Retail sales, Vinkesh Gulati, the president of the Federation of Automobile Dealers Associations (FADA), says, are a better way of judging the health of the automotive sector instead of wholesales. In an interview with FE’s Vikram Chaudhary, he talks about the impact of car subscription models on dealers as well as Mercedes-Benz India’s new sales model. Excerpts:
It’s argued that retails are a better way of judging the health of a sector instead of wholesales…
That’s correct. A manufacturer’s numbers (like what the Society of Indian Automobile Manufacturers provides) are production numbers, but if you truly want to judge the health of the automotive sector, the monthly or quarterly sales numbers we share are a better way.
How do you collect sales data?
We have two sources. One is the Ministry of Road Transport & Highways’ VAHAN portal, and the other is dealers themselves.
How many dealers had to shut shop due to the pandemic?
We have not seen many dealers shutting shop directly as a result of the pandemic, even though there are some slippages, which always happen. There are about 26,500 vehicle outlets in India and every year 30-40 closures happen. At the same time, 30-40 new openings also take place. But due to the pandemic we have seen some restructuring; for example, a dealer may have closed some outlets in certain places.
Mercedes-Benz India has said it will sell cars directly to customers, and dealers will become the company’s franchise partners. What is FADA’s point of view on this new sales channel?
The model introduced by Mercedes-Benz India is an out-of-the-box thinking. Even though such a model has tested waters internationally, India is a unique market where the customer physic is very different, as they change dealers and even brands on any additional discounts.
On the face of it, this model looks beneficial for the dealer community dealing in premium brands with low volumes, but we will need to see if such a model can work with mass market brands so that every dealer can benefit out of it.
Mercedes-Benz also said that dealers will be much more profitable in this new arrangement. Will they really be?
As an association, we are quite excited and optimistic about this unique model. We feel this will help dealers and customers both. As we all know, inventory build-up is one of the key ongoing exercises that a dealer has to invest in. Inventory contributes close to 80% of the total dealer working capital and maintaining an inventory of such big-ticket products is even higher than for mass-market products. Over the last few years, the automobile industry has been going through lower sales momentum, and under such conditions these high investments got further impacted considering the huge bank interest that the dealer was liable to pay for the unsold inventory. This has significantly impacted the operational cost and the capital of dealers, and, in turn, impacting their return on investment.
With this unique plan, dealers won’t have to invest in building up inventory. Rather, they will be utilising this money in newer ventures for the advancement of their dealership network, covering a larger geographical area for the brand and utilising the fund for better technology and after-sales developments, thus building a customer-centric organisation for themselves.
Although Mercedes-Benz has assured their dealers of better returns in the ‘Retail of the Future’ model, as they call it, or to compensate if there are any hiccups, the FADA is keeping a close watch on how this new strategy in retail pans out for dealers and customers both. Moreover, all Mercedes-Benz dealers are happy with this new model.
Do you think other OEMs may also start experimenting with such sales channels?
Mercedes-Benz India has tested this sales model in certain global markets, but will it work in the Indian market is something we need to wait and watch. Indian dealership networks cover varied geography and there cannot be a one-size-fits-all strategy for everyone. We should also consider that this model puts the onus of inventory on the OEM, which implies huge investment in working capital from them. Even in the case of Mercedes-Benz, the burden of inventory of approximately Rs 800 crore has been shifted from the head of dealers to the company.
A major drawback of this model is that it takes out the satisfaction/ego message of negotiation from the customer’s hand. A lot of OEMs are keenly observing the reaction of customers to this model and the impact on sales, and most importantly market share, before planning to take a plunge in this new way of retail. But we can be rest assured that this model is very difficult to be implemented by mass-market OEMs as the entire billing onus will shift on their head coupled with inventory management for the country of our size.
How does car subscription impact dealers?
Car subscription is a global trend that has immense acceptance in the global market, but India is a unique market, where buying vehicles comes under the aspirational product bracket. Car subscription has never been a popular choice for private car buyers in India, where many take pride in owning a car as an asset. For example, if we talk of an upper-middle-class or middle-class family, for them owning a car is an ambition that they could witness once or twice in their life and they would always prefer to own a car in their name rather than opting for a subscription model.
Subscription is a model that might enthuse the younger generation who are ready to explore and avoid large and long-term investments and commitment in acquiring a vehicle, but then this population is a handful, as car subscription and leasing has a penetration of less than 1%. Besides, the economic viability of this model is going to be a bigger challenge for the success and practicality of this format.
As far as impact on dealerships is concerned, dealers are not only responsible for vehicle sales and purchase, but after-sales are also an important aspect for them. Once the subscription format comes into play, dealerships can play a critical role in taking this format to a larger scale for OEMs as we have a large network and more exposure along with online and on-ground support teams.