With direct-to-customer model, Mercedes-Benz in the retail driving seat

The luxury car maker offers a new marketing template that reorients its relationship with dealers, customers

On Wednesday, Mercedes-Benz India announced a “direct-to-customer mo­del”. The move, it claimed, will be a win-win for all. India is the third market after Sweden and South Africa where Mercedes is deploying the new retail model.

For customers it would mean getting a uniform pricing across all sales outlets. Under the new retail model christened “Retail of the Future” (ROTF), Merce­d­es-Benz India will own the entire stock of cars, sell them via appo­inted franchise partners and in­voice the new cars to custom­ers directly, taking away the head­ache of inventory management and funding from the dealers.

“The auto retail business has been disrupted by digitisation and provides an opportunity to the original equipment manuf­a­c­turers for cost and efficiency optimisation,” said Ravi G Bhat­ia, president and director, JATO Dynamics, an automotive business intelligence consultancy. If anything, the Covid-19 pandemic has only accelerated the trend towards digitisation. Tesla is the first company to have showcased the direct-to-customer model. It sells through company-owned showrooms and has a strong digital presence.

Prima facie, the retail strategy that Mercedes plans to switch to from the second quarter of the current fiscal looks impressive and is likely to bring in efficiency across the value chain. It comes against the backdrop of the pandemic that has upended lives in every aspect. High working capital requirements, low sales and high fixed costs have forced several dealers to down shutters and exit the business lock, stock and barrel. The new model will, there­fore, help but come at a cost for the dealer or the franchise partner, Bhatia pointed out.

The business model will be ap­plicable for new car sales. Sep­arate business lines — including customer service, pre-owned cars and allied businesses — remain unchanged.

“The ROTF will enhance the buying experience for the custo­mers and help our franchise par­tners,” said Martin Schwenk, ma­naging director and CEO, Mercedes-Benz India. “We are not changing our footprint in any way. We are just integrating the whole process for the custo­mers,” he said, adding that the new mo­del will allow the company to leverage its network a lot better.

But JATO’s Bhatia believes that the new arrangement is “likely to shift the channel power in favour of the OEMs”.

So far, dealers have been an independent entity that will buy inventory, take associated risks and earn profits. In return for this business opportunity the dealer has agreed to comply with certain brand standards. Earlier when he was buying inventory, the risk and reward both belonged to him.

Under the new scheme of thi­ngs the touchpoints in the sales process will be reduced from 28 to two for dealers — test drive and delivery. Everything else will either be digital or be taken care of by the company. So, dealers’ interface with customers will be reduced substantially.

But that doesn’t take away the merits of the new retail strategy. The fact that most luxury car dealers in India have been fi­nancially unviable makes it a fit case for its adoption in India. “It has been running successfully in various markets and is set to accelerate in India,” said Bhatia.

According to Nikunj Sanghi, member of the Federation of Au­tomobile Dealers’ Assoc­iat­ion, the apex body for auto dealers, 35 per cent of dealership costs is on account of inventory. Even if the dealer margin reduces marginally under the new arrangement, it will still work in the favour of dealerships. “It looks like an exciting model and if other manufacturers of premium and luxury brands also adopt it, it would really help the dealers.”

Mass carmakers Maruti and Hyundai are likely to stay clear of selling directly to customers as the sheer volume is 25-50 tim­es higher than niche brands. It will require the mass brands to sink a massive amount of capital to have a company-owned centralised stock. It will, therefore, re­main confined to niche bran­ds. For instance, a brand like Stellantis, which was formed this year via a 50:50 cross-border me­r­ger between Italian Fiat Chrysler Automobiles and the Fre­nch PSA Group, that has just ent­e­red the Indian passenger vehicle market and would like to have a wider reach in a cost-efficient way, the model of direc­tly selling to customers works. Similarly, other niche luxury and premium brands will also see merit in it.

“It cuts the non-transparency for the customers and will be a game changer,” Mohan Mariwala, MD & CEO at Auto Hangar, an authorised Mercedes dealer in Mumbai and Nagpur. “It will make the entire system capital-efficient. Instead of dealer margin, franchise partners will now earn a commission. This frees up our working capital. Any kind of inventory lying with a dealer attracts anywhere close to 9 to 11 per cent, “ he pointed out.

For a customer buying a Mer­cedes, the changes will be discer­n­ible only when the invoicing is done, since that will be done in the name of the company and not the dealer partner, as is the case today. Also, one gets to choose from a wider pool — be it trims or colours. For instance, if a particular variant or colour is not available at a dealership, the centralised warehouse managed by the company can get the car delivery facilitated through some other franchise partner making the buying experience hassle-free, explained Schwenk.

It would also offer best prices directly from the company without having to negotiate and lead to easier price comparison, seam­less and simplified purchase process, complete transparency, sale, and save time and effort, Mercedes claimed.

The primary roles and res­p­on­sibilities of the Mercedes’ fra­nchises will include establishing and maintaining customer contacts, development of the market and facilitating the sale of Mer­cedes-Benz models. They will continue local retail marketing and also be responsible for lead generation and management. Current showroom infrastructure will be unchanged.

This long-term strategic move certainly entails a fundamental transition in the retail business in the luxury end of the passenger car market in India. And the “test drive” for it will take place in the challenging circumstances of a pandemic-year market.