Despite continuing developments in the way cars are retailed today, this process – as acted out in a traditional new-car dealership – remains an archaic way of selling cars. This system has been developed primarily to suit the needs of the carmakers and their distributors before the needs of their customers. Mike Wattam reports.
This mode of operation is prevalent in the vehicle sales function and is continued to a lesser degree through to all aspects of the after-sales process. It results all too often in a measurable degree of customer alienation.
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The simple fact is that the traditional adversarial relationship between the consumer and traditional dealers is not liked by consumers – or for that matter by relatively enlightened dealers.
The rate of change
So, have the current developments in distribution and retailing helped to reduce customer alienation? just-auto believes they have to a degree, and this paper provides a commentary upon those recent developments, their effects, and ways in which the vehicle retailing industry might be expected to change in the not too distant future.
Industry pundits have for some years been predicting a sudden and complete transformation of vehicle retailing, citing major forces for a quantum change such as ‘The block exemption’, or the all-pervasive ‘internet revolution’. But the revolution hasn’t happened. Instead, the car business has learned to adapt to an increased legislative load. As a large and highly complex infrastructure consisting of huge and intractable investments, the car retailing system can evolve only slowly, reacting to and dealing with genuinely changing market forces.
Why change?
So, what are the drivers of change?
- As more cars can be made than are sold, the carmakers remain locked in mortal combat in a bid to keep their own factories running at the expense of their competitors. Inevitably such competition gravitates to net retail pricing with knock-on effects on dealer profitability.
- Prices to the consumer are continually under pressure, in turn forcing pressure on manufacturing, distribution and retailing costs – with most carmakers now operating very efficiently (plant utilisation apart). It is therefore no surprise that their focus is upon eliminating further system cost from distribution and retailing.
- The development of ‘Consumerism’ has pushed car manufacturers and dealers to advance, modify and fine-tune their processes to stay competitive, while adapting to changing consumer needs.
- The e-enabled consumer is driving change in the way – and the place – in which car-related business is transacted.
- The intervention of ‘block exemption’ in the evolutionary economic process – or the probable imminent withdrawal of it – has brought further pressure into an already stretched system.
These forces appear to suggest that a substantially modified retailing model is required to deal with all these pressures for change, in a positive and consumer-friendly way.
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By GlobalDataWhich new models can work?
We have seen new retailer types developing in response to these forces for change:
1. The traditional ‘mom-and-pop’ dealer has adopted at least some elements of customer-facing e-commerce – evolving in a measured way to become so-called ‘bricks-and-clicks’ dealers.
2. Larger dealers adopting a new approach to their customer facing activities by attempting to create a more customer friendly atmosphere. Selling and servicing cars is likely to be found only behind palm trees, coffee shops and piles of Lego bricks – an outlet category often referred to as the ‘Experience Centre’.
3. Dealers offering multi-franchises under one roof – usually separated by partitions and corporate identity – but there is only one ownership, one piece of land and only one pot of money. This process has been given added impetus by the current provisions of ‘The block exemption’ which among other things gives dealers more freedom to pursue multi-franchising.
4. The more widespread entry of carmakers into car retailing investment – with either a ‘hands-on’ or ‘hands-off’ approach, with the objectives of controlling the strategic retailing points by owning their retail network.
5. Co-operatives of independent dealers – both ‘mom-and-pop’ and small groups getting together either under a single franchise or in geographical locations, to give themselves more collective weight in primarily the buying function – and we should not forget that their relationship with their franchisor car-maker ‘partners’ is that of major buyers.
6. And the darling of the consumer campaigners, the virtual dealership which we are expected to believe doesn’t need to exist at a finite location, but in the ‘internet space’ where cars may be ordered at significantly lowered prices – yet the mechanisms for making it happen still need to exist in the real world of traditional car dealerships, or at least in vehicle preparation units.
7. Current players – typically independent car service/repairers obtaining the right to hang franchise signs outside their premises.
8. New market entrants – normally specialists in particular processes or sets of processes.
The unfortunate consequence is that with the constant squeeze on operating margins and the unlikely prospect of achieving worthwhile profitability, there is no real evidence that any of these new models is going to be able to build some real profitability into the old processes when involved in car retailing. The key to profitability must lie elsewhere.
Drivers for change
There will be further developments and changes of direction in the near future:
- The full impact of the 2003 ‘block exemption’ revisions is yet to be felt in the areas of freedom of information and in geographical boundaries, and this is likely to enable independent workshops to take away at least some further market share from traditional franchised dealers.
- New alternative fuels – and motive powers such as hydrogen – may well require an innovative approach to motor retailing with parallel infrastructures needed to respond to the new technologies, probably this will be enacted through entirely new physical outlets equipped to deal only with the new ground-breaking technologies.
- Political pressure may change the pattern and quantity of car purchases – and indeed expansion of the car parc.
- Mobility providers and car share clubs may increase the mileage achievement by each car, thus reducing the numbers of cars sold.
- The continuing commoditisation of the car will inevitably change consumer-buying patterns further, making the traditional physical dealerships less important.
- Increasing service intervals will place more pressure on dealer operating margins as their KPI of ‘hours sold per vehicle’ continues to decrease.
Forces against change
But let us not forget that there remains no single viable alternative to a wide-spectrum conventional retailer-based distribution system – at least for IC engined vehicles – and is unlikely to be while on one hand retailers continue to be able to adapt to changing circumstances, and on the other hand the whole vehicle retailing system remains so marginally profitable.
The profitability problem has usually successfully deterred any potential significant new market entrants from entering the fray. It also inhibits carmakers and their retailers from attempting any radical change – the financial risk and probability of failure is simply too great to countenance.
The future
The scenario just-auto is expecting to occur is an increased rate of attrition and evolution of current franchised networks, albeit with some operational merging with previously un-franchised specialists so that sales points may be less frequent, while service points may actually increase in numbers and locations. These are likely to be joined by relatively few new market entrants.
The ‘free market’ philosophy being forced into car retailing will mean that in some geographic locations competition will be intense, while in others there is very likely to be an almost total absence of outlets present to satisfy customer needs – resulting in localised high prices and/or low quality to the consumer.
The basic inability to generate meaningful profit from most aspects of car retailing does mean that new market entrants are going to be quite rare, unless some new formulae can be found.
Whatever, retail pricing and cost pressures will increase and this will lead to the withdrawal – forced or voluntarily for whatever reasons – of the less fortunate participants.
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One consumer pressure has been known for a long time but largely ignored, and that is the basic geographical incompatibility of vehicle sales showrooms with after-sales workshop locations. As congestion increases and the number of sales outlets shrinks, this factor will become increasingly important.
Figure 1: The consumer/dealer geographical incompatibility
Source: just-auto.com
The palatial dealership model to which we have become accustomed over many years will then come under pressure to evolve into smaller, specialist function units meeting different local needs. For instance, if a consumer is prepared to travel one hour to a new car showroom at the weekend, it is very likely that the same consumer will expect after-sales support less than 15 minutes travel time from the place of work. This is likely to be in an entirely different – and closer – location.
The current retailer model in which palatial high street premises are owned, and in which there is insufficient customer parking and ‘dirty’ activities like car servicing being carried out, is a complete nonsense.
In summary, the conventional retailer as we have known it is likely to fade away over time due to attrition for very many reasons. In its place will be:
- Wide-spectrum retailers offering similar services as the current conventional dealer, but in a ‘lean’ way in multiple location facilities more appropriate to the product or service being offered;
- Process specialists offering a particular consumer service, e.g. franchised fast-fit;
- Process specialists offering a particular blend of business services to either of the above business types.
