A network is first and foremost used to adjust its pricing

 

The highly innovative study that the CNPA commissioned TCG to carry out makes significant progress in clarifying the debate on the distribution of new vehicles and its cost. However, it continues to give central importance to the fiction of the "list price". By questioning this, we can take a further step towards clarification and put our finger on the commercial work carried out by the networks and its cost for manufacturers and customers: faced with ever more expensive products for which customers are willing to pay much less than the catalogue prices and which are very heterogeneous, it is necessary to seek out customers who do not spontaneously subscribe to the manufacturer's offer and to adjust the prices. In this function, the network is difficult to replace.

Last week, the CNPA wished to clarify matters by indicating, on the basis of a very useful study carried out by TCG, that the margins that dealers manage to achieve on new cars do not correspond in any case - nor have they ever corresponded - to the 30% of the customer sales price often mentioned but, in 2019, to 7.2% of the catalogue price. 
The study states that this margin has contracted by 1.2 percentage points between 2011 and 2019, indicating that list prices have risen by 16%, that the purchase price of vehicles by dealers has risen even more, bringing the gross margin of distribution (the difference between net sales and the cost of acquiring new vehicles) from 10.5% to 9%. The discounts and rebates granted to customers by dealers have also increased: they were 15.9% in 2011 and reached 18.5% of the list price in 2019 (+2.6 points). The famous "commercial means" used by manufacturers to compensate for this have also increased (from 13.3% to 16.4%, i.e. +3.1 points) but not enough to maintain the margin rate.
 
Noting the simultaneous increase in catalogue prices and commercial resources (to compensate for the increase in discounts), Marc Bruschet emphasised at the press conference: "These two developments clearly raise the problem of the social acceptance of the price of the vehicle by the customer. 
He thus puts his finger on the very particular nature of this building and on the equally very surprising accounting by which it is treated. Indeed, when you think about it, all the percentages are calculated on a fiction that is the "catalogue price": it is applied to the number of vehicles sold by the distributors while the customers paying this price are non-existent or rare; a "purchase price" is set for the distributor that he knows, like his manufacturer, is higher than what the customer will pay; in fine, just as the customer will not pay the catalogue price, the distributor will see his unrealistic purchase cost compensated for by "commercial aid". In view of this, one might wonder whether it would not be simpler (and healthier) to consider the real turnover achieved with customers (i.e. the one that includes rebates and corresponds to 81.5% of the fictitious turnover in 2019 and 84.1% in 2011) and to deduce the "real cost for the dealer" where the cost of purchases from manufacturers would be reduced by commercial aids and would correspond to the net sum that the network would bring up in the manufacturer's accounts. 
 
By reasoning in this way, we arrive at conclusions that converge with those of TCG and the CNPA, but we move away from the fiction of the list price to express the distributor's margin as a percentage of the net price paid by customers: it was 9.4% in 2011 and will be no more than 8.8% in 2019, it being understood that, with this margin of around 1,800 euros on a vehicle sold for 20,000 euros, the distributor has to pay (and train) its sales staff and its sales administration and to meet its financial and structural costs. This means symmetrically that a manufacturer who had built his catalogue in 2019 by setting catalogue prices at 24,500 probably did not expect customers to pay more than 20,000 on average and thought that this would be associated with a turnover of 18,000 for him.
It is true that if we add 18,000 to 24,500, we arrive at 73.5% and we can draw the conclusion that distribution has cost 26.5%, but this is not true for the manufacturer, the distributor or the customer, since it is based on a "catalogue price" that exists precisely only in the catalogue.

First of all, in order to understand what is at stake and the importance of the 'fiction' that is the list price, it is no doubt useful to understand that in economic life, producers do their utmost whenever they can to avoid all customers paying the same price for the same product or the same service: while in the perfect markets of the economics textbooks, the market price is imposed on everyone, in the real markets we segment and 'discriminate' by making sure that each person pays as much as he or she is willing to pay. 24,700 in 2019, I know that on average I will sell 20,000, I will have to work out with my network a practice where, depending on the model, depending on the customer, some will pay the catalogue price without a discount, others will pay 20,000 and still others will be subsidised to some extent by the few who have agreed to pay the full price and will pay 15,000 or 16,000: in the same way that when the price of a car is lowered, the price of a car is lowered. In the same way that when you take two passengers on a TGV, it turns out that some will have paid twice as much as others, we know that in the car industry, today as in the past, the same product will correspond for the manufacturer as for the distributor to very different turnovers and the network is, for a major part of sales, this commercial tool by which both sides try to optimise price discrimination in order to maximise both the volumes sold and their margins.

This is the "normal" game in which both manufacturers and distributors play, and the 10% of the effective transaction price of the new car paid by the customer to the distributor corresponds to the value of this work. Clearly, for the manufacturer, mobilising its network and passing on this 9% of what the customer pays is tantamount to asking it to go out and find customers who, even if they were offered the product on the manufacturer's site at 18,000 or 20,000 euros, would in all likelihood not come and buy the product whose catalogue price is announced at 24,700 euros: the more products there are and the more expensive one tries to sell them, the more complicated and important the "commercial work" to be carried out in order to adjust the offer to the demand - and the pricing. 
 
If we consider the increase in price reported by the TCG study, the multiplication of products offered to customers, the acceleration of renewals and the parallel rise in competing expenses (housing, telecoms, etc.), it is easy to see that, historically, and in the last eight years as in previous ones, this adjustment work has become more cumbersome and costly.
 
The digitisation, simplification and corresponding reduction in commercial costs that one would have spontaneously associated with it have not been observed. On the contrary, the gap between the list price and the transaction price has deepened as the actual willingness to pay has been less and less in line with the fiction and more and more heterogeneous: the increasing discount rates and the increasing commercial aids refer to this phenomenon and if the manufacturers have succeeded in getting their networks to do this work by retroceding to them a slightly decreasing share of what the VN buyers pay, it seems unlikely that they can do this work centrally as well as their distributors.
 
The few cases where the commercial work is simple and easy and/or the manufacturer could hope to recoup a share of the 9% should be no illusion, on average and over time, achieving volume maintenance across the range will require work with customers that manufacturers need. Customers have been able to do without them for many years by using alternatives such as agents or 0 km second-hand dealers and do so relatively little. There are good reasons to believe that this will remain true in the future. The manufacturers who are currently studying alternatives and dream of leaving the very complex world we have tried to describe here thanks to digital technology will probably manage to make some adjustments at the margin, but will find it very difficult to reconstitute a price discrimination tool as elaborate and effective as the one they have structured with their distributors for decades.
 
26/07/2021 
 
 
 

The weekly column by Bernard Jullien is also on www.autoactu.com.

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