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    Munich, February 2020 | Topic: Sales & Aftersales & Dealership


    The automotive retail industry is facing an existential crisis. The way new cars are sold today has changed little in the last 100 years – but there’s an urgent need to change things. Dramatically.
    Margins on new car sales have steadily declined and in many cases are now below zero. Speak with any executive in the automotive retail industry and you’re likely to hear the same refrain: there’s no money in selling new vehicles.
    Rather than invest in yet another retail excellence program, the time has come for automakers and their retail partners to re-imagine the future. “We’re putting all of our investments into service facilities and IT, not new car sales,” says the chief executive of major European automotive retail group.


    Current threats – a quick summary
    The threats come from two directions: internal industry dynamics and external trends. The former includes the well-recognised operational problems of unwelcoming showroom staff, inefficient workshop processes and underutilized assets, along with rising costs and declining base margins, not to mention the internet and its flow of information on pricing, discounts and financial products.
    Externally, the lower profit margins and reduced service revenue of electric vehicles is expected to hit the market hard, while e-commerce and disruptive start-ups put margin pressure on every aspect of a traditional dealer’s business. Then there’s the changing demands of young people and city-dwellers, the advent of autonomous vehicles, and ever-stricter legislation to discourage private cars in favor of public transport.
    Manufacturers and retailers urgently need to seek innovative ways to sell and service vehicles, looking especially hard at their relationship with the customer – and with each other.


    Looking ahead – the future of auto retail
    Most visions of the automotive retail future tend to have certain features in common:
    • Online car sales
    • A greater variety of retail formats, from pop-up shops to mall stores to brand experience centers
    • Pick-up and delivery service for both test drives and aftersales
    • Increased personalization of all interactions, with brands and retailers leveraging the vast data they have on customers and vehicles
    Combining these features, the vision is for a true omnichannel customer experience similar to that achieved in consumer electronics or luxury fashion. But how do we get to such a point?


    Berylls sees two possible paths.
    Before looking at the two routes, consider the standards that automakers currently impose on retailers. The primary aim is to ensure consistency for the brand across the entire market.
    Yet many of these standards have little or no real impact on sales or brand performance. The costs, meanwhile, are significant. On average, automaker standards account for 27% of an individual retailer’s investment, which in the US is $11.3 m for a full-service facility.[1] And that’s not counting the operational cost to OEMs and dealers of developing and maintaining those standards, year in, year out.
    Much of an automaker’s spend is aimed at improving low-performing retailers. Meanwhile, artificial limits are placed on expansion by high performers, as automakers worry about becoming too dependent on a few powerful retailers.


    The crossroads
    We believe there are two potential ways forward, one of which is widely accepted as the only solution. The other is often ignored but – in some instances – could be the better choice.


    The favoured route: more automakers control
    Most pundits leap to the conclusion that automakers need to take greater control of their retail and digital sales channels. Indeed, many automakers are already:
    • Building online sales platforms to cover everything from fixed-offer pricing to payments to stock management;
    • Developing – and even operating – a variety of retail and service facilities (e.g. brand experience centers that don’t directly generate sales); and
    • Developing the skills and systems to manage increasing volumes of customer data, traditionally “owned” largely by the retailers.
    In this scenario, retailers end up as agents, receiving a service fee for such activities as conducting a test drive or delivering a vehicle.
    The process is expensive, but the benefits are obvious. Brands can engage directly with consumers and have greater control over the customer journey. They (theoretically) have greater control over pricing. And they own the customer data.


    The alternative route: Best Foot Forward
    However, there’s another option – one that might, at first glance, seem counterintuitive. But there’s solid business logic behind it.
    What if brands reduced their control of the network, relaxing many existing standards and giving high-performing retailers greater room for maneuver? In this scenario, automakers would reduce the costs imposed on retail partners for non-performance-related elements, such as showroom design, and remove artificial limitations.
    Territorial boundaries would be greatly increased, allowing top performers to expand into areas managed by weaker retailers. Retail partners would be encouraged to set up their own e-commerce platforms, leveraging their existing technologies and systems. They could also experiment with sales and service formats, adjusting to what works locally, rather than sticking to HQ-prescribed global blueprints.
    A key point here is recognizing that top-performing retail partners typically have their own best practices, developed over many years with multiple brands, across multiple sites. They have their own websites, systems and operational processes. And they have deep knowledge of their local markets. The Best-Foot-Forward scenario sees brands rely on the expertise of their top-performing partners.
    In exchange for granting retail partners this operational freedom, brands would steer dealers via metrics focused on actual performance: sales and mix targets, customer acquisition and retention, and local brand awareness – focusing less on input and more on output.
    This approach supports innovation and experimentation. Freed from the burden of strict standards for facilities and operations, retail partners would be encouraged to pilot new approaches to attracting and engaging customers – both online and face-to-face. It then becomes the automaker’s role to recognize the most successful practices and share them across the network.

    While the Best-Foot-Forward approach risks a degree of inconsistency in brand representation, it gains tremendously from leveraging the collective strengths of the top retailers. It also improves the brand’s appeal to retail partners, in terms of both return on investment and ease of doing business. This ensures the brand can attract and retain the best possible retailers – and it reduces the brand’s wholesale costs.


    Choosing a direction
    How should an OEM decide which path to pursue? Based on which criteria?
    Berylls believes there are eight key factors for an automaker and its National Sales Companies to consider, split evenly into two categories, namely economics (the factors affecting network profitability) and operations (the ability to meet the changing needs of customers and the brand).
    Sometimes, both paths have a positive impact. For example, selling power increases in either scenario – although in different ways. In a Best-Foot-Forward approach, top retailers expand their territory, thus increasing overall network performance. In a More Control scenario, brands launch online sales and a variety of flexible sales formats, better fulfilling the needs of the modern consumer.
    Other criteria would play out differently. For example, automaker costs decline in a Best-Foot-Forward approach as the need to develop and monitor a wide variety of performance and process standards is dropped. In the More Control scenario, automaker costs increase as the central functions take on more responsibility for the customer journey, requiring greater investments in technology and skills. Making the More Control scenario work requires certainty that the increased automaker costs are balanced by retailer savings.
    Certainly, there’s no one-size-fits-all answer. It’s possible that the Best-Foot-Forward approach suits volume brands, whereas for premium brands, the overriding importance of the customer experience encourages the More Control method – although other industries have shown that both premium and value brands can succeed with fully integrated distribution (Louis Vuitton,  IKEA) or looser retail agreements (Calvin Klein, Hewlett Packard).
    In choosing a path, the first step is for automakers to perform a detailed audit of their – and their partners’ – internal capabilities, both financial and organizational. The audit needs to take a 360-degree strategic view of the eight criteria above as well as other issues, such as corporate culture, to ensure there’s both the ability and the willpower to pursue a given direction.


    Conducting a 360⁰ audit
    It is important to conduct the audit from both an internal and an external perspective, looking at, for example, such internal factors as operational efficiency, product strength (including lifecycle management) and corporate culture, and external factors such as customer perceptions and attitudes toward the brand and its retailers.
    Whichever route is taken, it’s increasingly clear that the status quo will inevitably lead to a slow but steady decline as internal and external forces chip away at the existing retail network. The sooner a brand takes the difficult decision, the faster both it and its retail partners can enjoy a profitable future.




    Arthur Kipferler


    Berylls Strategy Advisors
    T +49-89-710 410 40-0