Automotive Blog

Are new dealer contracts going to miss the point?

Omnichannelblog

Many OEMs are in the process of developing or negotiating new contracts with their dealer networks in Europe.  This is generally being done to anticipate the emergence of omni-channel networks with the changes either providing for OEMs to sell some models directly (or at least not through the dealer channel) and for dealers to take on new responsibilities supporting a possible growth in sales through online channels.  Both cases affect the business model for the dealer by potentially reducing revenue or switching margin to a fee for service, or a combination of both.  Only in a few cases are these changes accompanied by more fundamental proposals for changes to network structures, and we are not aware of any where the investments required from dealers will be reduced, or investment risks shared.

It seems to me that an opportunity is being missed by not stepping back and reconsidering how retail sales and aftersales operations should be structured, how the revenue and costs are shared, and how the customer experience is enhanced.  Current proposals focus on providing for changes that will come, albeit in relatively low volumes initially, but do not consider whether the core – which will be supporting the majority of volumes for some time to come, is actually fit for purpose.  It is like taking a car from the 1970s, and bolting in the latest high power, high efficiency engine and thinking that you will have a better car.  The underpinnings need to be right if the overall result is going to be improved.

Based on ICDP research, there are some key points that can act as the cornerstones of a new relationship between OEMs and dealers (using that term in the broadest sense):

  • OEMs need a retail presence in the market to provide aftersales but also to support customers, regardless of whether they are buying a car, a subscription or a mobility service.  The more that the “product” deviates from buying an IC-engined car, the more support customers will need at point of sale or handover.
  • Pragmatically, if you have an existing network of businesses that you are working with who are providing this retail presence, it makes no sense to dispense with them completely and recruit a new cohort from scratch.  Roles and relationships may change, and not all the partners will be needed in the future, but the majority of tomorrow’s business will be done through the same partners as today’s business.
  • Future partners need a viable business model that provides adequate returns in relationship to the investment and risks involved.  As OEMs have generally increased their returns in recent years, we have not seen a corresponding uplift in dealer returns.  Increased investments are being accompanied by pressure on profits, and no change in the opportunity to achieve scale at the outlet level.
  • The retail business is about people buying products from people.  Technology plays a growing role in the products, services and channels, but few customers show any interest in buying in an entirely digital environment, with no human interaction.  Future retail models therefore need to address people skills in a way that the industry has notably failed to do in the past.

New contract negotiations therefore need to start with considering the size and shape of the network.  Within the network there will be fewer investors, each with larger areas of influence.  Within their area, they need more flexibility to manage the total facility investment and staffing to provide adequate returns whilst still representing the OEM brand in an appropriate way.  Where there are changes in the revenue model, there needs to be corresponding changes in the cost and investment required, or the way in which that is shared between the OEM and the “dealer”.  However, in making the changes, there needs to be a new focus on providing a greater degree of stability and predictability in dealer revenues such that this can be reflected in a new approach to the recruitment, training and reward of dealer staff.  It seems fundamentally wrong to me that in a multi billion euro business, the greatest proportion of risk-reward is finally taken by the sales executive who has the closest interaction with the customer.

Written by Steve Young

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