Keeping the flock happy

Automobile companies are building alternate revenue streams for their dealers. Is this enough to drive competition away?


If 22 people walked into my showroom by 4:30 pm, how many turned customers and how many didn’t? Maruti Suzuki now knows and monitors these things,” says Rajeev Gambhir, CEO of DD Motors in Delhi. A Maruti dealer for the last two decades, Gambhir attests to the new-found aggression at the country’s largest car manufacturer. Technology, rather the dealer management system, which allows the company to monitor end-sales, has been the biggest change, according to him. But that’s not all; OEMs are busy shifting gears to take on increased competition and customer expectations. Besides, a flurry of models, OEMs are investing in their dealers, the space where all the last mile action takes place. “There are 19 OEMs, with 197 variants today. We need to differentiate ourselves in that crowd,” justifies RS Kalsi, executive director, marketing and sales, Maruti Suzuki India.

Chic interiors
How exactly then is the country’s largest car manufacturer differentiating itself? By shifting its singular focus from the mass market to the ‘premium’ segment, with NEXA-branded showrooms. Over the last 3-4 years, urban consumers’ preference has moved from the A segment to the B segment and compact SUVs. Maruti says it is simply is trying to tap into the shift with NEXA. 

The car maker has thus opened 135 NEXA showrooms, retailing two models — the S-Cross and Baleno. While S-Cross hasn’t seen much traction, Baleno has garnered 50,000 bookings, with the waiting period stretching to over six months. “Maruti is following Toyota in premiumising its offering. Toyota and Lexus are offered as two distinct brands. NEXA’s initial response wasn’t good but after Baleno, things have changed and it is working for them,” says Nikunj Sanghi, director, Federation of Automotive Dealers Association, who also owns a Mahindra and Hero Motocorp dealership in Alwar, Rajasthan.

Kalsi says, “NEXA has placed Maruti in a different orbit.” A different orbit sounds about right. Setting up a NEXA showroom costs 30-50% more (both infrastructure and manpower costs) than a normal showroom, say dealers, adding that the normal setup can take up anywhere between Rs.15-20 crore (minus real estate). But while a premium showroom can ensure higher margins for dealers, is it sound economics considering the initial costs? JS Rekhi, CEO of Delhi-based Rana Motors, a Maruti dealer for the last 16 years, started a NEXA showroom in July 2015. “I feel the segregation has merit. Volume of 150-200 per month ensures profitability and margin is high, over 6% (between 4-5% otherwise),” says Rekhi. Gambhir of DD Motors, who owns a NEXA showroom too, says that it has turned profitable post Baleno. Can it keep up the volumes though? “We have a detailed plan till 2020. Two more models are slated to be launched via NEXA soon. In the second phase, we will include servicing facilities and launch 20 models by 2020,” shares Kalsi. 

Puneet Anand GM, marketing, Hyundai Motors IndiaWhere Maruti is revving up the interiors, Hyundai is running a global drive — GDSI or Global Dealership Space Identity — to up the ambience. “Just like a Starbucks or McDonald’s, our showrooms in the US, South Korea, and India will be the same. With a bronze color theme and wavy tiles and flooring, we want to offer the customer an experience,” says Puneet Anand, general manager, marketing, Hyundai Motors India. 

The company has already upgraded the interiors of 130 showrooms, and plans to take this up to 250 stores by the year-end. For the remaining, the deadline is 2018. But what about the upgradation costs for dealers? “We have negotiated the costs of material (flooring, fascia, ceiling, tiles) and services with selected vendors. That lowers the costs,” says Anand, adding that its costs anywhere between Rs.50 lakh to Rs.1 crore to upgrade a dealer outlet in Delhi.  

Digital psyche
The second largest car seller in the country is also tapping the digital psyche of buyers to reach out. With 70% of the people coming to showrooms doing their research online, Hyundai came up with the idea of launching “digital experience” outlets. The company has already launched two such showrooms in Delhi and Hyderabad, with 10 more in the pipeline. Typically, they are opened in high footfall areas such as malls or near metro stations in a 2,000 sq ft area (half the area of an average-sized showroom). 

With barely two vehicles inside, what’s Hyundai’s rationale behind this scaled-down format stores? Especially, when one can’t buy cars from these digital showrooms. “This is to showcase our product, to grab attention (and leads),” says Anand, adding that customers can check out 360-degree reviews and comparisons on screen. Besides, he says, “The digital store is serviced by another dealership that is 2-3 km away. So, test drives can be arranged easily.” But doesn’t this add to costs? “It’s around Rs.35 lakh in a city like Delhi. The staff includes two executives to explain features,” shares Anand. Typically, these units are owned by existing dealers. While Anand doesn’t reveal the leads created, he says that the “response has been good.” 

Toyota, meanwhile, is working on a cloud-based service platform — Toyota Connect, which will be supported by a dedicated call centre and integrated with Toyota’s dealer network and service providers. Where others are using the medium for lead generation, Toyota wants to focus on servicing, which is an alternative revenue stream for dealers. “Toyota owners will be able to access Toyota Connect through an app. Besides, all Toyota showrooms will be equipped with this technology. Services will commence from mid-2016,” says N Raja, director and senior vice president (sales & marketing), Toyota Kirloskar Motor. 

The carmaker is also focusing on after-sales maintenance. “We have developed a facility, Toyota Express Service that focuses on delivering the vehicle back to the customer in a short span after servicing. There are nine such facilities operational in key cities across the country,” adds Raja. 

Rural focus
All the moves afoot point to a new strategy. But if the passenger car biggies are working on the ambience and service factor, SUV leader, Mahindra & Mahindra is going down the beaten track. Mahindra has around 300 dealers across country, of which 100 were added during the last three years. “Between 2012 and 2014, Mahindra expanded like anything. But then, suddenly, vehicle sales dropped. The sales per outlet came down and it has been a big challenge,” says Puneet Gupta, associate director at IHS, the auto sector consultancy. 

Vijay Nakra, senior vice president, sales and customer care, automotive division, Mahindra & Mahindra accepts that volume has been under pressure. “Considering how the environment has changed and business has evolved, we have tried to keep the channel policy relevant and flexible. Unlike others, who have separate channels, our dealers can sell the entire range, but with separate focus.” Most of Mahindra’s outlets retail both its passenger and commercial vehicle range, but with separate managers and interaction areas. 

It also has an alternate ‘reach strategy’ that doesn’t involve huge investments for the dealers. “We have created the concept of grameen sub-dealers, appointed 3,000 Mahindra Mitras, mapped out dealer-trained technicians, and tied up with the Indian Oil Corporation for creating service outlets on highway routes,” adds Nakra. In metros, Mahindra is creating compact dealers — “a two to three bay compact quick service center, where vehicle could be serviced in 60 minutes,” he continues. 

Vijay Nakra VP, Mahindra and MahindraOff the kerb 
But with passenger vehicles sales being more than muted over the past years — de-growing 6.1% in FY14 and logging just 3.9% volume growth in FY15 — it hasn’t been easy for the dealers. The flattish volume growth has resulted in working capital issues. Nakra admits, “We have not set up new channels, but enhanced throughput (through new product launches), increasing the working capital of dealers,” he says. While new models create cost pressure, on the flip side, they help reduce the discount stress. Moreover, if a new model takes off, it results in good inventory turnaround and cash flow.

In contrast to Mahindra, Maruti and Hyundai claim their dealers didn’t suffer even during the slowdown. “Maruti and Hyundai, since they needed to expand their network, have been far more responsive to dealer needs than other dealers,” says Sanghi. Combined, the two players have an extremely strong product range and control 65% of the market.

Besides, Sanghi adds, “In the last two years, MNCs have come out in a big way to make up for the lack of large volumes. Marketing support and incentives have been offered to make ends meet.” However, the dealer satisfaction for brands like Chevrolet, Ford, Volkswagen remains still lower than the industry average of 845 (out of 1000) on JD Power’s dealership satisfaction survey. Here, the top three ranks are occupied by Toyota, Maruti, and Hyundai. (See: Kaizen wins). The nine factors that the survey examines include: marketing and sales activities; product; vehicle ordering and delivery; sales team; parts; warranty claims; after-sales team; training; and support from the manufacturer. Also, according to its latest report, 62% of the dealers say car manufacturers are offering them financial assistance to purchase new inventory in 2016, up from 55% in 2015.

When it comes to Toyota, Sanghi says it has managed to keep dealers happy despite low volume. “Their supply chain management is the envy of most OEMs in the world. They never supply more than 15 days of stock while some major dealerships in India even get inventory thrice a day.” Recently when NGT banned over 2,000cc diesel vehicles in NCR, Toyota bore the inventory and manpower cost of its dealerships. 

Alternate streams
While the sector has recovered, logging a growth of 7.8% in FY16, nevertheless, given the past experience, OEMs have become more aggressive in unlocking alternative revenue streams for dealers. 

N Raja Director and senior VP, sales and marketing, Toyota Kirloskar Motors“We are very sensitive towards dealer profitability and study the balance sheet of our dealers once a year,” says Kalsi. Considering that’s what keeps OEMs ticking, it is critical, especially when there is slack off-take. Hyundai’s Anand adds, “We study the profit-mix of the car-spare-insurance-bodyshop-financing-extended warranty, index the performance region-wise and work with them in areas where they are lacking.” 

That said what percentage of dealer revenue comes from non-vehicle streams? Anand says, “That varies from dealer to dealer and depends on volume as well. These days, insurance and finance are profitable because 70% cars are financed in India.” Hyundai has its own insurance portal and a separate finance division, which Anand says shows the “value in the business.” He adds, “Today, the sales of vehicle will always be under pressure because of competition but what you can work to your advantage is allied businesses.”

Maruti is no different. Gambhir of DD Motors says, “In terms of profitability and revenue streams, Maruti has divided each and every vertical. I used to sell insurance to 35% customers, now I am doing it for 90%.” The carmaker, he adds, has also helped ramp up insurance renewal as a stream of revenue. “Renewal was never a focus area for us. But today, we are doing 80,000 auto renewals every year, and had to increase the department size” 

Analysts agree that the margin on non-vehicle streams such as spares, servicing, accessories, insurance etc. is higher than that of vehicles. Maruti, thus, is also working on accessories, hoping to take back the market from unorganised players. It currently offers more than 2,000 accessories. “We do market research, then design and supply the products to dealers. For example, we have 20 different seat covers, all based on market research,” says Kalsi.  

The car maker also plans to beef up its servicing and workshop network to cater to the vehicles on the road. “As OEMs have increased electronic components and with more warranty extension products being sold, large number of buyers are coming back to dealers for servicing and repair,” says Gupta. 

For Toyota, Japanese philosophy ‘Kaizen’ is the buzzword. “There are continuous improvements being brought about in the way body and paint operations are being done at the dealerships. This is targeted at streamlining processes. A spin-off is improved efficiency as well,” says Raja. 

Considering that happy dealers can help them face headwinds, OEMs are focusing on channel financing too. Not only does the move boost the dealership’s working capital requirements at lower interest rates, it allows companies to play with discounts on specific models.  

OEMs with higher volumes such as Maruti and Hyundai, of course, have a better play here. “With a per month volume of 40,000, our dealers are able to churn higher inventory. So financing is comparatively easier for them. SBI has been a strong investor in us. We also help them,” says Anand. 

The thrust is also on developing the next generation of dealers. Maruti says post NEXA, the second generation of existing dealers are coming back. Moreover, to woo them, Maruti “organises two year training as special entrepreneur trainees, where they learn every aspect of the business,” says Kalsi. Hyundai is no different. “The children of our dealers, who are in their 20s, we train them and take them to South Korea as well,” says Anand. By the looks of it, OEMs are tapping every ‘strategic’ aspect, even the next-gen not just in terms of models but even dealerships to wade through the increasing traffic.