Volkswagen to rationalise dealer network, tap smaller towns for growth

Company says it will in 2019 launch products in 30 different tier 2 and tier 3 cities, which include Tumkur, Warangal, and Sivakasi

Volkswagen Passenger Cars, the brand that accounts for the lion’s share of sales at Volkswagen Group India, sees the slowdown in recent months delaying its goal of growing from just around 1.7 per cent to 3 per cent market share by a year or two.

But it will, meanwhile, rationalise its dealer network, tap smaller towns for growth, and focus on the SUV segment. The ongoing strategy is derived from a six-point agenda, which includes prioritising VW’s people, brand and product, network, corporate fleet, loyalty and digital, VW officials say.

Steffen Knapp, director at Volkswagen Passenger Cars, says by 2021 the German auto major will trim the dealer count from 63 to 56, with touch-points going up to 150 from the current 120. “The idea is to retain a self-efficient set of profitable and performing dealer partners and develop a network of partner that does enjoy economies of scale,” Knapp says. 

In 2017, there were 80 dealers. Volkswagen will for smaller towns also switch to smaller, economical showroom formats they call “popups” and cost around Rs 55 lakh to set up, as distinct from Rs 2-7 crore for traditional ones used in leading metros. 

Knapp says in 2019 they will launch in 30 different tier 2 and tier 3 cities, which include Tumkur, Warangal and Sivakasi. While the Indian car market was seen a small car- or hatchback-friendly one, the trend in recent years has shifted and moved to a wide range of SUVs across sizes and has been adopted by most manufacturers with success.

Renault started the trend with its successful Duster, followed by Ford’s Ecosport, Maruti’s S-Cross and Brezza, Jeep's Compass, Mahindra's XUV 300, and, most recently, Hyundai’s Venue. While Volkswagen does sell smaller hatchbacks and compact sedans such as the Polo and the Vento, the future launches will focus on versions of the T-Cross or the platform code A0 SUV but not sedans.

In the meanwhile, Knapp says there are milestones the company is working, including loyalty, something often ignored but vital for an emerging market. “In a first-time car-buyer market, that's a very critical pillar to build right,” he said, pointing to products that do well for the first six months when launched but then fizzle out. That’s because loyalty hasn’t been established.

The key to any foreign carmaker’s success in India hinges on the combinations of value and optimum cost of ownership, which includes the quality of service provided as well, says Kavan Mukhtyar, partner and leader automotive, PwC India. “Most buyers of foreign cars have no problem with products but expect more from their service partners.”

That’s something, Knapp says, Volkswagen is aware of and has taken steps to reduce costs of ownership. The regular service cost has been reduced from 24 per cent to 44 per cent across Volkswagen carlines from CY2019, he says, and steps are in place to offer long-term maintenance packages when selling the car. He’s also getting pickier with selection processes for service and sales representatives at outlets, sometimes to the consternation of his dealers.

Knapp says in the past two years, VW's loyalty percentage has grown three times from 5.6 per cent to 15 per cent, with most buyers upgrading from a Polo to a Vento or to a higher-priced SUV. “That can't happen unless high-level service continues even after a sale is concluded,” he says. 

Typically, for most foreign auto players it's a three-pronged model with an international purchasing office for parts, domestic car sales and an exports trade that keeps their cash registers humming. 

According to Suraj Ghosh, principal analyst, Powertrain Forecasts for IHS Markit, “In the long term, Skoda and VW combined could reach a market share of 5 per cent if their strategy is aligned, as they do have a range of proven products in their lineup.” He goes on to add that the trick will be in making exports sustainable while riding out the slowed sales cycles until the markets recover and bounce back. 

By that point Volkswagen, will have no choice but to make its volumes come into play full swing so that a virtuous cycle of healthy dealers, repeat buyers and steady sales gain traction, if it’s serious about making a dent in the Indian market.