Justin Benson is a partner and automotive sector specialist at Vendigital. This article was originally published in AM online.
Many dealerships and independent service centres were finding it hard to make a profit long before the COVID-19 pandemic hit, due to their low margin, high volume operating models.
They relied on the efficiency of their distribution networks to keep the forecourt moving and turn around jobs as quickly as possible.
Now, as the post-lockdown pipeline starts to refill, there is still time to do things differently.
With most dealerships and independent service centres back up and running and operating at near normal capacity in some areas, the focus of the management team is understandably on pushing through jobs, meeting customer expectations and providing a COVID-secure workplace.
However, there is still time to put in place a business recovery strategy and make significant operational and structural changes, as long as they are able to act on decisions quickly.
Implementing a well-considered rightsizing strategy for example, could help them to boost profits and improve their resilience through the recovery phase and beyond.
Prior to the pandemic, many garages and service centres had resorted to chasing volume in a market that had slowed considerably, primarily due to Brexit uncertainty and a dip in consumer confidence, which was affecting new car sales.
The increase in OEM recalls was eroding capacity and making it harder to service longer-term customers.
While national service centres and dealerships might have expected to gain from the increase in recall activity, the reality was somewhat different.
Unpredictable demand was putting pressure on the supply chain, undermining its ability to deliver parts on a just-in-time or just-in-sequence basis and this was slowing activity down.
Just two months after showrooms were allowed to re-open, used car sales have come back strongly and demand for used internal combustion engine (ICE) vehicles in particular is outstripping supply.
In July, the price of used cars rose to its highest level since August 2018, and this trend is affecting wholesale prices and parts availability too.
Pent-up demand for new cars is also adding some buoyancy to the market and while this situation is bound to benefit some businesses more than others, improving revenues have at least allowed a little more breathing space to plan the way ahead.
There is no time to waste however.
To emerge from the pandemic with a more robust and resilient business model, dealerships and independent service centres will need to address some long-standing structural weaknesses at the same time as adapting to meet future market demands.
Before remodelling their business for the future, it makes sense to focus on reducing costs and improving operational efficiency.
This is particularly important as many businesses are predicting that increasing volumes could be pegged by a reduction in demand for servicing and repairs, due to the impact of fewer car journeys being made during lockdown.
A number of major dealerships, including Pendragon, have recently announced plans to close part of their retail networks.
This will help them to reduce their fixed costs and adjust to a shift in consumer buying habits, as more transactions move online.
In some cases, a radical rethink of a company’s real estate strategy could result in service centres being relocated to well-connected brownfield sites, rather than taking up prime retail space alongside showrooms.
A close examination of third-party spend in areas such as cleaning contracts, catering services, merchant changes and fuel could identify opportunities to reduce costs further, delivering profit to the bottom line.
Depending on the operational structure of the business, it may also be possible to centralise third-party costs and realise economies of scale.
Investing in integrating dealer/data management systems with financing data/systems and manufacturer-specific software for customising customer requirements would bring significant benefits.
As well as helping dealerships to improve lead generation and customer experience, it would also be possible to reduce the cost of customer acquisition/service.
Interestingly, the best data is often held by finance companies. More than 85% of new cars and over 35% of used cars use a finance product for purchase.
Capturing the customer data is therefore regulated, which means it is high quality. However, this data tends to be transactional in nature, whereas the dealer is aiming for a longer-term relationship for parts and services, and often repairs.
Ensuring dealer systems are joined up and contain similar high-quality customer data can help them to retain and attract customers for longer-term relationships, as well as future transactions.
This is particularly important as new products and services come onto market such as electric vehicles, subscription models and, energy products and services.
A significant number of vehicles also go to auction after their first owner, typically following a three or four-year PCP deal.
Improving data capture and linking up systems would enable dealerships to keep track of the customer and ageing vehicles over a longer time period.
This would allow them to retain and grow profitable customer spend on aftermarket servicing, parts and repairs.
Dealers and carmakers have bundled a lot of value into one-off payments for aftermarket products and services.
Now is a good time to start unbundling services according to their value to the customer and rethink pricing structures.
For example, unbundling services might include charging a premium for higher-value services, such as home pick-ups and next-day delivery.
Experimenting with bundling or unbundling of services to meet individual customer requirements to deliver a better customer experience, could drive increases in volumes and profitability.
It is therefore possible for the aftermarket to come back stronger than it was before the pandemic.
Dealerships and independent service centres alike will need to right-size their operations by: reducing costs; moving more processes online; improve retention of customers though data analytics and customer experience; deliver flexible service and repair operations to manage volatile demand in capacity; and, consider innovative pricing approaches to ensure value is perceived by the customer.