Fuel For Thought: The Transformation Of Auto Retail

Republished By Plato

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When was the last time you went to a local travel bureau
to book a flight? Exactly!

While most other industries have transitioned to a digital model
for more than a decade — from travel services to
consumer-packaged goods to banking — the car-buying process has
remained a very traditional physical process. Until now.

No-haggle pricing, direct-to-consumer, and the agency model are
new retail concepts often referenced in an EV context. But is
selling EVs really all that different from selling ICE vehicles in
an omnichannel environment?

Evolving customer expectations are the impetus for change.
Electrification is merely the lever. Customers have been demanding
a more exciting and simplified sales process for decades, but the
industry has been resistant to change. It needed a global pandemic
and new powertrain technology (along with increasing cost pressure)
to force OEMs to rethink auto retailing.

So, what’s different compared to a few years ago?

The COVID pandemic had a lasting effect on
consumer behavior. 65% of US vehicle buyers shop online or
partially online according to S&P Global Mobility’s latest
Vehicle Buyer Journey Study. This continues a trend, with ‘Online
Readiness’ up by 17 percentage points in the past two years. Most
importantly, though, 61% of US consumers said that the availability
of an online transaction option influenced their purchase decision.
This is a global trend also observed in Europe and China.
Global inventory shortages during the pandemic
have further accelerated the shift in consumer behavior, as digital
shopping options made it easier to compare and locate the product
of choice, and high incentives/discounts stopped being the norm.
But the return of inventories and discounts could hinder this
retail transformation.
EV disruptor brands may strive in this climate
to prove that automotive commerce does not need extensive physical
networks to create market reach. More as a necessity rather than
planned revolution, new entry brands are creating a new experience
of highly digitized and CAPEX-light retail networks while promising
a superior customer experience.

The biggest motor for change, however, always was and still is
cost pressure. Traditional internal-combustion manufacturers are
finally buying into retail transformation — not ‘outside-in’
listening to customer expectations, but ‘inside-out’ driven by
financial targets. To cross-finance the expensive shift to EVs
while fighting dwindling margins at the same time, the reduction of
cost of retail is one of the most significant cost levers.

As a result, between 2% and 5% cost savings are expected to
result from retail transformation due to: lower incentives spend
and higher gross profit per vehicle; reduced staffing due to
simplified and digitized processes; and optimized stock management
with a significantly reduced number of demo cars and higher share
of build-to-order vehicles.

Aligning ICE and BEV marketing is key

You don’t do your brand a favor if there are different marketing
strategies for EVs and ICE vehicles.

EVs are not the impetus for change, but a very strong lever to
make the transition to the future of automotive retail. Traditional
ICE manufacturers have chosen different innovative approaches when
it comes to launching and selling EVs. The retail model where every
franchised dealer can sell a brand’s electric vehicles (as opposed
to only select, “qualified” dealers) does not seem to work for most
mainstream OEMs — due to limited stock availability (for now),
uneven regional distribution of demand, and the high level of
investment required per dealer to become EV-ready.

Selective EV retailing approaches vary between voluntary dealer
buy-out packages as offered by GM in the US, BEV-agency retail
models as seen with multiple OEMs worldwide, to very bold
strategies such as splitting entire business lines like Ford Blue
and Ford Model E.

Lest we forget, today’s EV strategy is the future strategy for
the brand. Very soon electric vehicles will be the majority of
vehicles for sale — by 2031 in both the US and globally —
and those innovative approaches become the standard for most
consumers.

S&P Global Mobility’s EV consumer analytics show distinct
differences between the so-called disruptor brands vs legacy brands
selling EVs. Disruptor brands conquest primarily fuel-type-loyal
Tesla customers, followed by early-adopter type consumers across
all segments. When established brands launch EVs, however, they
pull from their own existing ICE customer base as well as the
traditional core competitor basket in the established segments
(some legacy brands have had limited success conquesting
Tesla).

With that understanding, OEMs should rethink their selective and
radical EV retailing approaches. It’s still selling the same brand,
just a different powertrain. Retail innovation is ultimately
required for the entire brand network, and brand consistency can
provide psychological reassurance for customers as they embark on
the EV journey.

For all the praise of the Tesla model, this is not for everyone,
and the Tesla success story has yet to be repeated. Traditional ICE
OEMs should capitalize on the advantages of their dealer partners
and brick-and-mortar networks, rather than trying to emulate
new-entrant EV brands.

Redesigning bricks & mortar

So, what is the future role of the dealer? Undoubtedly the
digitization of automotive retail will lead to a consolidation of
brick-and-mortar showrooms. The conventional ‘convenience’ metric
needs to be redefined — it’s no longer convenient having to
drive to a dealership. Dealers need to meet customers where they
are: at home, at work, while shopping, etc. Convenience is about
ease and simplicity and availability anytime and anywhere.

A stunning 60% of consumers surveyed in S&P Global
Mobility’s Vehicle Buyer Journey Study reported that they drove
further than their nearest dealer due to the availability of online
channels. And based on actual purchases (sales data statistics), US
consumers today travel 11% further on average than five years ago,
reducing the need for dense dealer networks.

Intriguingly, out of consumers who admitted to choosing a
further away dealership due to online features, almost double the
amount of consumers in China and Europe (compared to the US) said
the specific online element that influenced their dealer choice was
the ability to compare pricing and offers, as opposed to being able
to complete parts of the purchase process online.

But consumers still want to touch, feel, and experience the
product. They also need the peace of mind to have a local go-to
point for servicing — as remote-servicing models continue to
face challenges. Physical representation will therefore remain
crucial. Consolidation should first occur in facility optimization
and investor consolidation, only then followed by responsible
rooftop consolidation.

Facility recycling and right-sizing showroom space is not only
important to reduce dealer operational costs, but also imperative
to adjusting the remaining showrooms as the sales process struggles
to remain casual and personal, rather than transactional — even
though replacing bricks with clicks might remove that personal
touch.

Brands need to create a new less intimidating feeling, with a
focus on hospitality. Showroom design should think of the human
being first, not the display of vehicles. Removing desk space and
printers in exchange for casual seating and coffee bars is only the
tip of the iceberg to a new physical retail experience – which
provides an opportunity to improve on ESG in retail.

There is opportunity to generate a win-win outcome from this
industry disruption, for OEMs, dealers, and consumers.

Breaking the model

Although anathema to franchised dealers, can the
direct-to-consumer (D2C) model provide an answer?

Franchised networks in most mature markets are over-dealerized,
highly cannibalistic, and have not proven sustainable. Many pure
D2C networks, however, face the opposite challenge; very lean
networks do not reach certain geographies and demographics,
especially in regard to service coverage.

Agency retail models can be seen as transitional, combining the
best of both worlds: the backbone of a strong physical partner
network with the cost savings of D2C models. If such a model is
adopted, OEMs and retailers should go all-in, as hybrid approaches
such as ‘non-genuine agency’ tend to fall short of generating the
expected efficiencies and expose legal risks.

However, agency or direct-to-consumer retail models alone are
not the answer and are not going to solve the omnichannel retail
challenge. Retail transformation is more than just a contractual or
facility issue, it is a data and a people issue. There needs to be
a parallel approach.

Pricing is one of the biggest challenges hindering online
adoption. Consumers will still go to the dealer if they can
negotiate a deal, even if the experience is terrible an online
purchase would be more convenient. The Vehicle Buyer Journey survey
showed most showroom visits in recent years were not actually
customers wanting to go to a dealer to touch and feel the product,
but customers cross-shopping between dealers of the same brand to
get the best deal for the product they already selected online.

During the pandemic-related inventory shortages, even
traditional US inventory-push models began making a gentle push
towards ‘build-to-order’ with online configurators and remote
test-driving options. As inventory is slowly coming back, it will
be essential for OEMs to keep incentives at moderate levels and
manage intra-brand cannibalization to enable effective digital
retailing. Of course, more than a century of habits may be tough to
break in transitioning to a new retail model.

Despite all the focus on digital tools and new forms of
bricks-and-mortar, the automotive industry is still caught in a
traditional retail mindset that has cemented over decades and
generations of dealers.

Firstly, people: The modern retail approach requires an
innovative mindset and new skillsets. OEMs and dealers need to hire
a different type of staff — less transaction focused, more
hospitable. We see OEMs hiring residential architects instead of
commercial architects to design new facility standards, for
example. More women leaders in dealerships to target a demographic
group that makes up 50% of consumers but traditionally has been
overlooked. Or product experts who support customers and make the
purchase experience less intimidating without the pressure of sales
targets or commission-based pay.

Secondly, data: The landscape of data, systems and vendors in
use at vehicle dealerships today is exhaustive and exhausting. In
most cases, customer data is fragmented and not connected across
systems — hindering a truly seamless customer experience
between online and offline channels. Data integration is the single
most important success factor for effective e-commerce, with
seamless hand-off points along the customer journey.

Both people training and data integration are not easy to
overcome as they require significant investments and scale. It
seems only large dealership groups can make that shift. Not
surprisingly, the consolidation of rooftops under fewer but bigger
groups is expected to continue, in parallel with facility
transformation and reduction of rooftops overall.

Future automotive retailing requires the holistic transformation
of bricks and clicks, and the people who will make this new
omnichannel platform work effectively.

Online platforms alone won’t do the job without an effective
physical footprint. But redesigned bricks and mortar is a wasted
investment without trained staff and a truly integrated omnichannel
process. This transformation goes beyond adjusted dealer contracts;
it needs a new collaborative approach between manufacturers and
dealers.

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Dive deeper into these mobility insights:

Evolving consumer expectations,
online dealer platforms, and OEM EV programs – learn more about
retail transformation

Top 10 Industry Trends Report:
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Vehicle Retailing: Old Dog, New Tricks – Read the blog

Learn more about S&P Global
Mobility’s Micro-Level EV Adoption Forecast

This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.