What’s around the corner?
Over the last three years, since both manufacturers and dealers discovered that they can make more money by selling fewer cars, we have been assured that lessons had been learned and that we would not return to the bad old days of oversupply. Pushing product drives discounts and campaign spending that amounts to billions of euros annually for a major manufacturer. It also positions that relationship between manufacturers and dealers firmly around volume targets and achievement and results in customers sometimes driving away in cars that do not really meet their original requirements. The price discount that sealed the deal soon fades in their memory whilst every day they have a reminder of the colour they did not want or the missing feature that was on their original specification. Ironically well funded dealers can make money in this environment through taking advantage of pack deals at the end of the month or end of the quarter where deep discounts allow them to make a good profit on pre-registered stock.
At various dealer events with representatives from multiple markets over the last couple weeks, the consistent message that I have heard is that stock push is returning from a number of manufacturers. This does not seem to be restricted to just one or two models that face low demand because they are at the end of their life cycle or face tougher competition in their segment. It seems to be much broader and targeted, as in the past, at hitting some notional sales volume and market share for the period. The costs associated with this through discounts and inventory holding periods represent around half of the “cost of distribution” – the 30% of retail price that has been a constant benchmark for at least 30 years.
Most manufacturers are sticking with their intention to switch to agency over the next two to three years, most recently Ford who confirmed their intention to move to agency across all models across all European markets at their European dealer conference in Copenhagen a week ago. There is no evidence from the pilots that have already gone live or what comes out from manufacturer-dealer discussions that manufacturers intend to go live with agency with pricing which is lower than today's list price under franchise. As a significant part of the difference between the total margin and bonus under franchise and the typical commission under agency actually reflects customer discounts previously given by dealers in order to move the metal, it is quite reasonable for the dealers under those circumstances to describe the whole agency initiative as being a “margin grab”.
If manufacturers go live with agency and take advantage of fewer restrictions in the supply chain to increase volumes above the level of natural demand, they are faced with the challenge of fully taking over the responsibilities the dealers have carried for years of judging customer by customer what price is required in order to close the deal. This process is imperfect when operated at a local level but the emergence of larger groups holding multiple sites for each brand, often in contiguous areas has reduced the level of intra-brand competition where dealer bid against dealer for the same customer. On the other hand new e-commerce marketplaces such as carwow highlight which dealers nationally are offering the best deal, perhaps because it is the last unit they need to sell in order to achieve a volume bonus.
Whilst this is a flawed process, it is much more efficient and less transparent to the market than across the board price cuts such as those we've seen from Tesla whose recent pricing strategy seems to displease more recent customers then it has attracted new ones, whilst also having a ripple effect across the whole BEV used car market. When a manufacturer makes across-the-board price reductions they lose the discount across that entire volume, whereas more focused price adjustments may include both higher and lower discounts, but in total the cost is less. (For a more in-depth analysis of this, see this great post from our good friend, Glenn Mercer).
What concerns me from an industry perspective is that the supply taps will be turned on at the same time as manufacturers start to transition to agency without the people, processes, systems and indeed even the will to dynamically manage pricing in the way that is required to achieve a demand-supply balance. They will end up pulling on levers that are crude, ineffective and ultimately damaging to the interests of all parties – manufacturers, dealers, fleet and leasing businesses and customers. The levers that they're familiar with are OK for wholesale business but inappropriate at the retail level. They may use across-the-board discounts, short cycle channels like daily rental, diversion of volume through broker channels, accelerated churn of demo fleets and other forms of self-registration. All of these will drive up the cost of distribution rather than reduce it, erode margins and residual values and discredit agency as a legitimate option to run omni-channel retail effectively.
We do not know what is around the corner, but my fear is that what we will find is a large truck resulting in a very messy car crash.