What’s in a name?
I have long been enthusiastic for an automotive business model based on usage rather than ownership, primarily coming from the viewpoint of the potential to maximise the profits derived from a car over its lifetime. The traditional model which I nicknamed ‘sell and forget’ maybe an over-simplification off the importance financially of aftersales to both manufacturers and dealers, but it has for many years been a fair description of their mental attitude. The accountants know how important parts revenue is to manufacturer profits and the dealer aftersales business to both dealer profitability and the ability to sustain oversized sales networks, but for many years, even decades, it is new car sales that have grabbed the limelight.
More recently there has been an increase in different forms of selling usage rather than ownership, ranging from mobility schemes that offer cars (and sometimes other modes of transport) by the hour or kilometre through to subscription schemes that give the customer exclusive use of the car over an extended period which might be as short as one month and with notice periods typically of around the same length. Some of those schemes have been manufacturer backed, others have been from established players operating broadly in the leasing or rental market and others have been start-ups who believed they were tapping into or creating a new consumer trend.
Their fortunes have generally been mixed, and the pandemic was particularly tough for the short cycle operators when peoples’ movements were restricted and their use of any shared space was affected by concerns over infection. However even without that interruption, and despite some having the ability to draw on the deep pockets of manufacturers, most have struggled to achieve any sort of sustainable profit. That's seen a number of manufacturers including BMW, Ford and Mercedes exit the business, almost certainly booking significant losses. On the other hand, others remain heavily committed including Stellantis, Toyota and Volvo. A number of independent distributors and dealer groups also continue to develop mobility offers, in some cases through relationships with white label independent operators who provide the know-how whilst the dealership provides the cars and the customers.
What prompts me to comment on this topic today is a few separate observations over the last week or two which reinforce the challenges of getting down to hard numbers in this area and from that to make any objective evaluation of whether we are genuinely looking at the beginning of a shift towards usage and away from ownership. Today I passed a Toyota which had a large Kinto (the Toyota brand for all their mobility style service offerings) on the rear quarter and then as I drove past it saw that it also had the logo of one of the major leasing companies on the side. Separately, speaking to a dealer last week, he told me that sales through the Care by Volvo subscription scheme had shot up recently, and a journalist talked to me about the ‘great success’ that Lynk&Co was having with their subscription scheme in continental Europe.
The Kinto brand covers the whole spectrum of mobility offers from micromobility through to traditional leasing, and with the resources of Toyota behind it, will clearly be a success overall, but how much of that comes from more innovative offers as opposed to the well proven models that are similar to operational leasing (sometimes referred to in continental Europe as long rental) remains an open question.
The apparent uplift in interest in Care by Volvo maybe down to a number of factors, but the offer has been progressively changed (at least in the UK market) so that it looks much more like a bundled leasing product rather than something which is truly distinctive. Customers are signing up for longer terms, albeit with more flexibility than they may contractually have had with a traditional finance product. In reality however under normal supply conditions, many UK customers were encouraged to switch into a new car many months before the formal end of the lease.
Lynk&Co registered just under 8000 units across Europe last year which feels like a strong performance for a new entrant. The price to buy is €44,500, but the CEO claims that 90%-95% of retail sales are on subscription with rates starting at €550 monthly. The pricing is lower than for the sister Volvo product, but I found almost 250 listings on autoscout24 of used 01 models, generally a year old and mainly with low to average mileage. Pricing was around €10,000 less than the comparable Volvo XC40. There were a couple of unregistered cars and cars over a year old with less than 5000km. Again, without inside information you can only speculate, but my feeling is that this looks more like a heavily subsidised product launch which is facing challenges in re-marketing cars returned early from customers and is not sustainable in the long term. I would certainly not use the term ‘great success’ without much stronger evidence.
I therefore feel the jury is still out in terms of the viability of subscription models. ICDP consumer research clearly shows that customers want to have a car that they have exclusive use of, and there is evidence to show that some customers are prepared to pay a premium for flexibility. However the vast majority remain focused on the monthly cost and for them the premium that has to be charged to offer flexibility and for the business to be viable is more than the value that they personally put on that flexibility. I'm sure that we’ll continue to see much talk about mobility and subscription offers, but the reality is that for most customers, an expanded lease with some additional services will remain their first choice, whatever you call it.