Automakers and Their Dealers: A Case of Passive Parenting

Courtesy of Urban Realm

As Tesla has blatantly showed us, owning dealerships (in the US at least) is a giant pain, so much so that for established brands like BMW and Toyota, it probably is not worth fighting for in the short term. And historically speaking, automakers make lousy dealers. But that doesn’t mean that you simply ship cars every month and reward them for doing well like a rich parent giving your kids an allowance so that they don’t bother you. Automakers need to be more actively involved with dealers, who after all are the face of their company.

In general, dealers don’t make nearly as much money on cars as they do on after-sale parts and services. This means that they spend boat loads of money on beautiful showrooms that take up half of their usable space but produce very little profit.

The car industry is one of the remaining few that has yet to really be disrupted by the digital shopping trend. Even diamonds and jewelry have begun to be bought online in increasing numbers – often with price tags equal to or above that of many cars. It would seem like a dream come true for auto dealers to finally get rid of their expensive showrooms, sell cars online or in some other form, and free up space to expand the area of their business that actually makes money.

So why hasn’t this happened? It’s at least in part due to misaligned incentives. Automakers have let the dealers sell how they want as long as they meet their sales quota, in much the same way that some parents don’t care what their kids do as long as they get good grades. But is that setting up the dealerships (or kids) to be better, to push more cars into more buyers’ hands than before? Odds are against it.

Auto companies like BMW see future growth through scavenging every possible customer niche imaginable, which is why we now have a different car for every corresponding single digit or letter. While this may help boost short term revenues, it doesn’t ensure long-term growth. There are only so many digits and letter combos for so many distinct customer segments. So along with (or instead of) expanding the already-bloated product line to increase purchases, why not focus on the ways in which the cars are actually sold?

Here is where incentives might start to align between automakers and dealers. Getting dealers to innovate and improve their sales strategy comes as a result of automakers enabling them to make more money. If Mercedes rolls out an innovative, global online selling platform, then dealers could still sell a similar number of cars while being able to allocate some of their showroom square footage to revenue-producing services and parts space. Obviously an overly-simplified example, but part of the key to selling more cars in the long-run definitely includes managing the incentives of your main consumer-facing stakeholder.

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