Distributing its vehicles and developing its services to customers with or without its network: the two schools

With the renegotiation of regulations and contracts, the question of how to manage its distribution, reduce costs and share work and value with the networks is, in 2022, posed with great acuity. While some believe it is time to 'disrupt' the historical model and put the traditional players at a distance, the majority of manufacturers do not think it is possible or appropriate to do without. The terms of this debate continue to remain rather nebulous as to the numbers. The underlying philosophies, however, are becoming increasingly explicit.

Twenty-five years ago, at the end of the 1990s, the world of American car distribution was in full swing due to the emergence of a few very large distribution groups such as AutoNation, Car Max and Driver's Mart.

Coming from other sectors of activity, these "new comers" promoted the concept of "superstores" and claimed to "disrupt" the dusty world of car distribution and its indecisive dealers. At the time, they were referring to - but never giving sources for - surveys of American households that would have indicated that the experience of buying and repairing a car was, in terms of "customer experience", just below that of visiting the dentist...
At the beginning of this month of March 2022, it was, according to what Florence Lagarde reported to us on Thursday, Carlos Tavares who took up this antiphon by speaking of the current distribution model which "does not give satisfaction to the consumer and is very costly not only for the manufacturer but also for the dealers". From his point of view, the die is cast: "very high costs and very low perceived quality, this is the perfect definition of a candidate for disruption".

In fact, in the presentation of the strategic plan, on one of those magic pie charts that abound in this kind of exercise, one is dedicated to showing how the new scale on which Stellantis is working will enable it to achieve operational excellence within 9 years. He says that the targeted 50% break-even point would be achieved by "reducing complexity at all levels" and that this would reduce engineering expenses by 30%, electric vehicle costs (BEVs) by 40% through purchasing and supply chain improvements, manufacturing costs by 40% and distribution costs by 40%. The whole thing is worth €5 billion a year and should be effective from 2024.

The problem is that we do not know exactly where we are starting from and therefore what needs to be gained. C. Tavares, reports F. Lagarde, has taken up the famous 30% figure which the CNPA had shown in July, with the help of TCG, to be unrealistic and that the "real" figure corresponding to the dealers' distribution margin was rather 7%. At the time, we pointed out that the profession continues to systematically refer to the fiction of the "catalogue price" and that, if we break with this curious habit and relate what the customer really pays to the dealer to what the dealer passes on to the manufacturer in net sales, we arrive at a figure of around 9%, which corresponds to 1,800 euros for vehicles whose prices paid by customers would be 20,000 euros.

If the distribution costs correspond to 30% of the catalogue price and the discount rate is 20%, then the vehicles are "worth" 25,000 and their "distribution costs" are worth 7,500 euros. 7,500. By reducing these costs by 40%, Stellantis would earn 3,000 euros per vehicle sold through the network. If, as we think it more reasonable to say, the part of the price paid by the customer to the distributor that does not "go back" into the manufacturer's accounts is 9%, then this "distribution cost" is 1,800 euros and reducing it by 40% only earns Stellantis 720 euros per car. We would therefore like C. Tavares and his teams would like to tell us which of the two arithmetic methods he uses to calculate his 5 billion euros of synergies and how he manages to ensure the same volumes for his 14 brands once the complexity of this sales and marketing organisation has been "reduced".

If we take the first approach, then the main 'reproach' levelled at the network is, if we are logical, to grant discounts of around twenty points and deprive the manufacturer of sales which should be made at the list price. In order to achieve this, the 'new' direct sales - in addition to those already made - would have to be made by the manufacturer, if not at list price, then at least at a price much closer to it. The rest, i.e. the "real margin" which is used to cover the costs of the salesmen, the land, the signage, etc., is in the end quite secondary. Nevertheless, if this is what it is all about and if the corresponding 700 euros must be recovered, then it remains to be seen whether the conclusions to be drawn in a context where neither the PR nor the workshop are or will be the economic 'crutch' for business that they were, will not cause the manufacturer to lose in terms of volumes what he believes he has gained in terms of margins.

Thus, behind these seemingly technical questions, there is the question of the role assigned to the network and/or the value that is recognised or not recognised in the services it provides. Clearly, for Carlos Tavares, the network is essentially a costly machine for selling off vehicles and therefore degrading the value of the work of the engineering departments and factories. By taking back control of the vehicle trade and, beyond that, of just about everything the network did (used cars, PR and AV), the manufacturer, its services and its "new partners" could do much better than it did for the happiness of the customer and the shareholders of Stellantis.

As shown in several interviews given to Autoactu in recent weeks by other leading figures, this analysis is not necessarily shared and this is not necessarily due to diplomatic needs which Carlos Tavares would be more willing to overcome than others. From this point of view, the comments made in these columns in December by Luca de Meo are quite enlightening. Indeed, he sees the difference between Tavares' point of view and his own as referring to two realities.
i) Stellantis must effectively rationalise the distribution of multiple brands, which is not the case for Renault: "We are not," he explains to F. Lagarde, "in a strategy to rationalise the distribution of multiple brands. Lagarde, in a strategy of integrating 14 brands together with cities where, at some point, choices have to be made." For this reason, the termination makes more sense for his competitor than for him. He has no reason to alienate his network.
ii) Similarly, when asked about the "agency contracts" that Stellantis could opt for, he reminds us that, in order to recover a part of the margin in the accounts of the dealerships, it is necessary to accept to carry the stock and to deprive oneself of the "buffer" role that the network plays in a context where production never has the flexibility one would dream of. Very clear on the stakes, he then explains: "If I take an example of a manufacturer with annual sales of 2 million cars and a stock of 300,000 units, multiplying by 25,000 euros, that makes 7.5 billion euros. This is a way of saying that if Stellantis can possibly make this bet, he neither wants to nor -still- can do it.

Thus, one could cynically argue that the differences in "philosophy" refer to differences in the constraints weighing on the various manufacturers. This would only be half true because if everyone agrees on the need to reduce distribution costs and to integrate the major changes implied by digital technology and electrification, faith in the capacity of digital technology and the central services of the manufacturer to take back the reins (and the money) is very strong at Stellantis and much less marked at Renault or Toyota. Thus, without being much more precise than C. Tavares on what he includes in his figures, L. de Meo affirms that "the distribution cost is high" and that 50% is with the distributors and 50% with the manufacturer. He describes the part of the job that falls to him, valuing the work done to be more careful about tactical sales. On the dealer side, leaving the 'bad cop' job to his colleague, he knows how to find the right words with the profession, saying:
"I'm very interested in forcing dealers to go for the 'basics' in structuring their capabilities. Maybe 10 years ago we were bugging them about the colour of the tiles, the flags that were coming in at 500 euros a piece... I think we need to be well represented but not force them to spend money on things that don't generate business."

Even more explicitly, the interview with F. Marotte allows him to reaffirm Toyota's commitment to delegated or partnership distribution in which it is the dealer who invoices - and carries the stock - because it is he who ultimately makes the commercial proposal and manages the customer relationship.
Thus, he states:
"When a dealer makes the invoice, he is in control of the game. Negotiation is part of customer satisfaction. The customer is faced with someone who is responsible for the commercial conditions and the structure of the offer made to him. He is not an intermediary who is not accountable.
These are very strong words which, for the group managers first of all, but also for the employees of the dealerships, are a recognition of the work they do and the service they provide to the customers on the one hand and to the manufacturer on the other.

This does not prevent him from subscribing to the shared analysis according to which it is partly by reducing the share taken by distribution costs that the manufacturers will make the price increases of vehicles associated with electrification more digestible. To counter this, he believes that value can be created and states:
"There are a lot of providers that capture value based on the business we do. There are mainly three types: the banking sector that finances, the insurer that insures, and the repairers that repair vehicles that no longer come to us. There are also more and more subscription formulas for short or medium term rental. We have value here that escapes the dealer and the manufacturer, even though it is around the product that we are marketing."

This reasoning which consists of going to look "around the product" for the value which we know we will struggle to find in the product itself is also present at C. Tavares but he does not necessarily propose to share these (more or less) new fields of activity with his network.

Thus, in 2022, the new battle of the old and the new is taking shape among the manufacturers. It is exciting and decisive, but its outcome will not depend solely on this confrontation. It will also depend on the strategies of all those players who work "around the product", who will not remain or remain on the sidelines and who, as Christophe Michaëlli of BNP Paribas indicated in another interview in Autoactu, will also be partners of the distributors when the manufacturers decide to do without them.