Dealer Engagement with Car Subscription
Retail automotive is arguably in a period of disruption unlike any before in its history. The transition to an agency-based distribution model, the introduction of connected, autonomous, shared and electric technologies ("CASE") and the emergence of subscription and other mobility-as-a-service access models ("MaaS") all threaten the traditional bedrock of franchise-focussed vehicle distribution.
While much has been written about the anticipated (and overwhelmingly negative) impacts for heavily-invested franchised networks, there is very little consensus as to how these networks might thrive in a disrupted market.
The Franchised Dealer Business Model - Franchised dealers almost uniformly define their businesses in terms of new car sales, used car sales and after-sales service.
In fact, the five "pure play" publicly traded franchised dealers (shown at right) all reflect a relatively even split between new and used car sales with a smaller, but more lucrative after-sales business.
However, such business organisation has not compelled investors as its relatively under-profitable and fails to address both market disruption and related opportunity.
The Impact of Agency on Franchised Dealers
So, how might the transition to an agency-based model impact these "formerly franchised dealers" (that we might come to refer to as "FFD")? At least initially, it's difficult to imagine that specific links in the distribution chain will materially change. As Marshall Motor Holding's CEO Daksh Gupta told AMonline, "if retailers do not exist, how will the OEM run its distribution channel"?
What will change is the specific relationship between OEMs and FFDs. Snow's CEO Neil McCue points out that because manufacturers have not yet defined agency, he and others are "a bit in the dark". However, it's reasonable to assume that, because each party needs the other, we should expect a broadly equitable relationship.
If FFD's are relieved of their responsibility for stocking, pricing and promoting new car sales, there's an argument that they will fundamentally shift their focus to something like:
A used car superstore,
Attached to a retail maintenance network with
A small "fee-for-service" sideline supporting OEM's omni-channel distribution.
While likely to be of only negligible profitability, agency operations remain critical to the formerly franchised dealer for both access to used stock supply and "steerage" of after-sales maintenance customers. There's also an argument that this re-focussed business model could enhance focus while accessing the higher profitability demonstrated by used car superstores and retail maintenance networks (indicated above).
The table below anticipates the pro forma impact on Marshall Motor Holdings of:
Replacing franchised new car sales with an agency concept that essentially eliminates any contribution to operating profit,
Replacing operating expenses with margins indicated by pure-play used car sales (Motorpoint) and aftersales service (Kwik Fit).
The exercise indicates slightly higher operating profit, a larger boost to profit margin and of course a much larger return on assets (not shown, but including elimination of new car stock).
Of course, this exercise is really just "fun with numbers". A re-focus of enterprise capital and resources requires huge flexibility and discipline from management and other stakeholders.
Industry veterans often cite an historic inflexibility of franchised dealer networks and point out the emergence of lease brokers (Nationwide Vehicle Contracts and Vanarama, etc), superstores (Motorpoint and Big Motoring World, etc) and virtual dealers (Cazoo and Cinch, etc) as fundamental failings to capitalise on opportunity in retail automotive.
However, the current disruption must be the irresistible force shifting an immoveable sector. Corporate boards and their management are obliged to re-assess the their distributions of capital and resources to capture opportunity. Those that fail to do so will be swept aside by manufacturers and investors determined to capitalise on segment disruption throughout the new mobility economy.
Dealer Opportunity in Car Subscription
In another earlier article "Leaseco's Engagement with Car Subscription", we explored the opportunity for leasing companies ("Leasecos") and their associated broker networks in car subscription. But, subscription is also a robust opportunity for FFD's to exploit existing resources in expanding both volume and profitability.
In another earlier article "Defining the Product to Capture Demand", we more precisely defined car subscription as:
More than just semantics, our more precise definition helps identify the specific resources required to deliver subscription at an economic price.
Formerly franchised dealers already present many of the operational and fleet-related resources sketched out at right. They are among the most proficient at cost-effectively stewarding new and used stock on behalf of subscription customers. Those with captive lease operations are particularly well-endowed with required operational resources leaving promotion as the sole area for development, acquisition or partnership/association.
Both formerly franchised and independent dealers may engage with car subscription in one of two broadly-defined operating models:
While the election as to which model to engage depends largely on the efficacy of the dealers' own resources, either can be terribly effective.
Subscription Price Efficiency
Here in the UK, Cazoo has followed up their acquisitions of Drover and Cluno with a significant investment in brand-new subscription stock from Ford, Mercedes-Benz, Hyundai, Vauxhall, Kia and others. As a larger commercial fleet, Cazoo seems to have secured manufacturer terms analogous to the daily rental sector (and potentially better as Cazoo will have refused a buyback option in favour of better "up front" pricing).
As a result, Cazoo is in the market with subscription pricing (shown at right) somewhat better than comparable contract hire. In effect, manufacturers seem to be buying in to Cazoo's "culture" even if only on a test basis.
At scale, formerly franchised dealers should enjoy access to manufacturer pricing comparable to that secured by Cazoo/Drover. As a result, their ability to cost-effectively steward vehicle condition positions them to offer subscription of both new and used cars in a compelling offer.
The chart below defines the projected retail and trade curves for a popular Ford Focus as a function of advertised contract hire rates.
As shown above, rental pricing (i.e. finance of estimated market de-valuation through a specified hold period) is competitive with Cazoo/Drover on brand-new cars and increasing more cost-effective on older cars. In fact, so long as the pace of market de-valuation slows faster than running costs escalate (and incidental damage is cost-effective refurbished and reliably charged to the responsible party), older cars provide a more cost-effective subscription alternative.
Current Market Conditions
The current pricing market (outlined below) may delay dealer appetite for subscription. However, such "pause" creates terrific opportunity to establish, reinforce and refine those resources required to deliver the product.
An undefined future instills fear in any investor. The onset of an under-defined agency-based relationship mandates corporate boards and their management to re-assess capital and resource distribution to ensure it is best-positioned to capture opportunity. Those that fail to do so will be swept aside by manufacturers and investors determined to capitalise on segment disruption.
Car subscription presents just such opportunity to formerly franchised dealer groups.
The ability to extract multiple profit opportunity from individual vehicles monetises operational and fleet-related resources and dealers' superior ability to cost-effectively steward vehicle condition is a "best in class" advantage. Furthermore, subscription provides dealers with more profitable control over procurement, stocking and re-marketing alternatives.
What remains is the opportunity to develop, acquire or partner with promotional resources that effectively capture subscription demand.
Those franchised dealer groups that effectively respond to the disrupted market will secure profitability and growth while attracting enhanced investor interest. Car subscription is just such a response and corporate boards are sure to respond.
Grace provides clarity in a disrupted retail automotive sector helping business leaders take better informed and more impactful decisions.