How can new business models not only be perceived as a threat to automotive retail, but also as an opportunity?

Two weeks ago, the first article in our blog series ‘The Retail Offensive Part One: Does Automotive Retail Need To Fear Apocalypse-Now?‘ mentioned that the basic parameters of automotive retail are unavoidably changing. Today’s article looks at how car dealers can boost revenue in the future.

One key question arises: How can new business models not only be perceived as a threat to automotive retail, but also as an opportunity?

Why the current business model won’t survive

Firstly, let’s look at how automotive retail is making money today. On the one hand, revenue is generated from the margin on vehicle sales, and on the other, from the number of leasing contracts being signed. Another important revenue stream is in the after-sales period from both the maintenance and repair of vehicles, as well as the sale of spare parts and accessories. Almost all of revenue sources are facing imminent threat.

We know that in the near future, vehicle sales and leasing will increasingly be conducted online through direct sales. In after-sales, some maintenance work can already be carried out by the OEM itself via Internet of Things. Furthermore, specific vehicle features can be activated directly from the vehicle itself, for a fee, by so called ‘functions on demand’ – thus reducing the need for on-site service at car dealerships.

In the long term, two other trends will emerge and reduce after-sales revenues – namely the electrification of vehicles and autonomous driving. The engines of electric vehicles are technically much less complex, have fewer moving parts and require less service appointments than the ones of gasoline powered cars which tend to wear out over time.

According to experts, autonomous driving can significantly reduce the accident rate of vehicles which reduces a need for accident repairs in the future even further.

Opportunities for new business models in automotive retail

However, there are also new opportunities opening up for automotive retail. For example, the market for automotive accessories, with a current growth rate of 6.4% CAGR, could potentially evolve faster than the automotive industry itself, with a forecast growth of about 2.6% CAGR. In this context, there are opportunities for new partnerships between OEMs and accessory manufacturers such as BMW and Louis Vuitton.

On the other hand, the entire field of energy supply for electrics cars represents a potentially attractive market, through the use of supplies such as electricity storage devices and solar cells.

Electric vehicles also offer attractive opportunities for innovative business models, that can be adapted by retail. Compared to gasoline refueling, electric recharging takes relatively long (about 30 minutes at a super charging station), which creates idle time that can be used commercially. For example Tesla’s CEO, Elon Musk, is planning to add small convenience stores and chain restaurants to its high-speed charging stations. This is a concept that could also be adopted in the future by the automotive retailers.

Beyond that, a significant opportunity arises directly from the changing customer needs regarding “vehicle ownership”. The willingness of customers to commit themselves to a single vehicle in the long term is diminishing. Conversely, customers are increasingly looking for new solutions that meet their constantly changing mobility needs.

These vary from solutions for short and long journeys, to family outings or simply for driving pleasure. And why do we need to choose one, when we could have it all? Various models for vehicle usage and ownership, allow customers to have greater flexibility today than ever before.

Traditionally, vehicles have always been sold through the dealership. In addition to this, there were leasing contracts that shortened the ownership cycle and helped bring new vehicles to the market faster. For more than five years now, large-scale car-sharing programs have made it possible to rent vehicles on a per-minute basis – often without tying them down to a base station. These are called free-floater models.

Beyond that, further innovative models for vehicle sales are now emerging. Porsche, for example, offers a new rental model on the German island of Sylt. Here, customers can rent their fun vehicle for holidays, from a newly redesigned dealership. An approach which makes skillful use of the dealer’s local context. Mazda, on the other hand, offers a car rental service, targeting corporate customers through partnerships with more than 300 dealers in Germany.

Some manufacturers and suppliers such as Audi or Porsche are also testing joint ownership models in which several vehicle owners can share one or more vehicles and use them when they like.

Considering all these different options for vehicle usage and ownership, it is important that automotive retail correctly defines its role and aligns its possible business models with these emerging trends. First and foremost, this means recognizing the right opportunities and taking on an active role in shaping them.

What may sound abstract can easily be explained by this simple illustration:

Figure 1 Future roles of vehicle ownership and usage models

It is clear that retail continues to play an important role in each of these models. A particular ‘sweetspot’ is emerging amongst car renting and joint ownership. For these concepts, it is crucial to stock vehicles locally at the dealership, so that they can be available to customers on short notice. Therefore, in these cases, revenues can still be generated directly from a margin on the vehicle.

Regarding the concepts of car sharing, as well as private ownership and leasing, it can be concluded that the actual sale transaction will increasingly be carried out directly online. The retailer will not necessarily be the decisive point of sale in the future, but rather a point of experience that has a significant influence on the purchase decision.

Even if the transaction is concluded online and not at the dealership; the dealership remains as a place where customers receive a physical impression of the brand and vehicle before making their decision. This is the place where they carry out test drives and receive advice, thus being an influencing factor in the decision process.

From the OEM’s point of view, it is important to make this role of the dealer, within the customer journey, as transparent as possible. It is also vital to steer dealerships through new remuneration schemes that can not only incentivize and increase signed contracts per dealership, but also create strong customer experiences which will ultimately have a positive impact on the conversion rate, independent of the sales channel.

Automobile retail as a possible hub for future mobility

These examples show that car dealerships can play a decisive role in the future of car sales. It can function as a central platform that meets the customer’s needs for individual mobility.

Shared mobility services, rental offers, or joint ownership models represent opportunities to not only sell vehicles, but also to make them available to customers on demand. Retailers can establish themselves as a mobility platform for such concepts and provide the right solutions for increasingly diverse customer needs.

Our next blog article will shed light on the different types of formats that will enable automotive retailers to achieve this goal.