Should you sign up for subscription?

There have been a number of recent announcements about new or expanded subscription offers, including the announcement last week that Stellantis will launch its Free2Move service in the UK, and earlier in the month the launch of AutoAbo in Germany by VW offering young used ID models for minimum terms of three months.  We have also seen the acquisition of Cluno and Drover by Cazoo, allowing them to offer their used car stock on subscription as well as sale.  Some manufacturers are promoting their own subscription services such as Volvo’s ‘Care by Volvo’ product, and independent players such as Onto in the UK (which is exclusively focused on BEVs) are making good progress, the latter offering a minimum commitment of just one month.

Whilst all these offers promote flexibility as a key attraction relative to a traditional lease, we do not see the extremes of some of the offers launched in recent years in the US such as cancellation after two days from now-failed independent operator, Fair, or frequent car swaps offered by Cadillac, Porsche and some of the independents.  In financial modelling conducted by ICDP, we have shown that vehicle utilisation is absolutely critical.  Any churn in the user base inevitably affects utilisation, particularly if their changing demands coincide, such as a switch to SUVs in the winter.  To carry a dedicated fleet on your balance sheet as Fair did in the US, is a high risk strategy, and it is no surprise that in their reincarnation they will act as an intermediary on behalf of dealers, rather than competing directly.

A common – though not universal – feature of the schemes that appear to be gaining traction in Europe is that in some form or other they address the question of fleet utilisation.  In examples like Cazoo, they have the choice as to whether a car in inventory is sold or leased in the traditional way, or is put onto a subscription scheme.  At the end of a subscription – whether at the planned point in time or unexpectedly early – the car can go back into inventory for either resale or a new subscription.  Similarly, at a time when OEMs must sell more BEVs in order to meet their emissions targets in Europe, but customer demand has been lagging, the traditional industry approach would be to offer bigger incentives or sell to daily rental channels.  Not only is this expensive, but it clearly sends the wrong message when linked to a new and necessary technology.  By instead adding a subscription channel with a different pricing structure, this provides a much more effective safety valve, and cars can be fed back into the market as used cars according to market conditions at the time.  Free2Move and AutoAbo will provide Stellantis and VW with this additional flexibility.

BEVs clearly provide an opportunity for subscription providers as many customers still have concerns about how quickly the technology is changing, how that will affect residual values and whether a BEV will fit into their lifestyle with current performance levels and charging infrastructure status.  The flexibility offered by a subscription gives them the opportunity to ‘put a toe in the water’ and then be able to make a more permanent choice at a later date if they want to, or indeed just become continuing subscribers if they value the flexibility and peace of mind offered.

Beyond that – and setting aside the slightly crazy new and used car supply situation that we find ourselves in now – there remains the question of whether subscription will become more firmly established in Europe, through existing players or start-ups.  Now that the focus has shifted away from total flexibility to something that is much closer to a more flexible lease, the financial viability improves.  Flexibility comes at a price, but there is evidence that at least some consumers are prepared to pay that price, and there are deals to be done when the manufacturer is supporting the pricing as a much smarter way of balancing overall supply and demand.  Subscription fleets need to be funded, and for those businesses that do not have deep enough pockets themselves this means that either new funding facilities need to be in place, or that providers partner with lenders who are happy to have the vehicles on their balance sheets.  For dealer groups, leveraging their used car stock to create a new business line, alongside car sales and aftersales, and potentially expanding their customer base may be a useful defensive action when the new car business may be affected by moves to agency, and the aftersales business is affected by electrification.

After all the initial excitement a couple years ago, we are perhaps entering a more rational period when decisions can be made on the basis of business fundamentals rather than over-excited hype about the next ‘new big thing’.  In principle, anything that allows more dynamic and engaged relationships with customers has to be a good thing.  If that also allows some other business challenges to be addressed or eased, that is even better.