Global automotive industry trends are likely to cause deep disruption to the incumbent dealership model
Historically, the relationship between Original Equipment Manufacturers (OEMs) and dealers has been symbiotic. On the one hand, OEMs have relied on their dealer networks to sell and service their vehicles; on the other, dealerships have relied on OEMs to provide the cars and components they sell, as well as financing their servicing activities while vehicles are under warranty.
ACES trends are very much here to stay, and as OEMs develop capabilities such as remote software updates and establish direct relationships with their customers through ongoing subscription models, they are increasingly taking ownership of elements of the customer relationship that used to belong to dealerships. Dealerships typically derive a huge proportion of their profits from services and after-sales (over 40%), whilst activities such as new car sales typically garner small profit margins (less than 8%) and may even be loss leaders. However, in this connected, direct-to-consumer landscape, the high margins of the servicing revenue stream for dealerships may well be eroded, and OEMs and dealerships alike will need to evaluate their relationships and their revenue models in order to survive.
A changing landscape means more revenue opportunities for OEMs, but less opportunity for dealerships through traditional means
Consumer demands of the automotive industry are changing. Not only is there a shift to electric drivetrains, but the car is now seen as a component of shared mobility services and models of car ownership are beginning to change. Furthermore, customers are increasingly viewing their cars as devices, not unlike their mobile phone, which they expect to be up to date, and are willing to pay a premium or subscribe to a service that promises greater benefits down the line.
OEMs are therefore developing their capabilities, leading to benefits on multiple fronts:
For the OEM, this makes promising reading; for the dealership, less so. These same services represent capabilities that had previously been the domain of the retailer:
In aggregate, these factors lead to a migration of revenue away from the dealership network and back to the OEM. Dealers’ profit margins and opportunities for customer interaction will likely be reduced. With such a large proportion of profitable revenue diminished, the financial viability of dealerships is at risk.
The traditional dealership, then, needs to transform, but what does this matter to OEMs? Are dealerships relevant in the future automotive landscape? If so, how can OEMs ensure that their dealerships are fit for purpose and financially viable?
Won’t dealerships still be required to service mechanical components?
We’re not yet in a world where we can be transported somewhere by software alone. For as long as vehicles are built from physical components, these components will fail and thus mechanical component servicing will still be required. Of course, this servicing may be performed by non-affiliated dealerships and non-dealer garages, but there will almost certainly still be a role for the dealership in this environment.
Indeed, OEMs will have a vested interest in not allowing dealerships to fail; the human face of their brands and the level and type of service these are able to provide will still be important.
OEMs will therefore need to answer the following key questions:
Many of these challenges are not isolated to the automotive industry. In recent years, falling footfall and widespread migration towards online buying habits have led to retailers searching for innovative ways to keep bricks and mortar stores profitable. Increasingly, retailers are turning to in-store experiences from pop-up events to AR-enabled dressing rooms to drive footfall and revenues in their physical stores. Westfield’s How We Shop: The Next Decade report, revealed that by 2027, 75% of shoppers expect the majority of retail space to be dedicated to offering up experiences, with 81% of customers willing to pay more for experiences. It remains to be seen if “retailtainment” can be relied upon to drive profit on a large scale, however.
Dealerships, too, will develop to become more experiential in nature, focussing on providing services such as test drives, VR experiences, and providing human touchpoints to individual customers and consumers of shared services alike, but these activities in themselves may not directly drive revenue.
What role will the OEM play in supporting the dealership of the future?
OEMs therefore need to consider what value they place on the dealerships of tomorrow and how these dealerships will be rewarded for this. OEMs will certainly take greater ownership of customer relationships (just look at Tesla), but they may need to provide additional support to their dealerships to avoid them disappearing.
A dealership that generates greater customer loyalty and brand engagement will benefit the OEM without necessarily impacting the dealership’s bottom line. Accordingly, OEMs should look at:
The KPIs implicit in the OEM-dealer relationship will likely have to focus more on experiences than transactions and OEMs should look to be agile with how this relationship develops over time.
The dealership isn’t dead, yet, but in order for the dealership to survive, OEMs have to be prepared to part with their hard-earned cash in ways that they have never had to before.
* Autonomy, Connectivity, Electrification and Shared mobility
https://images-urw.azureedge.net/-/media/Corporate~o~Sites/Unibail-Rodamco-Corporate/Files/Homepage/INVESTORS/Financial-Information/Other-Presentation/20200113-WESTFIELD-How-we-shop-the-next-decade_onlyEN.ashx?revision=aaf28ea7-7919-4cda-9577-1cd1d0dd6893** Dealerships will also have to work independently and with OEMs to innovate in the revenue-driving services they offer. Dealerships may look to implement localised partnerships with shared mobility services, enhance their role in vehicle financing or establish themselves as a centre of expertise in connected services, giving consumers a human interaction of the type that will become increasingly rare as buying and servicing habits become increasingly digital.