Direct Car Sales, Part I
Hi, I'm Markus - a strategy consultant based in Munich, Germany. In this newsletter I will collect, classify and share the most interesting information from the exciting world of mobility and take a look at the business and operating models behind.
In consulting, I have already worked for many car manufacturers and suppliers as well as providers in the field of mobility services. What strucks me most are all those old world dogmas still existing and new ones coming up. Let’s take a look on why they are there and how to overcome them.
I will, as far as possible, not talk about the brands I have worked for, but just in case: all opinions are my own.
Of course, my newsletter is only a small mosaic of the 15 trillion dollar world of mobility and transport. Let’s unlock it together and learn more about it every day.
Enjoy!
Markus
Direct Car Sales
Let’s start with one of the most dominant dogmas in the automotive industry: how to sell cars. I will write three articles on that subject. The first one explains the basics of online car sales, the second one will compare advantages and disadvantages of the dealership model and the last one will discuss the innovator’s dilemma with the traditional carmakers’ franchise model of selling cars. To receive the following articles, make sure you have subscribed to my newsletter.
Let us start with some basics today.
Data from countries that have already been able to relax the strict Corona measures provide initial indications of what the car market could look like in a post-COVID world. It is very clear that the pandemic will change the car industry forever.
Something we see more and more often in this context is the idea of selling cars directly to customers as an answer to both limitations in supply (closed stores) and demand (lower consumer interest in buying a car during the pandemic). Just recently, Vroom, a mobile used-car dealership, stated in its S-1 filing for example, that there is a “massive market ripe for disruption”, indicated by the current 0.9% e-commerce share of used vehicle sales. There seems to be a lot of momentum for direct selling.
To be more specific here with the definitions: By direct sales we mean the sale of vehicles directly from manufacturer to the customer. Online sales is a variant of direct sales that involves selling via the web and is synonymous with the e-commerce approach. All these terms are en vogue and the whole industry is trying to implement direct sales in addition to the existing sales model at the moment. But is this really the future of automotive retail?
To answer this question let us have a look at where the real differences between direct sales and a distribution model via dealerships lie. Let us start with a simplified comparison of these two models.
(Click to enlarge the image)
Right, it's a great simplification. The truth is that both models are many times more complex. But you can quickly see the point here that in the direct sales model expensive intermediaries like markets and dealers disappear. But you can also see that advertising has a more central meaning for the direct selling car manufacturer compared to the traditional model. I will provide an example on this later.
Let us first take a look at the arguments for the e-commerce approach, every argument is easy to understand, especially these days:
Direct sales increases independency of physical stores
During the pandemic, dealers worldwide had to close their showrooms and, due to a lack of direct sales, had little opportunity to sell cars. Irony of fate: a few years ago several states in the USA prohibited pure online sales of cars, maybe politically driven by traditional dealerships.Direct sales can increase customer and brand experience
Intermediaries (dealers) just move the product further away from the customer. This can lead to less customer experience, but it does not always have to be as bad as Scott Adam wrote in 2012 about car buying:“The rational part of me knows that somewhere there are customers getting better prices on this same vehicle, which causes me to hate both the car and the dealership.”
Selling cars online saves the margin for the OEMs
Direct selling carmakers like Polestar sell at fixed prices to guarantee much-needed minimum margin as long as demand is sufficient, without having to feed another intermediary like the dealership. This will become increasingly important during the transformation of the industry and the technological shift towards electrified cars. Electric cars are currently still somewhat expensive compared to internal combustion vehicles, which limits the prices upwards and goes against the margin of OEMs - either through fines (especially in Europe) or discounts granted.Direct lever of carmakers on targeted model mix
The demand for certain vehicles can be better managed by the manufacturer when no dealer (who is driven by its own goals) is involved. This is particularly important for traditional carmakers who, as is the case of Europe, will have to comply with new emission limits and thus sell a certain model mix. Control over this is more difficult to manage in a traditional model and only possible with additional incentives for the dealer and reduction of supply of specific models for the customers. The OEM’s nightmare: Incentives are expensive and further restriction of supply leads to customer dissatisfaction (as nobody wants to wait more than a year for a new car.)
Direct selling allows additional control over demands
So without a direct selling option, the car manufacturer only controls supply but not demand (distribution is handled by the dealer). In the past, this led to severe consequences in many cases. One of my favourites:
Based on initial demand forecasts for its 1992 line, General Motors allocated half the capacity of its Detroit-Hamtramck plant to (…) two models; the remaining capacity was slated to produce Buicks and Oldsmobiles. However, demand for the Sevilles and Eldorados quickly exceeded supply: GM’s underproduction of the two models led to the loss of thousands of potential customers.
So, supply and demand can only be separated for explanation, but especially in the automotive industry they are related strongly. Economists call that principle inverse relationship, but there are a lot of side effects here. The easiest: The better you control demand, the more efficiently you can structure supply.
Balancing sales channels: the holy grail of selling cars
So the key question is: if direct sales is offering so many advantages and give the OEMs control over supply and demand, why is it still so hard for OEMs to deal with it?
Behind the two sales models lie two completely different value chains. Most OEMs have so far tried to put a direct selling approach on top of their traditional selling approach via dealerships. But direct selling is not an add on - both sales channels must be maintained according to their very own principles.
Those principles can be found along each step of the value chain. Today, I would like to discuss the topic of "advertising" because it is hardly discussed publicly in this context. Plus, it shows how challenging the transformation towards online sales will be for traditional car manufacturers.
Aspects of marketing in direct sales models
With the direct sales model the car manufacturer has to do more product marketing itself. Don‘t get me wrong: OEMs are advertising a lot. But their focus is more brand than product marketing, which is more specific and with that, more expensive. Specific product marketing is one of the key jobs dealers take care of in the traditional sales model. On the contrary, a direct selling carmaker can own demand by controlling the advertisement layer by itself.
Tesla, for example, has opted for extremely aggressive marketing communication, strongly led by its CEO, Elon Musk instead of competing with other carmakers in marketing. This communication strategy is also partly connected with agitating against advertising platforms such as Google or Facebook.
At least in some parts, the communicative aggressiveness of Musk can be explained by the modified value chain: an approach to copy the OEMs' marketing communication with their traditional value chain would be doomed to failure from the beginning. It would simply be too expensive. Musk's job is to stand out here. And (whether you like him or not), he succeeds outstandingly. Being different in the advertisement layer is much more critical for direct sales and explains a little bit of Musk's attitude on social media. A similar behaviour of a traditional car manufacturer‘s CEO would be difficult to explain, as this would presumably be a less effective strategy in the classic sales model.
Balance is key
So, there is no doubt that direct selling has huge advantages. But finding the right balance between the two models is and remains the OEM‘s key challenge. To unlock this we need to go one level deeper so that we can better weigh up the advantages and disadvantages of traditional sales via dealerships. We will discuss these in my next article, Direct Car Sales II. Stay tuned and don’t forget to
To shorten the waiting time a little, here is my…
Reading List of the Month
Tough times for car rental: Hertz filed for bankruptcy
Good times for electric cars: Electric Vehicle Outlook 2020
Good times for electric cars II: European Electric Car Report ($, April Issue)
Scenarios for transportation after the pandemic: The Futures of Mobility
Cars-as-a-service from Lexus and Toyota: Kinto
COVID-19 mobility data from 50,000 people: Nexar Mobility Report
Intel has acquired mobility platform with 720m users: Intel Newsroom
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