduce the pressure on vehicle sales to increase overall profitability (see sidebar, “What is fixed-cost absorption?”).

This article explores how dealer groups can improve their fixed-cost absorption by addressing technician shortages, boosting customer retention, and optimizing their operations.

Persistently flat fixed-cost absorption rates, with a few exceptions

Average fixed-cost absorption rates for large dealer groups have changed little since 2020; consequently, many dealer groups are leaving potential profits on the table (Exhibit 1).

According to McKinsey analysis, even a 1 percent increase in a public dealer group’s fixed-cost absorption rate could yield about $20 million to $40 million in additional gross profit annually.⁴Additional gross profit is calculated by taking the gross profit improvement needed to achieve a 1 percent increase over current fixed-cost absorption rates for public dealer groups and subtracting current annual gross profit; McKinsey analysis of public US auto dealer groups’ annual reports via Form 10-K from the US Securities and Exchange Commission, 2020–24. And several private and best-in-class dealer groups have demonstrated that average fixed-cost rates of 80 percent and at least 100 percent are achievable (Exhibit 2).

Challenges to improving fixed-cost absorption

What are the best-in-class dealer groups doing to maximize their fixed-cost absorption rates? In our experience, their success hinges on their efforts to boost customer retention, expand their service capacity, and increase agility to navigate shifting industry dynamics. And yet these are three areas in which dealers often face considerable obstacles.

Customer retention hurdles

In the first two years or so after customers purchase a new vehicle, they tend to use their dealer’s service department more than independent repair shops. This is largely because many of the repairs they need are covered under vehicle manufacturer warranties. Holding onto customers throughout vehicle life cycles is challenging because customers tend to seek out independent repair shops for parts and service as their vehicles age. The share of customers using their dealers’ service department remains relatively high, albeit declining, during the first three to seven years after they purchase a vehicle, so this period represents a meaningful opportunity for dealers to increase customer retention. Beginning about eight years after vehicle purchase, dealers’ share of service customers drops to 25 percent, on average, and continues to decline (Exhibit 3).

Service capacity constraints

Technician shortages are widespread and severe, hindering volume growth for dealers. The US Bureau of Labor Statistics projects an average of 67,800 openings for automotive service technicians and mechanics each year through 2033.⁵“Occupational outlook handbook: Automotive eservice technicians and mechanics,” US Bureau of Labor Statistics, updated September 16, 2025. The aging workforce and low interest in pursuing a career as an automotive mechanic or technician are contributing to shortages. Overall, shortages mean underused service facilities and lost revenue.

Shifting industry and macroeconomic dynamics

New- and used-vehicle sales margins face growing pressure from increasing supply, rising interest rates, and higher carrying costs. Total retailer profit per unit has continued to decline since peaking in December 2021 because supply chains have normalized and production ramped up, increasing availability.⁶Auto dealer industry, Mercer Capital, 2024. And as financing costs remain elevated amid persistently high inflation and interest rates, consumers are less inclined or able to purchase new vehicles. Meanwhile, although it will take an extended period for the car parc to reflect a higher share of battery electric vehicles (BEVs), rising BEV sales represent somewhat of a headwind for dealer service shops⁷Maximilian Fischer, Nicolaas Kramer, Inga Maurer, and Rachel Mickelson, “A turning point for US auto dealers: The unstoppable electric car,” McKinsey, September 23, 2021. because BEVs require fewer routine maintenance services than internal combustion engine (ICE) vehicles. On the other hand, BEV repairs can be complex, so BEV owners are more likely than ICE vehicle owners to use dealer shops for these services. Servicing BEVs also means dealers must purchase new equipment, train technicians, and adapt their operating models to accommodate the needs of BEV owners.

Dealer groups can mitigate the impacts of these challenges and raise their fixed-cost absorption rates by implementing specific, targeted improvements.

Maximizing fixed-cost absorption with operational best practices and leading-edge analytics

While dealer groups cannot control macroeconomic and industry dynamics, they can realize efficiencies and achieve growth via small increases in their fixed-cost absorption rates—or even reach the 80 to 100 percent rates (or more) that private and best-in-class players have shown are eminently achievable. Such efforts should be focused in three areas: enabling volume growth, enhancing throughput to meet demand, and increasing revenue per repair order (RO).

Enabling volume growth

In our experience, dealers that successfully grow their parts and service sales volumes focus on optimizing their operations in the areas described below.

Fostering customer loyalty and retention. In our experience, creating personalized customer offerings and interactions can increase conversion rates by about 20 percent. Personalization is more accessible than ever with digital marketing tools and analytics powered by gen AI and a growing share of connected vehicles. By anticipating customers’ vehicle maintenance needs and engaging them with personalized outreach, dealers can bolster customer lifetime value. Best-in-class customer life cycle management begins with developing granular customer profiles that combine dealer customer-relationship-management system information and external data sources (local customer search patterns and third-party demographic information, for example). Such robust profiles allow dealers to tailor incentives more effectively and send practical, customized, and timely messages regarding vehicle or service needs.

Optimizing appointment scheduling. Convenience motivates customer decision-making and can propel customer loyalty over time. Dealers can ensure that their service availability aligns with their customers’ needs, potentially by shifting or extending their hours to give customers flexibility and the option to schedule appointments at various locations within 24 to 48 hours.

Expanding interactive and self-service options. By deploying digital tools that allow customers to receive information and accomplish tasks via multiple channels, dealers can improve customer experience and retention by enabling customers to engage with their service departments as easily as they do with their sales departments. For example, via an app or website interface, customers could choose which service center is most convenient for them, make and manage appointments, and get driving directions. Dealers can notify customers via email or text when a repair is underway, recommend repairs based on technician assessment (with pictures and videos), allow customers to approve and pay for their repair, and follow up with a customer experience survey and a link to book future appointments.

Enhancing throughput to meet demand

Even the most sophisticated marketing, analytics, sales, and outreach cannot increase customer satisfaction if dealers’ service capacity is limited, so dealers need to optimize their service centers’ throughput to meet volume. The same principles apply to filling vacant technician openings and reducing turnover. A few such operational enhancements are detailed below.

Tackling the technician shortage. Flexible appointment scheduling benefits customers, but it can also help recruit and retain the technicians needed to enable that flexibility. Dealers could attract candidates for their open technician slots via flexible hours (including three- or four-day work weeks) and multiple shifts. Dealers can also explore engaging training experiences for new or prospective technicians who are particularly enthusiastic or adept, such as having senior technicians supervise them in servicing luxury or exotic vehicles. To build a talent pipeline, dealers can partner with local trade schools and community colleges.⁸Kimberly Borden, David Ebenstein, Inga Maurer, and Asutosh Padhi, “The Titanium Economy: How to overcome the challenge of filling high-quality jobs,” McKinsey, October 26, 2022. Targeted training programs and scholarships can help provide a steady source of talent for service shops as well as clearly defined career paths for area residents.

Optimizing workflows. Smart work assignments, including ensuring that technicians are matched to the appropriate assignments, optimizing parts stock, and enhancing express and mainline team structures, are essential to create workflows that support higher throughput. For example, dealers can create a single queue and operation for express and mainline work to allocate technician time effectively. Dealers can also deploy predictive analytics using service history and real-time vehicle status (mileage and component sensor detections, for example) to proactively ensure labor and inventory availability and reduce out-of-stock rates for parts or lead times for more custom parts.

Eliminating process waste. Going paperless can help improve efficiency and provide other benefits: Technicians can submit paperless RO annotations to service managers, for example. When media usage is complete and consistent for all ROs, it helps reduce the time technicians and other team members spend at desks and increase interaction time with customers. In our experience, other benefits of going paperless include increased data security (including avoiding red flag law violations and fines), technician efficiency, team unity, data efficacy, and customer transparency.

Implementing gen AI–powered technician support. Providing technicians with a gen AI–powered chatbot can improve productivity by guiding technicians through repairs, troubleshooting issues on the spot, and providing step-by-step guidance based on technician inputs, such as the year, make, and model of a vehicle. In addition, a chatbot can speed up the ordering process by simply talking through the required parts while the system matches up the vehicle with specific part numbers in the inventory.

Increasing revenue per RO

Enabling service departments to make the most of each opportunity to increase revenue and volume means implementing three key practices at the RO level to maximize the revenue per RO:

• Next-gen additional service requests. This involves using high-resolution photos and video diagnostics that can help increase customer trust via transparency and convert service requests.
• Multipoint vehicle inspections. Multipoint inspections can help identify potential irregularities and educate customers on their vehicles’ needs, better informing decision-making. The inspection report can also include personalized recommendations for additional accessories or services based on the customer’s profile. While most dealer shops perform multipoint inspections, many may not follow the best practice of inspecting vehicles within 30 to 60 minutes of when they are dropped off. Prompt inspections provide customers with timely updates on their vehicles and sufficient time to approve any additional services, and they ensure that any necessary parts can be ordered.
• Predictive parts ordering. By understanding what parts are historically sold, as well as which vehicles and customers are booked for services in a given week, dealers can be more dynamic in ensuring the correct parts inventory is available. This can improve RO conversion by reducing customer wait times and free up cash for dealers that are holding large volumes of slow-moving inventory.

Getting started: Next steps for dealer group leaders

Successfully implementing the strategies discussed above requires a structured plan that addresses dealership capacity, data and analytics capabilities, and operational improvements. By systematically evaluating service potential and eliminating bottlenecks, dealers can maximize profitability.

To begin laying the groundwork for a turnaround, dealers can consider the following aspects of their existing operations:

• two to three drivers contributing directly to underperformance on fixed-cost absorption as well as actions taken to date to adapt to macroeconomic changes such as labor shortages
• true demand for parts and service (as represented by the number of vehicles currently in operation) and how demand may have shifted in the past three to five years
• success in attraction and retention of service technicians compared with peers
• the total value potential from optimal fixed-cost absorption and the top two or three business areas or micromarkets in which capital could be redeployed (for example, a capacity assessment could help determine the full potential profit if every service bay were fully utilized)
• the fundamental net-new capabilities required to reach full profitability potential, such as dashboards and reports displaying service bay utilization metrics
• the availability and use of data throughout the parts and service journey
• any opportunities to adjust incentive models to encourage desired behaviors and reward performance that enhances dealer success and profitability

Finally, once dealers have gained a better understanding of their current state and full potential, they can create a road map for turning their parts and service departments into meaningful profit pools with long-term resilience. Dealers that have already mastered initial operational improvements still have opportunities to “rewire” their dealerships⁹Inga Maurer, Nicolaas Kramer, and Khalid Quidwai, “Boosting auto sales productivity: A playbook for excellence,” McKinsey, January 23, 2025.—using data to achieve next-gen growth and efficiency. This could include implementing fully predictive and automated inventory management, bot-based lead management of new and existing customers based on real-time shop capacity, and service adviser “agents” that provide a personalized and streamlined customer experience.