McKinsey Envisions Big Change For Car Buyers: Is Tesla Right?

February 26, 2014
Americans sure don't research new cars—or even shop for them—in the ways that we used to. Why then should we have to buy them the same way?

That has been one of the hot-button issues of the past year for those involved in the auto industry, and it's not going away any time soon. With Tesla Motors selling its cars in an entirely different way, both small boutique dealerships as well as large dealership groups are crying foul, mounting a state-by-state challenge of Tesla's fixed-price, direct-sale model.

Tesla is, of course, the most extreme at this time. Shoppers browse, learn, and schedule a test drive at a local Tesla Store, often located in a mall; and they actually purchase the vehicle directly via Tesla's website, while service depots are located elsewhere.

Ask dealerships, and they'll say that they provide a very useful role—one that will be around for a long time—in supporting the after-sales experience, with repairs, maintenance, and warranty work.

Dealerships don't make their money selling cars anyway

Truth is, it's no goodwill sacrifice; that's how dealerships make most of their money nowadays. New car sales account for less than one fifth of dealer margin in the U.S., and negative returns aren't unusual. What keeps dealerships out of the red are things like financing, service visits, and warranty work.

And those are among the starting points for a new report called “Innovating Automotive Retail,” from the prestigious global management consulting and research firm McKinsey & Company. We know that the automotive retail experience needs to change; how can it be reshaped?

First off, an admission of the current realities. “Both US customer demand as well as recent retail initiatives suggest increasing dynamics towards online as a real sales channel, even though legal obstacles exist,” says McKinsey. And in addition to the idea that dealerships aren't making the bulk of their money today selling cars:

  • The average number of customer visits to dealerships prior to buying a car has dropped to just one, typically (from up to five not so long ago).
  • A shockingly low ten percent of car buyers don't actually test-drive the model before they buy it; and more than a third (37 percent) only take a test drive as a final confirmation before they buy.
  • One in four customers is not satisfied with the dealership experience.
  • More than one third would consider buying a car online.
  • The number of U.S. dealerships has contracted by 15 percent in the U.S. over the past five years.
  • Shoppers prefer 'new formats' like test-drive centers, exurban superstores, city showrooms, online stores, temporary stores, and even home visits to traditional, generic, 'Miracle Mile' style dealerships.

After all these admissions, McKinsey gets down to a nuts and bolts vision of the future, in a way that should be interesting to anyone who's involved at the moment in buying a new car, or daily in automotive retail or management.

“The financial sustainability of traditional dealership models is questionable in many countries,” concede the authors, who believe that “dealerships as retail formats will not vanish but will have to decide which part of the customer decision and experience journey they want to focus on: brand awareness building and messaging, product experience, sales transaction, or parts and service. ”

Empty Auto Dealership

Empty Auto Dealership

Changing the 'touch points'...and an entire business model

Dealerships won't cease to become a necessary part of consumers' car-shopping experience. Test-driving a vehicle before buying is essential—as it should be—to the vast majority of shoppers, and maintenance and repair needs will require a physical service point. It's also that crucial last 'touch point' (wherever you encounter the vehicle or information about it) before they put down the money.

But those touch points? They need to add value to the car and the experience. And that means, McKinsey submits, that there's major change coming:

  • There will be new retail formats and technologies. There's no doubt that sales forces need to be experts about new technologies on the market and in their vehicles—electrified powertrains are one big example, as is connectivity with personal devices. The firm points to some of their survey data from last year, which found that most shoppers expect the dealer visit to yield more information, and things not easily found online.
  • The number of dealerships will fall. McKinsey suggests metrics that obsolete new-car dealers be identified one on by one (by metrics or performance) and turned into service points, while sales are reserved for the top-performing dealerships. At present, using a number of criteria, there's a huge gap between the best ten percent of dealerships and the worst ten percent; and there needs to be more performance tracking in identifying these problem dealerships.
  • Change won't happen immediately. The firm suggests that change those entirely new dealership formats be introduced into the current retail landscape, and that this level of change won't be easy—for one, because of the sheer number of dealerships, and how hundreds would need to be involved in each major brand's transformation. Secondly, dealerships can't be forced suddenly to change fundamental ways of operating, so automakers and dealers would need to find a framework. And finally, there's the idea that dealerships run the gamut from single-store, independent community members to international retail groups.
  • It's an HR issue, too. The firm suggests that it may take changing the strategy of dealerships—and making them a place where top retail talent wants to stay—requiring new career paths, new positions, and new ways of incentivizing behavior that doesn't just sell cars but bolsters brand loyalty and satisfaction. The days of weaseling a few hundred extra dollars at the consumer's only contact point need to be over, as they aren't good for anyone but the salesperson.

And it really does come down to money in the end. “As more touch points become a key part of a customer’s purchasing journey, the challenging question is which channel gets credit for the sale (and how the rewards will be divided),” the McKinsey report says.

Don't be surprised if dealerships manage to slow the pace of change somewhat, and suggest some ideas of their own. But this is probably only the beginning of an epic haggling session—this one between automakers and dealerships.

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