Car makers cannot stall change for much longer

Make no mistake, a revolution is to hit the way the car industry does business. It is hooked on a marketing system that is ready to blow, says Alan Mitchell.

New ways of buying cars are popping up everywhere. Initiatives such as the Consumers Association’s Carbusters, Virgincars, Direct Line’s Jamjar, and Sainsbury’s entry into the market, have all grabbed headlines recently.

Interestingly, however, one of the most innovative of the new ventures ” Woolwich Motorbase ” has hardly got a peep, because it has been effectively stifled by the car companies.

Woolwich Motorbase is a brilliant marketing idea. It sources new cars for Woolwich loan customers at fleet prices through fleet management and contract hire operator PHH. But as the Competition Commission investigation into the new car market discovered, “in most cases manufacturers would not sell, and would not permit dealers to sell, if the cars in question were to be supplied to individuals”.

You can see why manufacturers would want to freeze Woolwich Motorbase out. By offering prices way below traditional dealers, it makes current dealer prices look excessive. By focusing on an Internet/financial services channel rather than the dealer, it bypasses all manufacturersí attempts to build dealers as part of a “total brand experience”. And by clinching the loan it captures the most profitable slice of the transaction.

But here’s another way of looking at it: for car manufacturers, today’s dealership system has become a dangerous addictive drug, shielding them from competitive realities, which creates an artificial marketing environment that they dare not exit. The car companies have become addicts, hooked to the very drug that’s debilitating them.

Take the industry’s chronic overcapacity. In any other circumstance such overcapacity would have unleashed a frantic round of rationalisation and a bloodcurdling price war. But the stranglehold on distribution has enabled manufacturers to defy gravity, keeping both capacity and prices at unrealistically high levels. Doing cold turkey on this is going to be incredibly painful.

Or take the technicality of “full-range forcing” by which manufacturers can require dealers to carry the full range of their models. The argument for this: it stops some dealers from “cherry picking” only the most profitable or popular models, thereby ensuring full consumer choice. And it helps to support manufacturers’ new product innovation.

But look at it another way. As automotive consultants Autopolis suggested to the Competition Commission, full range forcing is “the major instrument through which the industry protects marginal or uncompetitive products and thus its own excessive multiplicity of products and economic inefficiency”.

Or as one un-named Internet start-up put it, it exemplifies a “product push mentality”, which shields companies from having to refine their range “more accurately to meet consumer demand”.

Then there’s the dealership itself. According to manufacturers, consumers want and need its complex bundle of services, which include the actual sale of new cars, servicing and repairs, barter (negotiating about trade-in price), and the selling of financial services such as loans. If car retailers were allowed to pick and choose what activities they undertook, many would opt for only the most profitable bits and customer service would suffer.

The other side of the story, however, is that the complexity of this bundle and the fact that no individual buyer knows about the real cost of each element means he or she cannot make informed price comparisons, while shifting negotiating focus away from core product price to “extras”. This cushions manufacturers from real price competition. Meanwhile, not all consumers want the complete bundle. As the Competition Commission concluded “the present system requires them [consumers] to pay for the cost of services which they do not need”.

Worse, it continued, “suppliers’ practice of requiring dealers to achieve specific minimum standards relating to presentation, facilities and other aspects of their businesses prevents some dealers from setting up and operating businesses with lower costs and lower prices.”

For manufacturers, this is all part of ensuring consumers get the right brand experience. But do all consumers necessarily want this experience? The current system requires consumers to shoulder the costs of providing this experience whether they want it or not. It gives them “no choice, or influence on, the retailing format that they would prefer”. When it comes to brand strategy, in other words, car companies don’t really have to heed consumer preferences in the same way as other marketers do.

So now the industry is hooked on a marketing system that not only earns it endless negative PR, but which actually creates and reinforces huge structural, operational and marketing costs: the costs of chronic overcapacity, of maintaining a “push” marketing system that shields manufacturers from the full effects of market forces, and of continuing with ways of going to market that pile cost upon cost without truly adding consumer value.

The naive view about excessive list prices is that they mean car companies have huge pots of gold stashed somewhere, which they should share with the consumer. But we only have to look at Ford and General Motor’s European profits to see that’s not true. The real truth is much worse. The excess costs are embedded in these companies’ very operations and marketing strategies. So changing means addressing pressures that have been building up over decades, and are now ready to blow. Simultaneously. No wonder car manufacturers are petrified.

But don’t hold your breath. Yes, thanks to this week’s new regulations the posse of new entrants, including Woolwich Motorbase, will be in a better position to start unbundling the dealership bundle, and to cream off more profitable slivers such as financial services. But no fundamental change will happen until the EC review of block exemption in 2002. And even then change will be slow. Today’s dealership is a highly complex balancing act, involving multiple service offerings, cost centres, and revenue streams. Finding new balancing acts which are both financially viable and truly address consumers’ varied buying needs won’t be as easy as it looks – especially as most dazed and confused consumers opt for the familiar status quo.

Nevertheless, a real car marketing revolution is now under way. And the most successful car marketers will be the ones who recognise their addiction, kick the habit, and lead that change.

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