CASE – Reshaping the Future of Dealer Network

Introduction

Traditionally vehicles were sold mainly through dealer networks across the globe, and car manufacturers had very little or no direct contact with customers (refer Exhibit 1). In the last ten years, the automotive industry, along with its supply chain, has gone through a transition, which can be attributed to trends such as connectivity, autonomous driving, electrification (e-mobility), and sharing mobility. These megatrends are not only changing the automotive value/supply chain, but it is also bringing a change in the way how a dealer network is to be structured within a specific country.

For instance, with a rise in electric vehicle sales, OEMs may not require numerous dealers with repair & maintenance workshops within a specific locality in a country. Hence, OEMs are currently strategizing on their dealer networks and trying to optimize cost by keeping in mind the megatrends which are dominating the industry.

If we go back in history, earlier cars were sold directly by automotive OEMs, and they have to rely on in-house sales representatives to make sales (Exhibit 2). Through this model, automotive OEMs were not able to reach every city and sell their car. To tackle this problem, automotive OEMs franchised out to dealerships.

The introduction of dealers network in the automotive supply chain helped OEMs to reach remote locations in the country. Dealers were purchasing (through exclusive rights of selling cars in particular geography) new cars from OEMs and selling it to the customers. Dealers play an essential role in keeping inventory (cost of inventory borne by the dealers) of vehicles ready for the customers in remote locations. Dealers also offer spare parts and services to customers, which created an additional revenue stream. Over the years, dealership managed to push the cars in the market using innovative marketing techniques (such as value-add services and warranties) that helped them to grow in the market. To retain their domination, dealer lobbies across the globe have pushed the legislators to create laws to protect the franchise, and due to this, OEMs cannot sell vehicles directly to customers.

In this article, FutureBridge will try to answer the following questions about the future of the automotive dealer network.

• What is the role of dealers in the current automotive ecosystem?
• What are the different models followed by dealers in the current ecosystem?
• What are the emerging sales channels in the automotive ecosystem?
• Which are the new players emerging in the automotive ecosystem to replace conventional dealers?

Current Landscape of Dealer Network

Various trends, such as connectivity, autonomous driving, shared mobility, and electrification (e-mobility), are making inroads in the global automotive market, which are disrupting the current operating models of automotive dealers. Dealers have started exploring operating/business models that are in sync with a digital and omnichannel environment.

Single-brand Dealership Model

New cars are sold through the franchise-dealership model (refer Exhibit 3). Single brand dealerships are small scale retailers, mainly operating through single locations and catering to a small geography. Single brand dealers are the most affected by emerging trends such as ‘electrification’ and ‘shared mobility’.

Single brand dealers are mainly focusing on customer experience (test rides), spare parts and, services business segments to compensate for falling revenues from new car sales.

Multi-brand Dealership Model

New cars are also sold through the multi-brand franchise-dealership model (refer Exhibit 4). Multi-brand dealerships are large-scale retailers operating in multiple locations. In this model, the company is selling cars of multiple brands through its dealer outlets.

In June 2019, US-based automotive retailer – Group 1 Automotive launched an online car-buying platform that will help consumers to buy new or used cars online. The company offers around 38,000 cars along with customization options, accessories, and warranty coverage through the online platform.

Independent Dealers

Independent dealers are small and medium scale companies that are not involved in the selling of particular brand’s vehicles. They are mainly engaged in car servicing and used car selling business. They have a lesser online presence and primarily depend on ‘word-of-mouth’ for their business marketing. Independent dealers offer cost-effective service (charging fewer fees for part change and repair) options to attract more customers. Customers in tier-1 and tier-2 cities mainly rely on independent dealers for used car purchasing.

Hub and Spoke model

Hub and Spoke model is the response of automotive OEMs to changing market dynamics (refer Exhibit 5). According to industry experts, dealership adds ~30% to the final price of the vehicle, and hence, OEMs are focusing on optimizing their dealer network. This model is widely known and can follow specific guidelines in countries.

In the UK, this model was developed by Renault in 2012, and the company reduced the number of dealers from 190 to 144. Other OEMs such as BMW/Mini and Mercedes-Benz followed this model for their dealer network in the UK. Automotive OEMs are continuously updating (making it more efficient) their hub and spoke model. In 2019, Renault, categorized dealers in 60–65 territories across the country and plans to restructure its dealer network. This would further ensure each territory is covered, as per the specific customer needs, wherein the central control will still be managed by Renault.

Direct Sales Channel

Many countries around the world (US, UK, Germany, France, Australia, etc.) have a franchise protection law to promote competition, to promote job opportunities, and to secure MSME (micro, small, medium enterprises). Also, the dealers association has lobbied lawmakers to strengthen franchise law in their respective countries.

However, OEMs such as Tesla are selling cars directly to the consumers in the US (using loopholes in the current franchise laws in the US). Tesla is currently focusing on selling cars online and owning ‘service stations’ at strategic locations across the US.

• In 2019, the company announced that it is moving from regularly ‘scheduled service’ to ‘as needed’ model. This ensures their Model S and Model X and Model 3 do not require annual maintenance and regular fluid changes; instead, the Tesla app will keep track of the service issues and notify the owner whenever a repair is needed.
• For effective and timely service, the company has also employed mobile technicians known as ‘Tesla Rangers,’ who service vehicles either at the consumer’s home or office location, reducing the need for a physical service station.
• The company also has focused on avoiding physical visits and providing wireless update technology in the form of over-the-air-software updates. This has ensured cutting down on recall costs for autonomous/self-driving vehicles.

Other automotive OEMs are launching online sales channel in collaboration with their dealer’s network to serve their customers better (refer Exhibit 6).

Road Ahead

According to FutureBridge, in the next ten to 15 years, autonomous vehicles will replace most conventional vehicles. Currently, 20–30% of the vehicles have some or other form of autonomous capability. In the next ten to 15 years, around 95–98% of the new vehicles will have some or other forms of autonomous capability. Due to this trend, many MaaS providers (vehicles on-demand–Uber, DiDi, Ola, etc.) in urban areas might shift to autonomous vehicles, and many individual car owners may also shift to autonomous driving. Due to this, road accidents will be reduced (due to the anti-collision system), and as the vehicles are expected to be intelligent, it may impact the repair and service revenues of the dealers.

Similarly, the growth of electric vehicles will also adversely impact the repair and service revenues of the dealers. Electric vehicles will have lesser moving parts and better predictive maintenance systems (in built-in vehicles), which will reduce trips to the dealers.

To remain relevant, automotive dealers will shift focus towards enriching customer experience by incorporating various sales channels such as omnichannel (in collaboration with OEMs), online sales channels (own as well as a third party), on-demand service at doorstep, virtual reality technology, etc. (refer Exhibit 7).

Omni-channel

Automotive OEMs and multi-brand dealers are launching an online platform for the sales and service of vehicles. OEMs such as Tesla launched an independent online portal, and other OEMs such as Hyundai and Tata Motors launched an online portal in collaboration with authorized dealers.

In the next two to three years, the majority of the automotive OEMs and dealers will have an online sales platform along with mobile applications to facilitate sales and services. Automotive OEMs and dealers will digitally integrate to serve their customers better. (refer Exhibit 8)

Dealership malls

To improve the customer’s experience of vehicle purchase, multi-brand dealers are investing in ‘dealership mall’ in collaboration with other dealers and automotive OEMs (refer Exhibit 9). Dealership malls where multiple brand’s vehicles are displayed at one location with sales and service offered. The dealership malls also have restaurants, cafes, a hotel, a shopping mall, a children’s play area, and a movie hall.

Large multi-brand dealers are acquiring single-brand dealers to consolidate in the automotive retail market. This will lead to the emergence of mega dealers and mega dealership malls, which offer wide ranges of vehicle brands and aftermarket services. Currently, few dealership malls are operating around the globe and featuring multiple brands at one location.

Third-party online sales channel

Third-party online sales channels are leveraging their e-commerce technology to sell vehicles online. E-commerce players are partnering with automotive OEMs for online sales of vehicles via vending machines (refer Exhibit 10 & 11). Currently, e-commerce players are testing these technologies in selected geographies, and in the next three to five years, there might be more players (both OEMs and e-commerce players) in the automotive e-commerce market.

Broker Model

In selected geographies, automotive OEMs might introduce a ‘broker model’ for the sale of new vehicles. In this model, the automotive OEMs will be responsible for sales, marketing, etc. and dealers will take responsibility for services, spare parts, test drives, vehicle delivery. The dealer will get performance-based incentives (number of cars serviced, delivered, etc.).

In this model, the cost of marketing, sales, inventory is borne by the automotive OEMs, and due to this operation cost and risk are high. On the other hand, dealers might get less profit as they will act as a service provider with reduced cost and risk.

On-demand service at doorstep

Automotive OEMs, dealers, and third-party service (refer Exhibit 12) providers are adopting new ways to enrich the customer’s experience of owning the vehicle. These players are offering on-demand maintenance and repair services for cars. Automotive OEMs are also launching an on-demand service platform either independently or in collaboration with technology start-up (refer Exhibit 13).

Third-party service providers are also offering services such as on-demand fuel delivery to car or fleet of vehicles, on-demand car wash, etc.

Virtual Reality

Automotive dealers are caught up between showcasing vehicles that are high in demand (which will reduce their inventory cost) and showcasing all the variants and colors of the vehicles (which drastically adds to inventory cost).

To enrich the customer experience of vehicle purchase, automotive OEMs are testing virtual reality (VR) headsets technology for showcasing the exteriors and interiors of all the car models on the sale. They can also virtually change interior colors, exterior colors, and leather options (refer Exhibit 14).

According to FutureBridge, in the next three to five years majority of automotive OEMs might include VR technology for medium and high-end vehicles. In a similar line, key multi-brand dealers might invest in VR technology to lower the inventory cost and enhance customer experience.

Technology startups such as FlowFound (the US-based VR technology company) involved in developing VR technology-based test drive systems. The company has designed VR kiosks for selected dealers in the US. The VR technology offers the experience of self-driving, collision avoidance, and different driving modes for customers without driving the actual vehicle.

Currently, VR technology is used for selling high-end cars where customers can personalize vehicles using VR technology. In the next 3–5 years, VR technology is expected to be available for mid-range and low-range vehicle sales as well.