Can manufacturers do retail?

It’s been a busy couple weeks with an ICDP members’ meeting last week, and other member commitments to satisfy, so apologies for the break in the blog output.

Although car brands are amongst the most widely recognised consumer brands in the world, their manufacturers have almost universally relied on third parties to handle the retailing of their product.  In the cases where they do become directly involved, their performance does not generally impress.  When ICDP looked at the performance of the manufacturer-owned dealer groups around Europe a few years ago, their performance was lower than the network average in all cases other then Mercedes Retail in the UK (now sold) and what is now Trustford, also in the UK, and still well-respected by the dealer community.  There can be many reasons for this, including high-cost locations, unfavourable channel mix, and higher employment costs, but there is certainly little evidence to suggest that manufacturers understand retail better than the retailers.  Even looking at Tesla which is a direct seller from birth, the dramatic and sudden price cuts in recent months are the act of a wholesaler trying to hit period end numbers, not a retailer.

This is critical to future developments, because almost all manufacturers express a desire to get closer to the end customer.  That may be through the direct sale of digital services, operation of an online channel in parallel to dealers, or a transition to agency, but they still need to have the skills of a retailer to understand customer needs and budget, and try to optimise volume and profit.  There are some examples of senior executives who have had successful careers in both wholesale and retail, but they are a small minority, and at the working level, there is almost no crossover.  Even in manufacturers with their own retail groups, few employees transfer between the two, when you would have expected this to be a golden opportunity for staff development.

The various agency implementations that are now in progress in Europe cast a spotlight on this challenge.  As the manufacturer is now responsible for all inventory, demand generation, brand promotion and pricing, they have many new roles which they need to perform better than their retailers did on their behalf under franchise if there is going to be a financial benefit.  They need to decide what the mix will be in the order pipeline and adjust this as needed in the light of real demand.  They need to decide on the specification of demonstration and courtesy cars, not just for their immediate role, but also with an eye to their attractiveness as young used cars in a few months.  They also need to set the retail price for customers at the level which will drive the desired sales volume, and adjust this as often as is needed to retail the last car on the last day of the month.

Whilst updating our research in this area in the last few weeks, it has become apparent that many manufacturers have under-estimated the new challenges that this brings.  Although improved visibility of the sales funnel provides much more granular data to inform these decisions, there is still a need for somebody to interpret and apply that.  In retail, this is a full-time role, not something that can be done in a monthly planning meeting.  Long before agency became flavour of the day, I worked with what was then GM Europe on centralised order and inventory management, and we regenerated the order pipeline every night based on how quickly inventory was selling through.  The end result was more profit for the OEM and dealers and happier customers, and zero stock over 180 days.

The manufacturers moving to agency have taken actions to address the need through reorganisation and recruitment, but the results have been mixed.  One manufacturer spent most of last year trying unsuccessfully to fill the new positions created, another managed to hire a number of people, but they didn’t stay for long.  Whether this was because they didn’t like their new working environment or the environment didn’t like them is unclear.  The situation was described to me as being like a transplant patient rejecting a new organ – even though it was going to save their life.  Some manufacturers have turned to consultants from the blue chip companies to help, but in reality they do not have the skills that are required for this very operational task.  One dealer told us that the main lesson learned in his agency pilot was that “neither manufacturers nor consultants understand retail”.

An interesting development however – and one that might point the way forward – is that at least two manufacturers have turned to a different source for that missing retail expertise.  They have gone back to their dealers and engaged them in helping out!  One manufacturer whose approach to date has been very top down and directive, has now agreed they will meet with their dealers in the middle of every month to review order take progress and agree near term pricing actions.  It’s not perfect in terms of the time intervals, but it’s a lot better than end-of-quarter kneejerk actions to drop prices and turn the demo and courtesy car stock.  Another manufacturer is giving each dealer a brand marketing budget which they have discretion to apply to local promotional activities, and they have also created a budget for each dealer to allocate to supporting the price for specific customer groups such as current owners and SME fleets.

It seems that manufacturers becoming retailers will be a tough task – a real transformative change – but in the meantime, some are realising that they have friends with shared interests who are happy to help …