Why car trade is stalling over new pricing policy

Despite mounting pressure, the car industry refuses to lower prices and drop its control over dealers. But they have good reasons not to, says Alan Mitchell.

As the Great Car Rip-off debate comes to a crescendo, the car industry seems embroiled in one of the grandest acts of denial since King Canute. The UK car marketing set-up has descended into one the biggest insults to consumers marketers could conceivably devise. But, on the surface at least, car marketers are refusing to budge. Why?

According to the European Commission (the latest worthy body to add its pen’orth to the debate) UK car prices are 35 per cent higher than elsewhere in Europe before tax; a price differential that “is indeed too high”. Consumers now know that fleet buyers who can exercise a bit of buying power regularly get discounts of 30 per cent or more off list prices. But private buyers are lucky if they can negotiate 10 per cent off – through an extremely unpleasant haggling process which most of them hate.

They are also discovering that the cost of selling a car now typically accounts for a third of its final price. When they pay these rip-off prices they are subsidising the very system that is ripping them off.

So the message is: it’s over, folks. The old way of selling cars is dead.

It’s time to move on. The question is to what?

If car companies were simply laughing all the way to the bank, the answer would be simple: accept a reduction in your margins. But try telling that to Ford, which made profits of just $28m (£17.5m) on sales of $30bn (£18.75bn) in Europe last year – a razor-thin margin of 0.09 per cent. The UK may have been the one bright spot in a gloomy picture, and if that bright spot evaporates it has got a real problem on its hands.

And Ford is not alone. Every European car company is in the same position. Globally, the industry can now make 20 million more cars and trucks than it can sell, and Europe has more than its fair share of this overcapacity.

Blanket car advertising – £3.3bn worth in Europe’s five largest markets last year – isn’t really about building brands at all. It’s more an exercise in futility. The fact that General Motors spent £14,883 on advertising for every Cadillac it sold in the UK last year would be laughable if it were not so sad.

Dealers aren’t laughing either. Most of them don’t make money selling cars any more. They have to give that margin away to close a sale and make it up later on extras such as servicing. So, it seems, everyone is losing – and that’s the real significance of this debate.

For the best part of a century the car industry has been an icon of industrial marketing: an incredibly powerful, dynamic win-win system of mass production, distribution and advertising that delivered huge benefits to all who touched it – manufacturers, distributors and consumers alike. But now that system – as a system – is in crisis. It is collapsing into a lose-lose quagmire in which everyone involved is at each others’ throats.

After all, it’s not just consumers who are complaining. Dealers, for example, are descending into open warfare with manufacturers. After a private buyers’ strike left their showrooms empty, some leading dealers went so far as to draw up their own plans for car imports. According to a recent survey, more than half the top 100 franchised dealer groups actually support the Consumers Association “rip off” claims.

Manufacturers, meanwhile, are hardly in love with their dealerships. Take this recent private comment from one senior car marketer: “You spend half a billion pounds on a concept, putting a car together, and then what do you do?

“You let it out of the factory on launch day and you put it in the hands of people who are not exactly overwhelmed with O levels and have a reputation of being low skilled, low tech, no tech, don’t care. Then you spend £20m to advertise it, and you entrust it all to them – great product, great communication, and then it hits the point of sale and it all falls apart. We spend £550m on TV advertising to entice people to a place they would never go. They are centres of attrition not centres of attraction.”

That’s the problem. Lifting the block exemption (which enables manufacturers to control exclusive dealer outlets) won’t put an end to endemic overcapacity. It won’t put an end to billions of pounds being tied up in inventory in parking lots and showrooms, or to enormous sums of money being squandered ferrying cars from one part of the country to another because car companies don’t know how to get the right car to the right place at the right time.

In the US, which has a very different retail structure and no block exemptions, about a third of the final price of a car contrives to be eaten up by the costs of trying to sell it. As our disgruntled car marketer notes, “A revolution on the supply side has revolutionised the way we make cars. We can make a car in three to four hours, but we are still stuck with a demand side that is 75 years old.”

So knowing that the status quo has to change doesn’t really help. The challenge is to find a coherent alternative. So far, we can see only various strands of a possible solution. Big dealers evolving into mega car supermarkets. Direct sales to consumers through the Internet bypassing dealerships altogether. Internet-based buying clubs, perhaps linked to car rental and fleet firms to bring corporate buying power to the consumer. The complete unbundling of car selling from car servicing. The introduction of mass customisation: building and delivering to order rather than making a car in the hope that they may be able sell it.

But combining such disparate strands into a new win-win marketing system requires a work of genius to rival that of Henry Ford and Alfred Sloan. No wonder car marketers are doing their best to stall. Lifting the block exemption will trigger a tidal wave of change. And no one yet knows how to surf it.

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