The global automotive retail industry is becoming unrecognisable from what it was 20 years ago, and the pace of change is only picking up. Digitisation is reshaping the traditional sales and service formats, and customers themselves are changing their interaction and communication patterns in response to the rise in mobile technologies and social media. McKinsey’s 2013 Retail Innovation Consumer Survey takes a closer look at the changes taking place in automotive retail and the various strategies currently being adopted. McKinsey’s senior partner Hans-Werner Kaas spoke to Megatrends about the latest research findings and possible future directions for the industry.
Dealership numbers
McKinsey’s analysis takes into account responses from around 4,500 customers across the US, Europe, and China – regions with a marked difference in the dealer landscape. In the former two regions, the number of new-car dealerships has fallen by 15% since 2008. Kaas explains: “The reduction of dealerships in the US and Europe was driven by the necessity of economic pressure during the recession of 2008-09. That was a natural consolidation, so remaining dealers can become more profitable.”
In 2009, both General Motors and Chrysler made headlines with their drastic dealer reduction programmes, implemented as part of their bankruptcy restructurings. GM slashed its US dealer count by 42% to 3,605 by the end of 2010. Chrysler shut down 789 US dealerships, representing 14% of its sales volume. At the time, Chrysler’s then Vice Chairman and President Jim Press commented: “The unprecedented decline in the industry has had a significant impact on our sales and forced us to reduce production levels to better match the needs of the market. With the downsizing of operations after the sale and reduction of plants and production, similar reductions must be made to the size of the dealer body.”
In China, meanwhile the number of dealers has more than doubled since 2008. “When you look at China, it is a completely different situation and has seen a dramatic growth market over the last ten years,” says Kaas. “Although China’s economic growth rate has softened a little recently, it is still growing substantially on a very high basis now. You need to provide access to the increasing number of car buyers, including the first time car buyers.”
As a result, dealerships are not just growing in number but are also expanding to new regions around the country. “They have moved beyond the Tier 1 and 2 cities, into Tier 3 and 4 cities,” notes Kaas. This could go too far, though, and Kaas cautions that “economic health is required for any dealer. Each OEM needs to make sure that it does not lead to an unhealthy, economically unviable dealer body by increasing the numbers in too strong a manner.”
In fact, a 2013 report from Sanford C Bernstein warned that an increase in the number of car dealership in China would be likely to result in declining profits for dealers. It warned that “a crunch in returns is inevitable.”
China’s dealer network growth comes despite the new car registration restrictions in place in several big cities. Implemented as a means of curbing high pollution levels, these caps limit the number of individuals that can purchase a new car at a given time. “I’m sure that the Chinese policy makers will weigh carefully the requirements from an environmental standpoint, fighting pollution, against the further economic development of society,” observed Kaas. “You certainly might see a thoughtful selection of a dealer network of where the locations are for an OEM and the minimum size of a dealer. Those decisions will absolutely become more critical.”
Shrink the dealer network – it’s time for virtual reality
McKinsey believes that globally, the dealer network needs to shrink. With nearly 50% of dealer networks underperforming, additional closures would effectively reduce performance spread. This alone, though, will not be enough: “While reducing performance spread is a prerequisite for improving current retail network performance, it will, on its own, neither ensure future success nor transform today’s dealer network into a modern, multi-format, innovative sales and service experience for the customer.”
In general, it wants to see more fully integrated customer relationship management and dealer performance management systems. McKinsey believes this allows both dealers and OEMs to better use customer data and provide real-time transparency and insights into retail performance.
Audi has emerged as one of the leaders in this approach. The German OEM has been supporting its dealerships’ digital marketing by offering dealers a standardised set of digital tools (search engine optimisation and banner advertisements) to help them generate more qualified leads. At GM, more than one-third of the OEM’s dealers have started offering the OEM’s new online shopping tool ‘Shop-Click-Drive’. The software allows users to arrange a test drive, settle on the price of a new car, receive an estimate of the trade-in value of their old car, apply for financing, and arrange vehicle delivery. Kurt McNeil, GM’s US Vice President of US Sales Operations, told us the tool makes “it easier for the dealer to build a personal relationship with the customer.” Others, including Mercedes-Benz, BMW, and Ford are providing iPads to their dealers for sales staff to use with customers.
The technology goes far beyond this, however, as some showrooms do away with physical cars altogether. Jaguar Land Rover’s Virtual Experience is a portable system that allows customers to engage and interact with an almost life-size high-resolution image of any model. That’s a digital image, not a physical model. The portable system can be set up almost anywhere – showrooms or public spaces – to provide virtual ‘hands-on’ access to the range.
Audi is also an early mover in the digital retail sphere. It now operates three ‘Cyberstores’ – located in Beijing, London and Berlin – and it plans to open 20 worldwide by 2015. These virtual brand centres are located in the heart of thriving urban centres, where space is at a premium. With no room to display a full range of vehicles, these locations instead display Audi’s entire model range completely in digital and “almost true-to-life” form, projected on floor-to-ceiling projection surfaces. Prospective customers can use media technology to configure a customised Audi, book a test drive or directly order the production of their car.
Other brands are dropping the reference to vehicles altogether, as seen with the likes of Lexus’ Intersect brand experience space in Tokyo. Opened last August, the location is described as “unique-luxury spaces where people can experience Lexus without getting behind a steering wheel. Neither a dealership, nor a traditional retail space, guests are able to engage with Lexus through design, art, fashion, culture, film, music and technology.” Instead of seeing physical Lexus cars, visitors can buy a coffee and view a lifestyle and culture exhibition. Moving on to the second floor they can purchase various luxury items and snack at a café.
Mark Templin, Executive Vice President of Lexus International, explained that the locations are meant to serve as a “comfortable and inspiring space for interaction among people and between people and cars.”
New strategies build brand perception – but do they sell cars?
McKinsey is optimistic on the impact of these various alternative approaches, but so far there is little data to indicate their effectiveness in generating car sales. “The jury is still out in terms of actual conversion of sales leads. Nevertheless, what those new formats do is certainly help to reinforce and build brand perception,” says Kaas. “As a caveat comment, such a new format alone cannot be the ultimate and only driver of sales conversion. What we emphasise and what we have empirically proven in our research is that you need an integrated approach of all the touch points of a consumer and you need to know for a consumer or segment what the preferred touchpoints are – whether it’s word of mouth referral to friends or online forums in the decision phase. However, the decision phase still happens in a dealership. That information and the relevance of touchpoints is absolutely critical. I think all OEMs will step up their efforts in understanding their customers there.
Transformation is vital…and inevitable
McKinsey believes dealerships will remain a crucial touch point for consumers, but the variety and number of touchpoints is growing. “In understanding touch point preferences it’s more important to look at the demographics and preferences of a consumer that characterises his attitudinal characteristics but also purchase and usage preference. And different consumer segments will have different types of touch point journeys,” says Kaas.
The end message from Kaas is that transformation is inevitable if dealerships are to meet the coming market challenges. There is no ‘one size fits all’ approach for all dealerships, but a general integration of traditional techniques with new formats offers the most promising strategy, and on that will both keep customers happy and improve dealer profitability. The important thing now is to start acting or risk getting left behind: “Those that do not move ahead could find themselves driven out of business in the mid to long run…. So there is no time to lose – the time to act is now.”
