Alarm bells are ringing at the fourth emergency service. The Automobile Association is returning to its core roadside rescue business as it faces a squeeze from a bigger and broader RAC, and the launch of Direct Line’s low-cost car rescue service.
It emerged last week that the AA is reviewing non-core services (MW May 21) in a move initiated by director general John Maxwell, who joined from the Prudential in December 1996. The review has already claimed two victims – the AA’s link-up with ScottishPower offering electricity and gas to its members has been scrapped, as has a scheme to help members find reputable builders (MW May 7).
This retrenchment comes against the backdrop of the RAC, the AA’s principal rival, being bought by US conglomerate Cendant for 450m. The purchase was announced in April and goes through in June. To add to the pressure, only a month after Cendant showed its hand, Direct Line has launched its own cut-price motor recovery service.
This shake-up in the motor rescue sector has been a long time coming and the AA says it has been laying plans in preparation for the last year.
AA membership services managing director Colin Skeen says: “The recent consolidation is a logical result of competition in the market. Last year, we had a fundamental rethink and we anticipated the consolidation, but the biggest surprise has been the speed of events.”
Indeed, Maxwell was brought in specifically to cope with the coming onslaught. Skeen says changes in the UK insurance market had been a taster for what was to come in road rescue, with new cut-price operators and foreign interest in the sector.
The plan is to take the AA back to its motoring roots and become “number one at the roadside” and to reinforce the image of the AA patrolman as being a “safe, reliable and expert figure”.
But add-on services – first developed in the Sixties under director-general Alec Durie, another external recruit, this time from Shell – threaten to divert resources away from this prime focus. They are being scrutinised to discover if they really are profitable seams.
Skeen says: “The AA is divided into several activities, and we want to make sure they are working efficiently. Although we are a membership organisation we have to be run as well as any company. We want to set realistic profit returns to produce a better range of services. This backdrop will allow us to invest and strengthen our roadside delivery.”
The first fruits of the renewed focus on the roadside was a 10m investment last December in a further 250 patrols, adding to the existing 3,600. Another 10m investment to create 50 extra patrols and to build relationships with new garages was pledged in March. AA services are split 90/10 between uniformed patrols and garage services.
Skeen argues that the review of add-on services, which range from motor and home insurance, driving schools and high street shops to the “AA Roadwatch” traffic service broadcast on radio, will check that they are run profitably. Skeen does not say as much, but if they are not, they face the axe. Where services are profitable, the surplus can be invested into the core road rescue operation. One service being closely examined is Home Assistance, which provides emergency repairs for home emergencies such as burst pipes and broken locks.
The AA’s return to its motoring roots has a sound commercial logic. By putting all of its energy behind its “fourth emergency service” positioning, the AA is focusing its brand. One source says: “The other businesses the AA was involved in were marginal. They were an opportunity to increase sales revenue rather than to add strength to the equity of the brand.”
The time is right for the AA to fine-tune its positioning because, until the dust settles on the RAC/Green Flag merger, and while Direct Line Rescue is still a fledgling operation, the AA is the only big player with a clear identity and heritage. One observer says: “This could be the AA’s year. While the RAC merger is going through, the AA is the only brand which has got its act together .”
However, the AA will not have its own way forever. Cendant already owns breakdown service Green Flag and National Car Parks. It is also affiliated with Avis car hire, and US hotel chains including Ramada Inns and Howard Johnson.
An RAC spokesman is scathing of the AA’s positioning: “The AA lost its way a long time ago. It has been trying to be all things to all people.” He says the RAC brand is finely-tuned, that its positioning is based on “mobility”. The company sold RAC Insurance to Guardian Royal Exchange last year.
Findlay Cauldwell, RAC managing director of membership and marketing, says: “We value our members from a breakdown and mobility perspective. Anything which fits into that is a core product.”
Last month, the RAC joined forces with Virgin to launch co-branded holidays (MW April 4). Called Classic Global Drives, the initiative includes ten driving holidays in the US, Australia and South Africa which will be promoted in co-branded brochures.
At the end of last year the RAC bought the British School of Motoring for 50m. Cauldwell sees great potential in building a relationship with new drivers, and it is already possible to sign up to the RAC in some BSM outlets.
Plans for links with Cendant affiliates are at an early stage – the RAC will make a decision on Cendant’s offer in an extraordinary general meeting scheduled for June. However, the spokesman says there is potential to offer RAC customers discounts on car parking, car hire and travel products with sister Cendant companies.
The RAC is also planning to launch new products later this year. The spokesman hinted that they will involve “harnessing technology to avoid getting stuck in congestion” – an early warning system for traffic jams.
The RAC’s intention may well be to provide a variety of services which fit within the “mobility” tag, but the definition is fuzzy and it will be difficult to communicate this positioning to consumers. One source says: “Cendant will take a long time to be digested by the public.”
The RAC’s image is also reeling from the recent furore surrounding its demutualisation. The company is giving dividends of about 35,000 to each of 12,000 “clubhouse” members, but the 5.6 million other members will get nothing. As one observer says: “To its customers the sense of a club has been thrown out of the water. ‘We don’t give a damn about our members, we’re just looking after our shareholders’ is what customers see.”
To exploit this, Britannia Rescue is launching a print campaign this week using the headline, “Has your trust in the RAC broken down?”
Moreover, the potential merger of Green Flag and the RAC has pitfalls. The two services have opposing positions. Green Flag offers a low cost, good quality service and the RAC offers a top-of-the-range service at a premium price. As one observer says: “It would be like sticking Waitrose and Kwik Save together.”
Direct Line stormed into the motor insurance market in 1984 and undercut the prices of established insurance giants by cutting out brokers. The rescue service works on the same basis as Direct Line’s main insurance business in that a cheaper premium is charged to low-risk customers: those in favourable areas with newer cars pay less. Direct Line claims that it is up to 50 per cent cheaper than the AA and RAC.
It remains to be seen whether Direct Line will take customers from the AA and RAC – it only has 1,500 garages on its list, which does not compare favourably with Britannia Rescue’s 3,000. However, it has built up a strong database from its insurance and financial services arms. It has built a strong brand through its advertising.
Mark Godfrey, marketing manager of Direct Line Rescue, says: “We have a large number of customers already keen on the Direct Line brand and we can use that strength.
“Our product and price is market leading. The savings will encourage people to switch to us. Direct Line Rescue has the advantage of having the lowest cost base.”
The RAC spokesman claims not to be troubled by the new service: “Direct Line is bringing nothing new to the party except discrimination.”
The battle lines are far from being drawn up. The Monopolies & Mergers Commission is likely to show more than a casual interest in a merged RAC and Green Flag – a move which would yield a market dominated by Cendant and the AA. And although the AA makes much of its mutual status at the moment, the cash may be needed to take on Cendant.
The AA has 9 million members – 3 million through tie-ups with manufacturers and fleets – versus just under 6 million for the RAC. A feature of the market to date is consumers’ reluctance to switch from one to another. With the recent round of comparative advertising from Direct Line and the unseemly squabble between the RAC and AA over the benefits of mutuality, loyalty is one area where leading players stand to lose most – there are about 40 rescue services operating in the UK, all keen to pick up new members.
If consumers get used to the idea of shopping around for the best deals, price cutting could become routine. But it all comes down to quality of service – getting to the scene of the breakdown quickly, and doing a good job once there. Investing in road rescue services will be the key, which is why the AA is looking to remove any business inefficiencies, and why Cendant’s deep pockets make it a strong contender to challenge the AA’s dominance.