# Insights

Jul 10, 2020

Is Covid-19 a watershed moment for car sales?

As more countries come out of lockdown, the automotive sector has seen some encouraging “bounce-back” sales activity. However, this doesn’t mean that industry players can simply go back to business as usual. The Covid-19 pandemic has changed the landscape of many industries, who in turn need to adapt in order to survive. And motor retailing is no different.

Perhaps the greatest challenge for the automotive industry will be the reluctance to make the necessary changes. Apart from the fact that some retailers, such as Citroen and Peugeot, have added a Click & Collect service, dealers’ digital presence has not gone through the evolution it needs to. The market has shifted, and it will require bold changes to meet new client expectations.

This was true even before the current global crisis. Many original equipment manufacturers (OEMs) were preparing for an increasingly digital world and the subsequent need for evolution and transformation. Covid-19 has only accelerated this trend, with some observers noting that we are seeing five years’ worth of change happening in just three months.

And while the immediate future may be unclear, it’s certain that in the long-term, companies in the automotive industry will need to adopt a new playbook to survive and thrive. As McKinsey & Company noted in its recent report The road to 2020 and beyond: What’s driving the global automotive industry?, “OEMs cannot simply turn to their traditional toolbox. They need to review and adjust their strategic priorities, deploy the appropriate investments and resources, and develop new skills to execute these strategic objectives.”

A new landscape for car retailers

Many of the norms in car retailing have, as a result of recent events, been challenged. None more so than the supposed need of prospective customers to physically interact, in person, with cars, especially used cars. With many countries providing high levels of regulated protection, perhaps this paradigm will no longer be relevant going forward; and, instead, customers will be able to return purchased cars if they’re not happy with the final product, in the same way they already can when shopping online for clothes, for instance.

If this is the new status quo, then car retailers will have to provide customers with a new level of digital experience. Product information will need to be detailed, easily accessible and transparent; they will need to provide a wealth of reviews, comparison tools and car configurators, among other online tools. The bottom line is, the experience will need to be engaging, interactive and compelling in the pre and post-purchasing stages. This is going to be the case for both new and used car retailers.

Going back to the future

The original car distribution model saw manufacturers selling direct to customers or through a variety of channels, including mail order, via department stores and travelling representatives. On occasion, they also relied on local agents. This all changed, of course, with Ford’s mass production system in the early 20th century, which completely reinvented the distribution model. The volume of cars produced and the stock cash flow implications saw the development of the franchise dealer model.

It appears, however, that this is also on the verge of change again. Many brands, including Volkswagen, are slowly shifting away from franchise to agency models, meaning customers will increasingly have the option to buy directly from the manufacturer, and dealers will become agents that facilitate the sale.

The positives of an agency model for an OEM are clear:

  • Control of the car-buying and pricing process
  • Direct access to the customer and their data
  • Control and optimize finance and insurance options
  • Better after-sales access
  • Control over their brand
  • Takes cost and disruption out of the distribution chain

Again, this paradigm shift could be a major boon for those OEMs who are prepared to take advantage of the situation.

Ripe for disruption

As many will attest, used car retailing is a complicated undertaking. From buying right through to transportation, preparation, marketing, pre-delivery inspection and, of course, stocking/floorplan costs, it’s a long, complex and time-consuming process. So it’s no surprise that many consider the sector ripe for disruption. Digitally-led businesses are moving to capitalize on some of the major problems in used car retailing, which are outlined below:

  • Reputation. Like it or not, negative perceptions of car dealers continue. This perception issue is a significant hurdle and one disruptors are seeking to leverage
  • Dealer marketing is too often geared toward price. There can only be one lowest cost provider, and to be near the top of online aggregator sites (who might themselves be seen as disruptors) dealers could be risking margin and reputation by adding in back-end fees and cutting back on the customer service experience. Arguably, the opportunity should be to add value rather than to undermine it – to build a more engaging and trusted experience
  • Disruptors are leveraging dealer stock to the cost of dealers by creating a better upstream experience
  • There may also be opportunities to re-engineer the upstream remarketing/stock process to take out time and cost

Furthermore, customer expectations and behaviors have changed, which has also been accelerated by the current global crisis. Digital is increasingly how many of today’s consumers prefer to purchase. Over the last three months, this trend has only risen. Recent research from Kantar highlights these two points:

  • The share of people who undertake 50 percent or more of their total purchases online grew from 25 to 80 percent during the Covid-19 crisis
  • Post-lockdown, 80 percent of consumers intend to return to shopping online for non-essential products later in the year

The internet does not need to be a cudgel to beat dealers into submission. It can be a place where customers find and discover a car, support services and retailer that meet their needs, respect them as an individual and deliver exceptional service, plus much more.

Adapting to a new status quo

Clearly, the automotive sector has been in a state of flux and on the verge of disruption for some time now. But recent events have accelerated many changes and opened the eyes of industry players to the need for drastic transformation.

As with other industries, though, this should not necessarily be cause for despair. Rather, those savvy enough to adapt quickly can take advantage of the changing market and come out stronger as a result. By embracing new customer behaviors, the digitization of the sector, and a changing relationship between OEMs and dealers. Car retailers can not only survive in the new era, but thrive in it.

Natalie Sweet, VP of Marketing for the Sopra Financing Platform