Car dealer survival strategies

Date of publication: June 15, 1992

Author: Jonathan Brown

Abstract:

Car dealers depend on three main sources of income: the sale of new cars, used cars and of service and parts. They face major challenges in all three, possibly to an extent that threatens the very structure of the industry. In this paper, we review the reasons for this concern: Intensifying competition has produced an underlying fall in dealer initial gross margins. As a result, in the UK and USA at least, dealer profits on new car sales are very low. The coming recession combined with overcapacity in the world industry will put yet further pressure on profits. This margin reduction results from changing consumer behaviour, convergence in product design and quality and aspects of both dealer and manufacturer behaviour. An extended period in which dealers make little or no money from new car sales must be very dangerous for the suppliers. Dealers have opportunities in the used car market, which is often underexploited. However, in the long term, gross margins may come under pressure here as well. Improved reliability, durability and designed-in serviceability are depressing service and repair sales. A creative response is required and there are many possible remedies. The current distribution system is sub-optimised and better integration of the manufacturer and supplier systems, most notably in stock management, are essential. The only workable solution would appear to be "lean retailing" (effectively selling only to order) which should ensure that the market is not oversupplied. Retained margins should benefit both from reduced negotiation by customers and from less need to discount slow selling vehicle stocks. Dealers would also benefit in a number of ways from the freeing up of space and cash tied up in new car stocks. This would both reduce their costs and enable them to exploit profit opportunities in related areas such as used car retailing. However, such an approach is not without its risks, especially whether customers are prepared to purchase cars that they have not already seen. We consider the results of some initial research in the area.

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