Mixed signals on future dealer networks

The last couple of weeks in ICDP have been focused on dealer networks.  This week we published our annual update on the Top 50 European dealer groups, and we are just finalising the latest edition of our European Car Distribution Handbook (ECDH) which details the size of sales and service networks for 50 brands in 35 European markets.  The related webinars can be accessed by following the links in the titles above.  More on the Top 50 in next week’s blog probably, but today, I’ll pick up on some thoughts triggered by ECDH.

Following a period since the pandemic when some commentators (though not ICDP) have been predicting radical change in and even the death of dealer networks, as customers were forced online by the pandemic and manufacturers thought they had found a source of improved profitability and greater channel control through agency, this edition of ECDH reflects a very different world.  Our consumer research confirms that online research by new car buyers continues to grow, leveraging multiple sources so that the buyer is very well-informed on the product, potential deals and finance terms before they visit any dealers.  However, they still place high value on the opportunity to see, feel and try products, and to get specific questions answered by a real person before they then close the deal.  This is still most effectively done in a dealer environment due to the complexity of combining a purchase with a sale or return of the customer’s current car, and the provision of financing and additional products such as service plans. 

That is not to suggest that the dealer model today is perfect, nor the broader ecosystem within which dealers sit, encompassing the network structure, the integration of the digital and physical journeys, and the way in which the new vehicle supply chain is managed and steered by the OEMs.  ECDH focuses only on the network element of this, but how many dealers are in a network and the role that they play for sales and service has an immediate effect on intra-brand competition and the scale of investment at each franchise point.  It also affects the complexity of network management, and the attractiveness of an OEM brand to different types of dealer investor.

In this latest update, we have seen a meaningful reduction in network size from the established OEMs, but it is unclear how much of this is being driven by a deliberate strategy, and how much by investors choosing to exit certain brands because of poor franchise profitability or perceived future prospects.  By observation, we see evidence of both, but it is too early to declare that we are on a definite transition path to what we would see as a more rational network model from the established brands.  On the other end, this edition is the first year in which we have three new entrant brands – BYD, MG and Omoda Jaecoo – with significant networks, at least in some of the markets in scope.  It is clear that both market scope and network size will increase for these OEMs in the coming years, and surely some of the other new entrants will follow.  Based on public statements by a number of the new entrant brands there seems to be the potential that they will build tomorrow’s legacy, with networks that prove to be too dense and then need to be down-sized at a future date.

Because OEMs are unable to block repairers from joining their service networks as long as they meet the defined standards, these networks cannot be planned against some defined strategy in the same way as those for sales.  The numbers alone do not therefore tell the whole story in terms of what shape the OEMs would ideally like to have in their service networks.  However, the majority undoubtedly would prefer to have integrated sales and service points as the core of their network, in part because of the cross-subsidy from relatively higher aftersales profits that allows new car sales margins to be lower than they might otherwise have to be to maintain overall profitability.  ICDP consumer research also consistently shows that car owners place convenience as one of the three most important factors in choosing a repairer and will only travel half as far for aftersales as for the original purchase, implying a higher network density for service than sales.  However, structural decline in aftersales needs as the result of electrification and other factors would imply less aftersales capacity is required in future networks.  To confuse matters further, other research by Urban Science – one of the leading providers of network planning services – shared at a recent ICDP Members’ Meeting also shows a number of areas where customer retention for sales is enhanced through actions in aftersales, and this might be weaker if they do not share the same site.  We therefore have a confused mix of sometimes conflicting drivers on how service networks should evolve – perhaps the next edition of ECDH will provide some more decisive clues on the actual direction of travel.

Taken together, it seems that we might be entering a period when sales networks at least go through some significant restructuring, realignment and rebadging, with the jury still out on whether service networks follow largely on the coattails of sales network change or set off on a distinctive, more specifically tailored direction.  At this stage, the signals are mixed, so whether as a network planner or a dealer group investor, some judgement and consideration of the other related drivers of performance will be needed.

The official press release can be downloaded HERE.