Insights

Buying A Car Means There Is Money On The Table

Going digital could cut automotive distribution costs by a third

The conundrum posed by automotive incentives could have a digital solution. The industry gives away hundreds of millions of euros a year – equal to about 30 percent of its total cost of selling and distribution – due to old-fashioned rebate battles and intra-brand competition. The use of digitized customer-oriented processes combined with newly granular insights from the underlying data could allow automakers and dealers to save about a third of that money.

Almost uniquely among retailers, the car dealer most desperate to make a sale often ends up setting the local market price. That is not the case with other in-demand consumer goods like iPhones, where companies successfully impose greater price and cost discipline. Incentives such as zero-percent financing, special promotion packages and discounted special models are expensive for car manufacturers. Worse, no one really knows how effective they are.

The automotive industry gives away hundreds of millions of euros a year – equal to about 30 percent of its total cost of selling and distribution.

Instead of the contradiction it now is, capturing big retail savings while simultaneously delivering better customer service could become an automotive win-win in the digital age. For one thing, continued digitization should boost dealership network consolidation, promoting greater competitiveness and economies of scale while increasing IT performance and professionalism. At the same time, manufacturers should seek to “bend the curve” regarding their own digital distribution channels, cleverly integrating with their dealers to improve test drives and vehicle handover processes. Digitizing and automating certain steps in the sales process can lead to a more fluid and effective distribution of roles between brands and retailers that helps both parties.

A car with a list price of € 30,000 comprises about € 10,000 cost of selling and distribution

Source: Oliver Wyman analysis

Potential savings can come from two places: first, direct digital sales can reduce the value-add levels dealers must bear, so costs (and dealer margins) decrease. Second, with better customer knowledge, companies can optimize or discontinue many ineffective sales promotion measures.

To work, this plan requires seamless data access. That means retailers and manufacturers need to share data and knowledge freely regarding the end customer. This sharing will become more important as the new mobility age takes hold. Today, for example, traditional dealers handle about 80 percent of car purchases; by 2025, that amount will drop to only about 50 percent (via physical car dealerships.) That means automotive OEMs, dealer online portals and other potential players like the tech giants will step in and thus require higher quality customer data to provide a positive customer experience.

Whether the car manufacturers or their digital rivals will win the customer remains unclear at this point. The decisive factor will likely come down to which group manages the interface with the customer better – an area where automakers now enjoy a promising position. Nevertheless, success will require strong efforts to block the progress of digital players like Amazon or Alibaba, because once they control small transactions like carsharing or short-term rentals, vehicle purchases will likely soon follow. Industry leaders recognize that if the smart mobility customer experience shifts away from the vehicle to smartphone-like devices and apps, the automotive brands could become mere suppliers of the “hardware” and thus occupy the shallow end of the industry profit pool.