7 minute read 12 Oct 2020
man-working-on-a-car-in-a-factory

Why UK automotive dealers must prepare for change sooner than expected

Authors
David Borland

EY UK&I Automotive Leader

Passionate about the automotive industry and delivering innovative solutions for clients. Outside of work, focused on family and community. Enjoys sports.

John Simlett

EY Global Future of Mobility Leader

All things mobility. Innovative thinker. Entrepreneurial mindset. Strategic partner and consultant for the auto and transport industries.

7 minute read 12 Oct 2020

British car buyers are adapting to new sales practices faster than many predicted. And the pace of change is likely to continue.

Automotive sales have remained relatively unchanged by the rise of online shopping. The internet provides peer reviews, showroom locations and negotiation advice but the final purchase is almost universally in person. 

COVID-19 opened Pandora’s box

Before lockdown, remote delivery or dropping off cars for test drives was reserved for longstanding customers, or used to make up for gaps in the relationship between the dealer and original equipment manufacturer (OEM). Suddenly, contact was minimised: brands delivered keys by drone; trained workshop mechanics via video; and online product reveals were commonplace. Dealers were relieved to reopen in June but protective screens and capacity limitations to prevent virus transmission may unsettle buyers.

Car brands are now taking digital transactions seriously – one forecasts that 25% of sales will be online-only by 2025 – and admit that dealers are likely to lose market share. Volumes and profits are already under pressure: matchmaking websites extract commissions for linking new car buyers with dealers, while rental innovations diminish retail demand. Car sharing promises hourly billing, simple sign-up procedures, and vehicles located close to customers that can be driven away in minutes. Anyone wanting longer-term exclusive use can purchase monthly all-inclusive subscriptions with frequent opportunities to change car.

Expanding customer choice, shrinking physical footprint

Increased online sales, reduced ownership and declining physical servicing volumes make reductions in showroom and workshop space inevitable. Some brands are rejecting traditional sites because they are expensive – commonly over £2 million to furnish – and lack passing trade. The recent trend is to bring cars closer to the customer: smaller showrooms, with room for a couple of vehicles and product experts, are placed in shopping centres, creating an atmosphere focused on information rather than outright sale. New players are experimenting with brand stores that reserve space for lifestyle activities and coffee bars. Dealers are less keen than manufacturers, seeing such locations as marketing assets for the good of the brand, rather than contributing to local sales performance.

Additional pressure to downsize comes from well-funded asset-light used vehicle traders. They use algorithms to minimise inventory and save money on salespeople and showrooms. Customers can finalise and finance purchases from home then have the vehicle delivered to them and collected without fuss if they change their mind. UK dealers may need to adopt some of these practices, and shrink used car lots, to compete.

Technology will reduce servicing volumes: OEMs say all-electric models, forecast to make up almost 30% of European sales in 2030, will require less service and maintenance, while vehicles with the latest safety systems need fewer crash repairs. The end result is likely to be lower revenue in the service lane. Connected vehicles detect and report problems early – although recently entering the mainstream, their popularity is predicted to grow by circa 20% CAGR.

Software delivered over the air will fix many concerns – cheaper for manufacturers, simpler for customers but lowering revenue for dealers. In 90% of cases, one brand’s mechanics know in advance which tools and parts are needed and can often fix the issue at the customer’s location in a specially equipped van instead of a workshop visit.2

Dealers and manufacturers must jointly agree how to adjust their footprint and deploy new assets. Physical sites will remain significant – an EY study found that 58% of German buyers still intend to purchase cars in person by 2025. 3 Dealers must decide between remaining focused on completing sales, and making greater cuts, or becoming more involved in the consideration process, and learning new competences. Some advocate for OEMs to take complete control but experience with in-house dealer groups has demonstrated the value of independent dealers’ specialisation and capital.

Selling cars seamlessly

British buyers generally struggle to order new cars online. After creating their ideal car on the brand website, they are quoted the list price, often without the discounts they suspect are available, and get referred to a dealer – instant purchase options are rare. Dealers have reason to dislike online transactions: they prefer selling from inventory to tailored orders; accurately valuing a trade-in without seeing it is tricky; and financiers often confirm high-value leasing contracts only after personal records are submitted. However, challengers now provide levels of speed and convenience to buyers that dealers must match: online businesses buy used cars instantly, at a discount and subject to a final inspection; FinTech companies, some backed by car makers, offer on-the-spot leasing deals.

The sales system must become entirely electronic, enabling customers to move between home and showroom without having to restart the process or undergo lengthy login procedures. An integrated “digical” platform will ensure consistent quality on and offline. 4 Traditional roles, where manufacturers controlled prices and advertising, while dealers sold cars and cared for customers, will blur. For some customers, the entire sale will be completed on the OEM’s website.

A sustainable model for brand-led sales already exists: around half of UK registrations are to fleets. They normally buy directly from the manufacturer and dealers receive a fixed fee to arrange delivery. OEMs are updating dealer contracts with a similar philosophy for internet sales, motivated by the additional challenge of selling electric vehicles alongside an ecosystem of services. But this still implies customers can be neatly filtered into online and offline streams – many will want to use both. There are several sales channels where dealers and manufacturers can find key enablers of seamless digital retail. User choosers, those enrolled in OEM management car schemes and commercial vehicle customers, can configure and order the precise vehicle they want, normally online. Daily rental companies select suitable vehicles directly from stock. Fleets receive targeted discounts through automated systems. The most challenging problem is reducing the wait times for vehicles built to order.

Customers can quickly buy from dealer stock but, with hundreds of potential variants, they often get a close (rather than exact) match. Building to order is possible but patience is required because production schedules are frozen weeks ahead. Designing more options that dealers could fit would help. Some brands make a virtue of the wait, providing photographs from the factory so that owners can watch their “baby being born.”

Digital tools used in a contactless vehicle sales process

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22_10_20_WA_AM&M article 2 author_Asset recreation

Don’t forget used car buyers

Used car sales underpin dealer profits, and substantive contradictions with the new vehicle customer experience require reconciliation. OEMs should help. Used vehicles are entry level products that build brand loyalty. Technology for browsing features on new vehicles and remote viewings can be applied to used models, as can tools for trade-in and finance approval. Manufacturers, dealers and software providers must collaborate because customers expect the back end to work without issue. Are management systems ready to integrate all the features needed for synchronised digital and physical purchases across brands, covering new and used vehicles, without holding up the transaction at any point?

Opportunities to improve the customer experience

OEMs are extending personalisation beyond alloy wheels and decals to parts such as customised floodlighting and sills, leveraging rapid prototyping techniques and challenging the third parties that traditionally dominate aftermarket upgrades. Providing new capabilities after the vehicle leaves the factory is another growth area – cheap modems that plug into diagnostic ports give older vehicles basic connectivity and create scope for extra services. Connected cars interacting seamlessly with dealers might convince more owners to stay with franchises, rather than opt for independent garages. Customers routinely experience mobile windscreen and paint repairs. Now they can order car washes, fuel top-ups and tyre changes. Why not offer similar products from mobile servicing vans?

There are opportunities to improve marketing effectiveness and refine product strategy. Big data promises much, assuming customers consent and are not presented with any unsettlingly accurate insights. Alongside vehicle data, which could lead to per-mile servicing plans, interactions with dealers and manufacturers provide clues about consumer tastes. They should be shared, rather than duplicated. Some firms are bolstering their knowledge of cross-shopping and brand reputation by acquiring third party comparison sites. Selling online enables customers to pre-order new models. Using cheap and refundable deposits, some brands have built excitement about product releases and received free publicity for their impressive pre-order figures.

Collaboration redux

Dealers and manufacturers must develop a shared perspective about which new competencies and assets will be required, how to acquire them and who should be responsible. There are tough choices – more investment in mobile servicing will mean less spent on showrooms, but also opportunities for collaboration in servicing networks and backend software, providing dealers can agree on how to apportion costs and benefits. Brands might find collaboration with competitors attractive, just as video streaming providers buy server capacity from rivals, parts warehouses and digital assets could be shared.

Five questions for dealers and manufacturers:

  1. What should our future UK footprint look like?
  2. How can we have a seamless handover between OEM-led and dealer-led activities?
  3. Where should new and used sales experiences be the same, and where should they differ?
  4. What new revenue streams will result from changing technologies?
  5. What are the opportunities for pooling assets and back-end processes with others?

Summary

Digitalisation and alternatives to ownership are challenging traditional vehicle sales methods and business models, but manufacturers and dealers have the advantage of incumbency. Brands rather than dealers are likely to lead online sales in the future, although both will play a role. There is significant opportunity for continued success, but OEMs and dealers need to establish new operating models, processes, systems and data that serve the needs of the end consumer.

About this article

Authors
David Borland

EY UK&I Automotive Leader

Passionate about the automotive industry and delivering innovative solutions for clients. Outside of work, focused on family and community. Enjoys sports.

John Simlett

EY Global Future of Mobility Leader

All things mobility. Innovative thinker. Entrepreneurial mindset. Strategic partner and consultant for the auto and transport industries.