Despite the rise of direct-to-consumer (DTC) car sales, the modern dealer franchise model remains more cost effective, according to a study conducted by the consulting firm, Oliver Wyman.
The report, commissioned by the National Automobile Dealers Association (NADA), is based on an analytical examination supported of U.S. auto sales and distribution cost data from thousands of dealers.
Notably, the net cost difference between franchised dealerships and DTC is minimal, about $200 per vehicle, according to Oliver Wyman officials.
“Our research emerged in response to the oft-repeated but not yet proven assertion that the dealership model is more expensive,” the report stated. “It proved this assertion to be incorrect. In fact, it is the traditional franchised dealer channel that has a lower net cost of distribution than direct and agency-like (“hybrid”) channels when operating at mass market scale in the U.S.”
Dealer Model
There are approximately 18,000 franchised automotive dealerships operating in the U.S. today. The modern dealer franchise model emerged as early auto manufacturers sought ways to expand their distribution networks and reach large numbers of customers efficiently while focusing their efforts and capital on product development and manufacturing.
The authors of the report cited two key aspects that show why dealer channels outperform direct sales: direct sales and dealerships share similar cost efficiencies and net cost of distribution is the key metric for channel success.
After removing the impact of non-channel-specific factors that distorts the true “cost of the channel” that are commonly touted as advantages inherent to the DTC channel, they turn out to provide the same benefit regardless of channel selection, and thus cannot be counted as a benefit inherent to any specific channel, stated the authors.
Distribution Questions
For example, low advertising spend or minimal inventory investment are choices made “upstream” of channel selection and their savings cannot be credited to channel strategy. When the impact of these non-channel-specific strategies is removed, the study found that dealer’s cost about the same in terms of gross distribution cost per vehicle as an equivalent direct or hybrid channel.
As for the net cost of distribution, gross channel cost offset by the incremental value delivered by the channel is what matters.
“This, in our view, serves as an optimal metric for channel comparison because every channel type both incurs cost and generates value,” the study stated.
For example, the DTC channel—used by companies such as Tesla, Lucid and Rivian— delivers the value of eliminated intra-brand price competition, while the dealer channel delivers the value of customer-by-customer price optimization. When the relative value each channel delivers is accounted for, this study found that the net cost of distribution per vehicle is lower for franchised dealers than for the DTC channel.
Report Highlights
Three highlights of the report included:
- DTC models save by centralizing tasks like inventory management and marketing, eliminating dealer-level roles. However, these savings are balanced by the higher wages manufacturer-run dealerships tend to pay.
- Hybrid distribution reduces labor costs, but not as significantly as DTC because independent stores still operate some local functions.
- While DTC models eliminate intra-brand competition, they don’t offer the same flexibility as dealerships.
“The wide range of costs among different brands and market segments shows that there are ample opportunities to improve efficiency within the existing traditional franchised dealer framework,” the report stated. “And, of course, capturing such opportunities hinges on enhanced collaboration between OEMs and their dealers: by definition, neither participant in a two-party channel can optimize the system on their own.”
OEM, Dealer Relationship
In this mature and highly-efficient industry, the consulting firm noted both will need to work diligently and constantly to identify and seize opportunities for cost reduction and value enhancement. It used as an example of the excess capital is tied up in inventories, OEMs and franchised dealers can work together to optimize them without resorting to costly channel changes.
On the demand side, dealers can improve their systems for providing more timely and accurate demand signals to their OEMs’ factories; on the supply side, OEMs can improve factory flexibility so as to more rapidly and cost-effectively respond to such signals. There are dozens more areas to be jointly tackled.
Wyman Conclusion
Oliver Wyman summed up their finding stating that with the enormous total cost that completely transforming a dealer network in pursuit of another channel would require, “there is no good case for an incumbent OEM to make that change.”
“Our analysis also revealed large variations in costs and values within channel types, implying there are larger savings to be had by optimizing one’s channel rather than by changing it,” the authors wrote. “For incumbent OEMs committed to the dealership channel, and for dealers in the channel committed to their OEMs, this means collaborating more closely with each other in pursuit of such optimization, to the benefit of both.”
