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Automotive OEMs Selling Direct

While the automobile has undergone a revolutionary transformation over the past century, auto retailing has largely remained unchanged.

Automotive original equipment manufacturers (OEMs) still sell more than 70 percent of new cars and trucks from the factory primarily to independent franchise dealers and they, in turn, sell them to consumers.

In contrast, retailers in most other industries—from apparel to banking— sell directly to the consumer, while information and communication technology firms continue to innovate and set new retail standards in terms of optimizing digital technology advances for consumers and the customer experience. In other words, to maximize opportunities in today’s market environment, OEMs should seriously consider rethinking how best to execute the auto retailing business model—a proposition that will not be without challenges.

Not only must OEMs take into consideration a fairly entrenched business model that is dominated by independent dealers, but include in that consideration three major developments that are redefining the auto market. Profitability, for instance, is increasingly being impacted by greater competitive pressures, saturated Triad markets, alternative mobility concepts and increased economic volatility.

At the same time, consumer expectations and needs are dramatically changing, driven by digital technology advances. According to a new Accenture global survey of 10,000 consumers in Brazil, China, France, Germany, India, Japan and the United States, 80 percent of drivers seeking to purchase a new vehicle are using some form of digital technology to research their buying preferences, and nearly two-thirds (62 percent) are initiating the car-buying process online, including consulting social media channels before entering a dealership. As an innovator, Tesla is selling vehicles directly to consumers via multiple channels without assistance from independent dealers. By adopting this approach, not only is it successfully demonstrating how to differentiate the company from competitors, but it is making significant strides toward addressing the profitability challenge OEMs face today. Retail is a major generator of profitability in the OEM business model. Using a direct sales strategy also results in significantly lower retail costs (RC), contributing to that profitability.

A second key argument for direct sales is that it encourages a greater focus on customer centricity and the customer experience, which addresses a major challenge. Directly controlling all customer touch points, including new and existing sales channels, means being able to provide a consistent and integrated customer journey for the first time—across channels and markets.

Automotive retail has quite obviously reached a crossroads in terms of needing to undergo a fundamental transformation in order to effectively compete today and in the future. As one Austrian dealer succinctly put it in an interview during the development of the survey: “Traditional car retail is dead.”

Direct sales can be a powerful tool for improving sales performance and aiding growth, while reducing costs in a changing retail environment. But, automotive OEMs considering shifting to such a model will have to reflect on all of the challenges such a move may entail.