RETAILING NOT DEALING – WHAT'S THE PROBLEM?

Introduction

In the work that ICDP does across Europe and further afield, one of the biggest challenges we face is trying to explain the difference between “retailing” and “dealing”. The difference between the two does not translate well into other languages, but it is important. By our estimations, out of the Global Top 50 dealer groups, 7 are in the UK, including Pendragon, Arnold Clark, Inchcape and Lookers. (22 out of the Top 50 are Chinese by the way…) As a Brit speaking to international audiences, I frequently refer to the positive qualities that are demonstrated by UK groups, such as the smart use of shared services and the balance across the business portfolio of new, used, aftersales and F&I. However, as a UK customer, I experience some of the worst customer experiences and disconnected thinking that I have experienced in any of my interactions with business as a consumer. At the heart of that is the difference between retailing and dealing.

ICDP research shows that customer behaviour is changing, and along with other factors such as the reduction in aftersales volumes and the impact of everything digital, this will lead to fundamental change in the way in which the industry as a whole interacts with customers for the sale and support of cars, Being a “better dealer” will not be enough to survive and be successful in this emerging world. Even those with many years of experience running dealerships in the traditional way will not be a guaranteed ticket to future success. Our research in Europe and more broadly suggests that that there are five critical areas that need to be at the heart of a dealers business strategy in order to deliver well in the short term, but also to build sustainable success over the next decade.

These are:

· The customer journey – how do people shop today, what does this mean for dealers?

· People – dealers all want staff like the Apple Store, but won't make the commitments to deliver

· The property “timebomb” – what do we do with dealer sites when buyers don't want to or need to visit?

· Car for Life, Customer for Life – why do retention strategies go wrong?

Customer Journey

Whilst there are some people who still deny that customer behaviour is changing, most industry participants recognise that customers are buying cars in a very different way to even five years ago. ICDP consumer research in Western Europe has shown a shift towards online research replacing physical dealer visits. This pattern is also evident in the USA, and even in China. Our research in Turkey (Figure 1) shows some differences, with even more extensive research on line, leading to new car buyers feeling better-informed, but this is followed by more dealer visits. Interestingly, when we asked their subjective view about dealer and brand loyalty, most declared that they felt loyal to both, although this was notably higher to the brand than to the dealer (85% vs 73%). Unsurprisingly for a high growth market, Turkish buyers make more use of finance, and less have another car to trade-in. More Turkish buyers contact a dealer than other markets before visiting – for information or an appointment – and also make more dealer visits, around twice the level of Western European markets, across a total of 3 dealers, rather than 2 in the mature markets. A key question for the Turkish auto industry is whether this behaviour will converge with Western European or US markets, and if so, how quickly?

The implications of this profile, and the rate at which it is changing, are profound for all dealers. When the customer first walks into your dealership, often without warning, they are already well informed about the car they plan to buy and all other aspects of the possible deal. Many are not deciding what to buy, but whether to buy from your dealership or an alternative – possibly a competitor, possibly another within your group if it is relatively local. When we spoke to customers in focus groups in France, Germany, Italy and the UK, it was clear that although they like buying a new car, they do not enjoy the dealer experience – complaining in particular about the condescending attitude of salespeople, low staffing levels, and complex processes to complete the purchase. As the customer is “purchase ready” when they walk into the dealership, it does not seem too bold an objective to make that experience so positive that they skip the visit to a second or third dealer, and conclude the purchase immediately. The key to achieving this objective may lie in exceeding the customer's currently low expectations of the dealer experience, whilst simply matching their expectation in respect of the financial aspects of the deal. People – your employees – will make the difference.

People

Many dealer group executives say to people like ourselves, that they want to have staff who are like the people they deal with in the Apple Store. They recognise that the quality of the customer experience there is different and better than their own dealerships. However, most lack the commitment to follow through with thinking about why we have the type and quality of people that we have in customer facing roles in dealerships. This is not only the fault of dealer group management – manufacturers bear some responsibility as they try to micro-manage the dealer experience through standards, bonuses and CSI schemes.

There is a disconnect between what is measured through manufacturer and dealer customer satisfaction surveys and what buyers told us in the course of our research. We attribute this to two factors. The first is that buying a new car remains an emotional event for most customers, even for the most non-car minded individuals. The car represents many aspects of them as an individual, what they do in life and how they see themselves. We found that until you probe further into the detail, new car buyers merge their thoughts about new car ownership itself with the process of buying it, resulting in more positive feedback on the latter. The second factor is that customers have a low expectation of the dealer experience – perhaps one of the reasons why they increasingly look to the internet for information, rather than visiting their local dealer. If the experience is less bad than they feared, the consequence can be a relatively positive survey score. In addition surveys generally ask closed questions related to a fixed process. The customer is not given the opportunity to comment, for example, on low staffing levels at the weekend – a common complaint in our focus groups, leading some buyers to take holiday so that they could visit dealers during the week.

Achieving an Apple Store experience requires both the right number of staff and the right type. Sales executives need to respect the fact that the customer has invested time in pre-visit research, and engage with them in the final stages of their decision-making process, rather than just try selling to a rigid process. Arguably dealer organisation structures have not adapted to current buying or aftersales behaviour, with rigidly defined roles and hierarchies contributing to frustration and poor customer experience. Salary structures and a volume-driven culture which are not comparable with premium retail organisations – in particular the fixed/variable split – mean that a dealer will never be able to attract someone from the local Apple Store as a sales executive. It also means that the salesperson is strongly motivated to move around to wherever the bonus opportunity is greatest, driving high staff turnover, and a lack of willingness on the part of dealers to invest in development and training or adopt different organisational approaches. Whilst there are encouraging signs that some dealer groups, particularly in the UK, are putting a much greater emphasis on HR in general, we are unaware of any who have taken a more fundamental look at the type of people they hire, the roles they are asked to fulfil and how they are rewarded. Until that changes, consumers will continue to look to the internet, the media, friends and colleagues for advice on what car to buy, and where to have it serviced, and dealers will play a more and more limited role as an order capture point.

Property Timebomb

The franchise system means that it is generally the dealers who make the investments in property, whilst the manufacturers dictate, but rarely fund, the scale and style of that investment. In the United States, this has now come to a head with the National Automobile Dealers Association (NADA) sponsoring research in order to push back on “Factory Facilities Programs”. In Europe we also see a number of manufacturers requiring major makeovers of dealerships and investment in new technologies that provide bigger and better virtual displays of products and features, despite the fact that in many markets dealer margins are under real pressure. In no case do we see any indication yet that manufacturers have stepped back and reconsidered what the role of the dealership is, as customers do more online research and visit fewer dealers, less often.

We see two fundamental options with respect to physical dealership sites. The first is that the dealership is made into a “destination” – somewhere where the experience is so positive that it will draw customers in, potentially even when they are not actively considering replacing their car. This experience will require more than a display of vehicles and a glitzy showroom, and manufacturers and dealers should look to other forms of retail for inspiration to see why some retailers (including Apple) and shopping centres have become destinations for “retail therapy”. We should also not forget an example closer to home where some motorcycle dealers attract large numbers of customers and prospects on a regular basis who are not in active buying mode.

The second option is that dealerships adapt to the new customer behaviours, finding ways to get engaged with customers during their virtual shopping activity when they can still be influenced with respect to which cars to consider and which two dealers to visit. As most buyers start their process on manufacturer websites, before looking at third party sites and possibly dealer sites, this virtual engagement is something which manufacturers and dealers need to work on together, capturing the customer to the brand, and then steering them to contact the dealership. The initial dealer interaction will then be by phone, email and internet, requiring different skills (and working patterns) than in today's dealership. In the US, this type of activity would normally be established as a standalone “business development centre” – an approach which makes sense in terms of having the right skills for that task, but ignores the possibility that those same skills might also work better in the face-to-face interactions in the dealership.

Taken together, these approaches suggest that investing in facilities for today's business model is highly risky. As the investor, dealers should be demanding a 10 year view from their manufacturers as to how they envisage the dealer network developing in terms of locations, format and role. If the manufacturer is unable to convince the dealer that a required investment is justified in this context, the dealer should be either refusing, or ensuring that the investment can produce positive returns over a shorter timescale than normal. Existing property portfolios should be critically reviewed to ensure that property and leases do not become a liability with values falling as the whole sector restructures towards a new business model. We call this the “property timebomb” on which the clock is already ticking, and it possibly represents the biggest balance sheet risk for groups and the personal fortunes of owner-operators.

Car for Life, Customer for Life

All business people recognise that winning a new customer is significantly more expensive than retaining an existing customer. There is nothing to suggest that this is less true in automotive than elsewhere, and dealers have the additional opportunity to retain the car within “their parc” – a known quantity that has been sold and serviced by the dealer, reducing risk. We take this view in suggesting that from the manufacturer and dealer perspectives, the goal should be to retain the “car for life, customer for life” (Figure 2). This goes further than traditional thinking on customer retention, as that tends to focus within a single ownership cycle on the retention of the customer for aftersales business, using service plans and systematic service reminders and follow-up. Many dealers fail to do this well, so extending the horizon out from the next service to “life”, and from the customer to the car will demand new ways of thinking.

Compared to other retail sectors, financial services or the travel industry, our research has shown that customer retention programmes operated by manufacturers and dealers have limited scope, and tend to operate in “selling mode” rather than trying to build a broader and more robust relationship. Unlike most other sectors, the product itself is durable with a large and profitable market for resale as a used car, with associated aftersales and F&I opportunities. From our consultancy work, we have found that the opportunities for dealers from taking a similar approach to used cars as they do with new, i.e. offering appropriate F&I, and maintaining aftersales retention with tailored, lower cost offers appropriate to the age and value of the car, can generate larger profits than the used car sale itself.

In order to succeed with this philosophy, dealers will need to become more effective at capturing, updating and leveraging large volumes of data related to customers and cars. At what point might a customer be open to changing their car? Are they likely to stick with the same brand, or have they outgrown that and retaining the customer might require a switch to a different brand from another group dealership? Which car in your parc might match the identified needs of one of your customers, and will the current owner potentially be open to switching now? This approach to capturing and analysing data is one of the key differentiators between retailing and dealing, and demands skills and technology investment that to date we have only seen in the automotive retail sector in CarMax – a business with consumer retail roots that boasts an operating margin of almost 7% based mainly on used cars.

Summary