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
Summary of Direct Sales I
In the first issue of my series, we looked at where the charm of direct car sales lies. The big advantages are:
Greater independence from physical showrooms
Improved experience
Potentially higher margins
Lever on the model mix
In sum, direct sales lead to a control of demand, no longer just supply. This leads to positive, intercorrelated effects, a central one: the better demand is controlled, the better supply can be structured.
The better the offer can be structured, the faster development can take place and the lower the development costs for these cars. This in turn generates a competitive advantage (cost leadership), which in turn generates higher demand when passed on to the customer.
A classic (of course simplified) flywheel, therefore.
But if direct sales is offering so many advantages and creates a fantastic flywheel for the OEMs, why is it still so hard for OEMs to deal with it?
Behind the two sales models (direct and indirect sales) 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. 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.
Advantages of traditional sales via dealerships
Of course direct sales has many advantages. Of course, new technology makes direct sales easier. Of course direct sales is good when all the stores are closed. But to win in a Direct-To-Consumer (DTC) market is not so easy.
This can also be seen quite well in other mobility areas that are in high demand. Currently five e-bike companies control the total market in the US (they aggregate about 70% market share). Only two of those five brands are DTC (marked as green in the graphics below).
So, there seem to be a lot of arguments for the dealership model from the carmaker perspective (for more details follow Rudi Thun, he knows best).
Let’s go trough these arguments.
Competitive Pricing
This point sounds somewhat surprising. When passenger cars are distributed through dealer networks, it is indirectly ensured that prices remain relatively low, even for vehicles in very high demand. This is also due to the fact that dealers still earn most money with repairs. Dealers are, tied to the brand for repairs, so that there is an interest of dealers to continue selling cars of that brand in order to be able to carry out repairs on them in the future.
Multi-brand retailers have tried to soften this direct relationship somewhat, thereby minimising individual risk, but a wider choice also increases the cost of overhead, training and showrooms. So there are natural limits to this to a certain extent. This limitation ensures competition (and thus low prices) at least where the density of dealers is high enough.
Efficient (global) allocation of cars
Through decentralisation/localisation, dealers can ensure the correct distribution of cars according to actual demand in a very efficient way.
Pre-sales experience
Dealers are optimized to offer a very good pre-sales experience, for example through test drives and events. And there is another point: even before you buy, you can be sure that the car you bought can be serviced at this dealer. This seems to us to be a matter of course in the classic structure; but if you look at newcomers such as e.Go from Aachen, for example, it becomes clear that it is not that simple. If the car manufacturer had not found a partner to take over the maintenance of the cars, the project would have failed. One can imagine how this has influenced the negotiating position of e.Go.
Disadvantages of traditional sales via dealerships
Lack of transparency
Information asymmetries exist between customers and the dealer. The customer does not know what the dealer knows about the car and he does not have the same means to find out. Okay, there are supposed to be people who actually have a lifting platform for cars. These are excluded from this ;-)
To cure asymmetries, things like the used car warranty were invented. Nevertheless, there are further asymmetries in the relationship between customer and merchant, which ultimately result from a loss of transparency (some of which are natural, others more synthetic). As a customer I cannot be sure to get the best price. So I have to go to several dealers to make a price comparison. In the pre-Internet era this was very costly; in the meantime this customer disadvantage has somewhat diminished, but it’s still there.
Heterogenity of brand experience
The experience of the customer is directly dependent on the dealer's execution. This can be good, but it can also be just as bad. Overall, people are likely to be unhappy with the length of the purchase process of a car.
As long as there is only one car sale through a dealer and there are physical limitations (not everyone can drive 100km to the next dealer), you are at the mercy of the dealer in a certain way. And what applies to the end customer also applies to the car manufacturer. The latter does not own the experience.
Low competition outside of cities/higher prices
Competition typically leads to lower prices. However, if the physical distance between dealers becomes too great to be a serious alternative for customers (for example, outside cities), discounts become scarce. This in turn is a source of high customer dissatisfaction. Price differences of more than 20% are not uncommon, and in some cases even more for leasing rates.
It becomes really interesting when we compare these advantages and disadvantages with the characteristics of direct sales.
Comparison: the 4x4 table
Let us bring everything on the table.
(I try to use some automotive language in this newsletter, so excuse the pun with the 4x4 table.)
You can see that this list of advantages of one sales model is a certain reflection of the disadvantages of the other sales model. What is good with dealerships, is mainly bad with direct sales. And vice versa. In recent years, this has led most car manufacturers to try to add direct sales on top of the existing model with dealerships.
This approach is similar to the idea of plug-in hybrids (PHEVs). At best, PHEVs can be seen as low-consumption, yet powerful long-range cars (= the best of both worlds). In the worst case, you have a vehicle that is heavier than necessary, that consumes more and has two different engines to be maintained. One one hand, this is every dealer’s aftersales dream come true, but for the consumer it is the worst of both worlds. Everything here is dependent on the utilization of your car:
Can you charge your PHEV, it will be a low consumption car (=best case)
If you can’t charge your PHEV, it will be a heavier car with higher consumption than needed (=worst case).
This is strongly dependent on the individual use case. Customers who need a test drive should buy from the dealer. People who do not need a test drive can order directly at a fixed price. But if it depends on it so much, where is the problem in offering both models?
The problem is that this inhibits innovation, which would be needed for a completely new idea of car sales. We need a new idea that is more than the best and worst of both worlds combined.
We will talk about this in the next and last article of the series, which will highlight the Innovator’s Dilemma of car sales for traditional OEMs.
Stay tuned and stay subscribed for more to come.
To shorten the waiting time a little, here is my…
Reading List of the Month
Future assessment of existing business segments of OEMs: Future of Automotive Sales and Aftersales
Unfortunately, no surprise: SUVs are more lethal to pedestrians than cars
Planning for gradual recovery: Jaguar Land Rover reports full-year results
Expansion for micromobility during the pandemics: A Watershed Moment for Shared Mobility
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