June 28, 2021

Is there a future for the traditional dealership model in the rapidly changing “Mobility” Industry?

The current wave of revolutionary change will disrupt the established value chains in our Automotive industry. What will you do when the world is changing around you? How do you stay relevant (and in business)?   

 In my last few blogs, I’ve discussed a number of the trends currently transforming the automotive industry – the switch from internal combustion engines (ICE) to electric vehicles (EV), new entrant challenger brands who either sell direct to customers or offer subscription models, vehicles becoming more electronic than mechanical and requiring less servicing.  Today I want to speculate on the real world impact those changes might have on perhaps the most traditional part of the automotive value chain – the dealer network and associated aftersales service business. 

The Threat 

In theory, dealers have an enviable position because they own the golden nugget, the customer relationship. Until recently, new cars could only be bought from dealers. In addition, every car sold potentially brings a captive market of after-sales service customers, as a result of the terms of their warranty.  

In practice, this golden nugget comes at a price. Their sizable bricks and mortar investment means dealerships are a capital-intensive business with high-fixed costs.  At the same time, manufacturers are squeezing downstream margins to fund their R&D investments in EVs, connected cars, autonomous cars, and so on, with many aggressively consolidating their dealer networks.  As direct sales become increasingly popular, new entrants and traditional logistics providers represent a huge threat because they have the infrastructure and skills to carry out all of the preparation and handover activities currently performed by dealers. 

All of this is taking place against a backdrop of falling volumes of new car sales since 2017.   

Mixed messages abound with Ford stating it will close half of its UK dealer network by 2025 whilst Volvo insists dealers will be “more important than ever”, albeit it with a different role with the manufacturer handling sales and the dealers handling customer service.  Perhaps most telling is KPMG’s Automotive Industry Survey which polls car industry executives for their views on the future of the industry.  The surveys for 2018 and 2019 both showed over half of the respondents were “highly confident that the number of physical retail outlets would reduce by 30-50% by 2025 and that it was necessary to “reinvent, reimagine and eventually rebuild and reorganize existing structures.” As existing players and new entrants alike experiment with new sales models, smart dealership owners must realise they are the most vulnerable part of the existing value chain, the most likely to be disintermediated in any streamlining process, or revenue optimisation programme.    

The only thing that is certain in this uncertain market is that standing still is not an option.  Dealers need to explore ways in which they can remain indispensable. 

The Opportunity 

What are the options for the traditional dealer network? Part of the answer – and possibly the easier action to take – might be to do what they do today but do it even better and with more efficiency.

Some dealerships invest in creating an excellent sales experience that seamlessly blends into the after-sales service experience.  Others not so much, with salespeople forgetting to call customers back, lacking basic knowledge of individual models, or simply focusing too aggressively on the sale because that’s how they’re measured.  After-sales service is a similar story with some dealerships trying to make the service process as convenient for customers as possible with waiting areas where they can work, free pick-ups, or complimentary replacement cars, while others appear to see it as simply an additional revenue stream.   

This evolutionary path is often the easiest option when threatened with change. You’re not changing what you are, you’re just trying to do it better than before. Dealers can invest in building lasting customer relationships that increase the sense of loyalty to their business model and approach and are spread by word-of-mouth recommendations and personal experience.  Improved customer relationship management and customer insight are vital to this kind of improvement.  So too are metrics that reward customer retention and repeat business, rather than just the number of units sold. Metrics and customer insight help to reshape both sales force behaviour and the very culture of the on-premises sales and service experience.   

However, in this situation, I’d argue evolutionary change is a short-term strategy at best.  Whilst delivering a more effective version of the current situation is an effective way of managing the transition (or delaying the inevitable), it takes time to implement and rarely survives a revolution. 

Perhaps it is time to take a path less well travelled, cast aside our traditional approach, and look at embracing and adopting a revolutionary mindset. 

As an example, Volvo envisage a post-2030 dealership model which they described as “an agency-style handing model”.  Dealerships would fulfil sales made online and take care of aftersales service. Whether this new model goes far enough or is attractive to dealers remains to be seen – especially when you consider EVs are expected to require less servicing than existing ICEs and financing might disappear as mobility as a service and subscription models replace current purchasing models.  I believe, therefore, that dealers need to explore radically different business models, reinventing themselves within the value chain and becoming newly relevant. 

A Brave New World 

Generally speaking, dealerships have at least two undeniable assets: 

  1. A physical location. Dealers are currently the only point in the value chain where the customer can physically experience driving the vehicle, so how can they better leverage that fact? 
  1.  Customer contact. Dealers are the only ones who physically meet and talk to the customer, so how can they use that contact to gain better insights into customer needs and preferences and thereby create stickier relationships? 

The key challenge is to work out how to use those two assets (and others that we possibly haven’t even thought of yet) to maximum advantage, getting ahead of the wave of change, rather than being driven along (or engulfed) by it. 

Some of this will need to be done in collaboration with the OEMs.  In a previous blog I wrote about the importance of an effective omnichannel strategy and how the real winners will be those who are able to support the consumer seamlessly throughout their own unique journey, making each experience special through interweaving online content, material and functionality with human interaction.  

I believe these human interactions will become a real differentiator in a world where more and more of the sales process is completed digitally.  They will underpin a more memorable consumer experience and create delight moments and advocacy stories which in turn nurture the trust and loyalty underpinning stickiness. This should be an area dealerships can naturally own – after all, they have nearly 100 years’ experience in managing human interactions relating to mobility purchases –  but perhaps not in the way we traditionally might think. 

KPMG’s survey suggests the only viable option for physical retail outlets is to transform into service factories or used car hubs.  Perhaps other, more creative, options are available.  What if dealers offered an EV version of Apple’s Genius Bar – a multi-brand dealership specialising in educating customers about the emerging EV market, comparing brands and models, and recommending the most suitable car based on an individual customer’s driving habits and needs? Could the physical showroom become the hub of a portfolio of mobility-related services, delivered through a seamless digital and physical experience? How could dealerships utilise their expertise in vehicle preparation and handover?   

Whatever form the reinvention takes, it must be based on both a data-driven knowledge of the customer and a clear understanding of which aspects of customer-defined value cannot be delivered via a digital channel.   

Change isn’t coming.  It’s here. 

We all know the consequences of a failure to react to a changing environment – decline and extinction.  Kodak used to own the film market but missed the rise of digital cameras.  Nokia used to own the mobile phone market but failed to react to smartphones.  Business history is littered with companies who were rendered irrelevant by revolutionary change in their markets.  I believe the automotive industry is at a no less radical inflection point and dealerships are the most vulnerable link in the value chain.  

Perhaps the most important reaction to a time of revolutionary change is to be proactive. Embrace the change. Be ready and dynamic. Be willing to break existing models and approaches.  Relying on evolution to save the dealership model is simply not an option (ask the dinosaurs about trying to out-evolve rapid revolutionary change!). The hardest time to try to reinvent yourself is as the wave of change is breaking over you but if not now, when? I know quoting old Chinese proverbs is a bit of a cliché but there’s one that seems very relevant to this discussion – “The best time to plant a tree was 20 years ago. The second-best time is now.” Now is the time for dealerships to be considering “what next?” with a disruptive, brave mindset that will build sticky long-tail customer relationships to sustain them through the coming revolution. 

Here at changemaker, we support organisations and individuals in delivering sustainable and lasting change, especially during pivotal times of transformation. Our 5 Step change model and significant experience realising sustainable change in the automotive sector allows us to help identify the changes that need making then bring a structured process to change that fully engages your people (colleagues and customers). We help make change predictable so you can be certain of realising your goals in an increasingly uncertain world. 

If you want to learn more about us, take a look at our website http://www.changemaker.org.uk or email myself at jason.craker@changemaker.org.uk 

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