ROLAND BERGER STRATEGY CONSULTANTS STUDY In-depth knowledge for decision makers -3,800 OUTLETS -200,000 JOBS 22% DEALERSHIPS AT RISK RE:THINK AUTOMOTIVE RETAIL NETWORKS The next challenge for the US auto industry
STUDY 3 RE:THINK AUTOMOTIVE RETAIL NETWORKS THE NEXT CHALLENGE FOR THE US AUTO INDUSTRY US automotive retail networks are stuck in legacy structures. Transformational change and further consolidation is needed to reflect the realities of a changing automotive landscape. A study by Roland Berger Strategy Consultants CONTENTS EXECUTIVE SUMMARY 4 RETURN OF AUTO RETAILING? 8 Time for fresh thinking about dealer networks Dealer profits have been restored to healthy levelsbut will it last? NEW REALITY 12 TIME TO RE:THINK NETWORK 20 Current network structures are not sustainable 3,800 dealers at risk and further consolidation needed OEMs need transformational change to address market challenges INSIGHT FROM AN INDUSTRY THOUGHT LEADER Interview with Jos Muoz Executive Vice President of Nissan Motor Co., Ltd and Chairman Management Committee Nissan North America 28
ROLAND BERGER STRATEGY CONSULTANTS EXECUTIVE SUMMARY THE RECOVERY OF AUTOMOTIVE DEALERSHIPS POST-CRISIS HAS CERTAINLY MADE THIS INDUSTRY LOOK ATTRACTIVE AGAIN. BUT IS THIS REVIVAL BASED ON SOLID FOUNDATIONS? ARE THE CURRENT DEALER PROFITS TRULY SUSTAINABLE OVER THE COMING YEARS AND DECADES?
STUDY 5 According to a recent study by the National Automobile Dealers Association1), the average automotive dealer in the US made over USD 840,000 in profit in 2012a historic comeback for an industry plagued with bankruptcies just four years earlier. The recovery of automotive dealerships post-crisis has certainly made this industry look attractive again. But is this revival based on solid foundations? Are the current dealer profits truly sustainable over the coming years and decades? We believecontrary to popular opinionthat things are not as positive as they seem. In our view, the massive consolidation of the recent past was not the end, but the beginning of the change needed for dealers to maintain healthy profit levels and for OEMs to transform their distribution networks. In fact, we estimate that an additional 22% or 3,800 outlets would need to be closed and approximately 200,000 jobs eliminated to maintain current profit levels through 2020. In a nutshell, it is time for OEMs to rethink the current structure and set-up of their dealer network. What lies behind our controversial viewpoint? Our belief that dealer margins will soon come under attack again. It is true that volumes are quickly recovering, but these volumes are less profitable than in the past. We are witnessing an inexorable shift toward smaller, less profitable cars. In addition, service and aftersales revenues are harder to come by as independent shops continue to take a larger share of the pie. And, last but not least, the internet is making the auto retail market a smaller place, with more and more dealers fighting for the same customers. The combination of these factors leads us to believe that the next wave of consolidation is just around the corner. In fact, it may hit much sooner than later. As the digital age rapidly evolves, it is creating a new type of car buyer that comes armed with deep product knowledge and full price transparencynot to mention they also have a radically different demand and expectation of the retail experience. Today's consumers look online for information rather than making multiple visits to their local dealerships. They arrive at the dealership with a clear expectation for the price they should pay. They expect a world class brand experiencethe sort of experience provided by the likes of Neiman Marcus or Apple. These rapid changes will put additional pressure on dealers' margins and will make it difficult for the "mom-and-pop" outlet to survive given complexity and resource requirements. Of course, the auto manufacturers are not blind to these challenges and are responding in various ways. However, their actions do not go far enough and keep current structures un-touched. Instead of using the opportunity of a changing automotive landscape to transform their retail networks, OEMs are stuck in legacy structures and only remain focused on making incremental updates to their business modela model that is effectively obsolete. They have been slow to adopt radical measures in today's stringent legal environment, afraid of the risk and cost of making such changes. We believe that transformational change is both essential and needed. In the following pages, we look at what OEMs can do to make the radical alterations needed to put their dealers' profits back on a sustainable basischanges that will ensure that they remain winners rather than losers in the fast changing retail game. 1) National Automobile Dealers Association, NADADATA 2013
ROLAND BERGER STRATEGY CONSULTANTS
RETURN OF AUTO RETAILING? DEALER PROFITS HAVE BEEN RESTORED TO HEALTHY LEVELSBUT WILL IT LAST?
STUDY 9 Dealer profits are back to healthy levels The recent economic rebound, release of pent-up demand, network consolidations, and increasing OEM financial support measures have led to record profits for automotive dealers in 2012 and 2013. Those that survived the crisis have emerged looking better than ever: Average dealer profit margins increased from 1.5% to 2.2% between 2007 and 20121). To all intents and purposes, the industry has recovered from the financial crisis with a positive outlook on the future. RETURN OF STRONG DEALER THROUGHPUT From around 2007, the financial crisis began to hit the automotive retail network structure hard. In 2009, the industry hit rock bottom with a meager 10.4 million new car sales in the USa drop of more than 38% from a few years prior. Several dealers were driven into bankruptcy as there was not enough volume to cover fixed costs. Future viability of the auto retail structure was brought into question. By 2009/2010, automakers were massively consolidating their networks, led by the Big 3GM, Ford and Chrysler. Their reasoning was logical enough: Reduce the size of the network to a healthy number of outlets and dealers' profits will go up, as higher average throughput increases profitability. This led to a reduction of more than 4,000 outlets across the network structure. Even though this represented over an 18% net outlet reduction, many still questioned if the cuts went deep enough. F1 As the recovery began to finally come around in 2011, these pessimistic views regarding the future outlook quickly dispelled. Volumes were rapidly recovering as all the potential buyers who had delayed purchasing a vehicle due to the financial strain began returning to the market. This quick recovery in volume plus the outlet consolidation helped increase average dealer throughput for volume brands by 249 units or 43% between 2009 and 20123). While the increase in volume has played an important role in the return of profits, it is only one piece of the puzzle. 1) National Automotive Dealers Association, NADADATA 2013
ROLAND BERGER STRATEGY CONSULTANTS REBOUND OF THE PROFITABLE TRUCK SEGMENT F2 Another key element that shouldn't be overlooked is the strong return of the profitable truck segment. During the downturn the truck segment's share of new vehicle sales went below 50% for the first time since 2000. This development was extremely painful for dealers because in a time where volumes were drastically declining so was their most profitable sales segment. In fact, dealers often lose money on several segments within their portfolio and depend on truck sales to make up a significant part of their profit. Without truck sales, more pressure is put on aftersales and service to carry the load. In 2010, the sales levels for trucks returned above 50% and has been well received by dealers and OEMs alike. The boost in volume per dealer combined with the strong return of the highmargin truck segment has played a significant role in the profits that are being seen today. INCREASE IN OEM SUPPORT HELPS FUEL PROFITS The other driver of recent dealer profitability has been the increase in financial support provided by the OEMs. Manufacturer dollars have helped fuel profitability by reducing the required investment F1 US retail networksOutlet development ['000] -18% 21.8 14.8 21.5 14.2 20.5 13.2 18.6 11.3 17.7 17.9 18.0 10.2 10.1 10.0 6.9 7.3 7.2 7.3 7.5 7.8 7.9 2007 2008 2009 2010 2011 2012 2013E Source: Automotive News Dealer Census 2005-2012; Roland Berger Total Big 3 Import
STUDY 11 by dealers and providing large incentive bonuses for volume targets achieved. Many OEMs continue to subsidize dealer operations to ensure that they remain solvent, focused on the business, and keep facilities up-to-datein a time where competition is fierce and consumers expect a differentiated retail experience. For example, Ford announced in early 2012, that they would be guaranteeing dollar-for-dollar match of up to USD 750,000 for facility upgrade projects. Other OEMs, such as GM, Hyundai, Kia and Nissan have committed cash incentives for participation ranging from USD 50,000 to 1 million (and in some cases even more) per outlet. Mercedes Benz, Audi and others are offering dealers an extra bonus for every new car sold as an incentive for dealers that take on facility capital projects. In addition, volume based bonuses have been increasingly used to incentivize dealers to drive volume and gain market share. Many dealers have become heavily reliant on these incentives as they represent a large proportion of their yearend profits. HAPPY DAYS ARE HERE BUT THEY WON'T LAST All in all, the industry appears to have pulled through the crisis and rebounded with new energy. But does the recent recovery have solid foundationsor is it built on s
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