Having previously suggested that distribution models sit on a spectrum from the traditional franchise through to the direct sales model, I am concluding that this is not actually the right representation of the different models that we will see in 3-5 years time.
It will be much more like a smörgåsbord – the Swedish buffet offering a wide range of dishes to satisfy all tastes – where manufacturers will choose different approaches for different building blocks of the total distribution model, tailored to suit their market position and appetite to shoulder more or less responsibility for the process and costs.
Why do I think this will be the case? It is not because there has been a collective recognition that having choice is a good thing, but more because they have discovered that following the latest fashion does not work.
Big name consultancies mis-sold the advantages of the Tesla direct sales model, offering agency as the silver bullet that would dramatically cut the cost of distribution, then approached the implementation with a poor understanding of the real complexities of automotive distribution and the role that dealers normally play. As a consequence of that and other external factors such as economic and market conditions, implementations have been cancelled, reversed and rescheduled, starting to create that smörgåsbord.
As we move forward, elements that have been debugged, refined and proven successful in some markets such as new retail platforms, will be rolled out into other markets, but without all the original package that was part of the full agency roll-out.
Efforts to develop dynamic pricing models for retail might be redirected to optimise how variable marketing spend is deployed for better effect at lower total cost. New vehicle supply planning approaches that have become possible with manufacturer ownership of stock and a better view of the sales funnel can be implemented and rolled out to other markets to deliver the revenue, cost, working capital and customer satisfaction benefits that have been highlighted by years of ICDP research in this area.
A few manufacturers might still choose to follow a direct model, but the majority – potentially including Tesla and others who are currently direct – will choose to work with third parties who handle the day-to-day customer interactions.
They may not be ‘dealing’ as much in the future as they have done in the past, but they will still play a critical role regardless of the actual distribution model used. Fixed pricing will remain unobtainable as the most effective means of balancing supply and demand is through price. Achieving ‘list price’ will be something that is as rare as snow in New Orleans (this blog is being written as I return from a severely snow-disrupted NADA Show in that city) – the consequence of having (for a time) a hot product where demand exceeds supply.
In some cases, the manufacturer-dealer relationships may meet the strict legal requirements to be operated as agency, i.e. no commercial risk taken by the agent/dealer, but I wonder whether it is even necessary to make that formal distinction.
The advantage of agency as a contractual format is that it allows the manufacturer to set prices, and that eliminates price-based Intrabrand competition, which in turn means that the customer will find their omni-channel buying journey to be more seamless.
Retaining a franchise contract format, but with intrabrand competition reduced through investor rationalisation, shared inventory and modified margin and bonus structures may still give the customer more flexibility in their buying journey.
However, it would also leave the manufacturer with more flexibility than they would have under agency to adjust the parameters to reflect different customer segments, product competitiveness and market conditions.
This flexibility is not legally possible under agency where you need to be ‘all in’ to be compliant, a problem that VW would have had to deal with if they had maintained their mixed approach for ICE and BEV.
It will allow manufacturers to differentiate models within their range through the distribution channel used – potentially an important additional lever if the product itself becomes increasingly homogeneous through platform strategies.
We have seen this to a limited extent in the past with sub-brands like Maybach within the Mercedes network, but the Chinese newcomers would also find this useful as they seek to bring their premium brands into Europe such as Yangwang and BYD or IM and MG.
They do not want to incur the additional cost of an entirely separate network for relatively low volumes, but do need to find a way to make their premium brand stand out from the ‘G3’ of Audi, BMW and Mercedes as well as the existing challengers like Genesis and Lexus.
The smörgåsbord approach will be more complex than a single ‘menu of the day’ solution that neatly falls under a banner of franchise, agency or direct, but if the complexity is delivered through combining individual dishes in a customised way, and it delivers value to the customers and other stakeholders, then that may well be justified.
Although I can see that some commentators and industry players would like to see a decisive victory declared for their preferred model over ‘the opposition’, I believe that we will all need to become used to a much more varied offer, and become skilled at exploiting that for competitive advantage.
