A Future Beyond Brick And Mortar: Disruption In Automotive .

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McKinsey AutomotiveA future beyond brick andmortar – disruptive changeahead in automotive retailHow to leverage the current crisis to leapfrog into the next normal

ContentsIntroduction and key messages41The traditional automotive retail model is under severe pressure71.1 The current retail model does not satisfy customer expectations anymore –pain points across the car-buying journey persist91.2 Customers’ online expectations are rising and acting as a catalyst for change acrossthe industry111.3 Customers’ are looking for an adapted dealer role in a new multichannel landscape141.4 Globally, four major and distinctly different groups of car buyers can be identified162 Cost pressure fueled by ACES trends and digitization is accelerating the retail modeltransformation193 Five future retail-model archetypes and their implications for OEMs and dealers223.1 OEM building on dealer as entrepreneur233.2 Dealer as execution agent, OEM in control of new-car sales253.3 OEM fostering competition, dealer as exchangeable execution provider263.4 OEM owning retail273.5 OEM handing over to importer274 Outlook – getting started with the automotive retail transformation28Legal note30Authors and contacts31

Introduction and key messagesDisruption ahead – shifting customer expectations,new mobility offerings, and technological disruptions such as digitization, vehicle connectivity, andelectrification are driving the transformation of automotive retail at an unprecedented speed and magnitude, radically changing the status quo. The currentCOVID-19 situation is further accelerating the ongoing transformation and leap frogging the adoption of digitally-enabled car buying and onlinesales models. Moreover, the current crisis raisesthe cost consciousness of OEMs and dealers andfacilitates critical decisions on further outlet consolidation, leaner retail formats, direct customeraccess, and alternative sales models.Consumer confidence has considerably dropped asa result of the Covid-19 crisis and is also impactingcar buying intents. A McKinsey car buyer survey fromSeptember 2nd to 4th, 2020, indicates that new carpurchase intent in the US is still 20% below preCovid-19 levels, while Europe and Asia have alreadyrecovered from their lows in April and May (minus 10to 40% depending on country) and currently showa drop in purchase intent of 10% respectively 5%compared to pre Covid-19 levels. From the remaining respondents with purchase intent around halfindicate that they will delay their purchase for at leastanother 4 months. Economic reasons (e.g., reducedincome) dominate the decision to delay the car purchase mentioned by around 55 to 60% of respondents across countries and become even more relevant, whereas delays due to health concerns (e.g.,no safe test drives offered) indicated by 25 to 35%of respondents keep decreasing. Additionally, around 10 to 15% of respondents are also holding backto wait for subsidies and discounts to support theirpurchase. Our survey also shows that this drop issignificantly impacted by the primary channel usage.Consumers in the US that are buying their car mainlyonline are less likely to change their purchase intent(drop by 2pp) than consumers that planned to conduct their buying journey “offline” and purchase inperson at a dealer (drop by 8pp). This trend causeda significant rise in the adoption of remote sales toolsand online sales channels since the Covid-19 outbreak for both OEMs and dealers on a global scaleand will likely continue in the upcoming months.Covid-19 and the current economic situation alarmingly disclose the necessity for players in the automotive industry to act now and to rethink their retailstrategies.4Beyond COVID-19, an overhaul of the current automotive sales model has long been discussed due tounderlying constraints that affect customers, dealers,and OEMs alike. From a customer perspective, thecurrent retail model cannot fully accommodate thediverse set of realities in terms of customer expectations, needs, and behaviors. Across all regionsand customer groups, only 1 percent of the customers we surveyed were “fully satisfied” with theiroverall car-buying experience. From a dealer perspective, innovative mobility concepts, digitizedretail formats, and new market entrants drive significant deterioration of dealer margins, congruentwith 88 percent of automotive executives expecting that at least some dealer groups will not survivethe upcoming disruptions. From an OEM perspective, the current automotive retail model equatesto spending up to 30 percent of potential grossrevenue on vehicle distribution in the form of wholesale, structural, and tactical costs of retail. Moreover,75 percent of automotive executives believe thatretail is one of the main battlegrounds where newplayers will attack to gain customer access, occupycritical elements of the car-buying journey, and gaina significant share of revenue and profits.Given this context, the future of automotive retailhas understandably become a top agenda item inmany boardrooms. A noticeable example for this isVolkswagen’s announcement in 2018 to “restructure its sales model” by issuing new dealer contractsin Europe becoming effective in April 2020. Othermajor automotive players such as Daimler and Toyotahave announced similar moves over the past fewmonths with notably accelerating speed and clarity(Textbox 1).Textbox 1:Announcements of new automotive retailmodels (selection)Volkswagen: Digitized and more direct salesmodel in EuropeVolkswagen’s new sales model aims to “provideseamless individual round-the-clock supportfor customers,” expanding online sales, enabling direct sales models, and targeting customers more individually through new salesA future beyond brick and mortar – disruptive change ahead in automotive retail

and service formats such as city showroomsor pop-up stores. In addition, Volkswagen’sagreement with the Volkswagen and AudiPartner Association on an agency model forthe ID. family marks an important milestoneand allows Volkswagen to be the customer’sdirect contractual partner for the first time.Daimler: “Best Customer Experience 4.0” anddirect salesDaimler aspires to “offer its customers seamless luxury experiences and lasting memories –regardless of the time, place, or channel theyare using. Buying a Mercedes-Benz shouldbecome as easy as ordering a book.” The “Mercedes me”- ID allows customers to chooseflexibly between different sales channels usinga single profile. To support its goal, Daimlershifted to a more direct sales model, initiatingpilots in Sweden and South Africa in 2019 tosell new cars directly to customers at a uniformprice – regardless of whether the customerbuys the vehicle via an online or traditional saleschannel. In recent months, this model has alsobeen adopted in Austria and partly implementedin Australia for the EQC and other EQ electricmodels to be launched by the end of 2023.Toyota: Drive Happy Project in New ZealandToyota’s Drive Happy Project, launched in NewZealand in April 2018, aims to eliminate severalcustomer pain points at once along the carbuying journey, from online configuration, toextended test-drives, to seven-day moneyback options. At its core, Toyota implementedthree radical changes. First, the shift to a directsales model where new vehicle stock is centralized country-wide in three pools and ownedby Toyota, which alleviates sales pressure fromstock on dealerships. In this model, dealers arecompensated via a handling fee for providingspecific retail services such as test-drives andvehicle processing. Second, sales reps targetsin dealerships are focused on customer satisfaction, not volume, to incentivize customercentric behavior. Third, prices are haggle-free“Toyota Driveaway Prices” to enhance transparency and facilitate omnichannel purchases.Sources: company announcements andmedia coverageHowever, staying ahead of the current disruptions inautomotive retail will require more from OEMs andtheir retail partners than simply moving their operations online or going direct. Changing consumerpreferences and the non linear speed of change makeit difficult for OEMs and dealers to transform theirretail models, and it is safe to say that no single OEMor dealer has fully “cracked the code” yet. Inaction,on the contrary, is not an option. The strategic direction of an automotive retail model will likely determine the future success of an entire company, andany step in the wrong direction will be difficult oreven impossible to take back. A commitment to innovation in automotive retail is the imperative – andthe time to get started is now.Against this backdrop and based on our extensiveresearch and analyses (Textbox 2), we will provide acomprehensive perspective on three key questionsthat are currently a top priority for automotive OEMsand dealers:1. Why exactly is the traditional automotive retailmodel so severely under pressure at present, andwhat do OEMs and dealers need to know aboutchanging customer preferences and technological megatrends currently impacting the automotive retail space?2. What are the compelling future retail model optionsfor OEMs and dealers to stay ahead, and whichcapabilities and changes do they require?3. How can individual OEMs and dealers effectivelystart their transformation journey towards arobust and future-proof retail model?Textbox 2:How we derived insights for this report:1. Launched a comprehensive consumer surveyin China, Germany, and the US amongmore than 3,000 car buyers2. Conducted dozens of interviews with executives from the automotive industry (bothOEMs and dealers), mobility players, andstart-ups3. Worked with an agency to gain firsthandinsights into today’s retail experience andsales readiness for electric vehicles (EVs)4. Accompanied a dozen car buyers in the USover a two-month period to gain deeperinsights into the emotional experience andconsumer behaviors of car buying.5

In our attempt to answer the above questions, wedistilled three key messages regarding the futureof automotive retail and how OEMs and dealerscan stay ahead of the disruptive changes in progress:— The traditional automotive retail model is undersevere pressure because: Customer preferences are evolving and significant pain points at various stages alongtheir car-buying journeys persist The ACES trends (autonomous driving, connectivity, electrification, and shared mobility)plus digitization will have a major impact onthe current automotive retail landscape.— OEMs and their retail partners are “stuck in themiddle” due the to varying needs of today’s andtomorrow’s car buyers and how different playersin the market are responding to the changingretail landscape. As our research indicates, theirstrategies for the future need to become muchmore diverse and will diverge from the currentretail model to an extent not seen before. Becauseof this, a strong need is emerging to carefullyplan and assess their transition into the futureof automotive retail. To this end, OEMs and theirretail partners should consider our comprehensive perspective on the strategic options currentlyavailable to them. From the total number ofoptions, we have defined five different archetypes of future retail strategies: 1) OEM buildingon dealer as entrepreneur, 2) dealer as executionagent, OEM in control of new-car sales, 3) OEMfostering competition, dealer as exchangeableexecution provider, 4) OEM owning the retailapproach, and 5) OEM handing over to importer.— At the same time, it is important to quickly beginpreparing for the transformation of automotiveretail, given the magnitude of change and theimplied amount of time that these changes willtake within larger organizations. Getting startedsooner rather than later becomes even moreimportant when considering the amount of time,it will take to implement changes across theretail networks, which are built on long-termpartnerships and investments. To this end,OEMs and dealers should start with five “noregrets” moves, which will also enable themto prepare themselves to take on and masterambitious future challenges, such as big dataand advanced analytics in automotive retail, inthe medium and long term. These moves are: Define strategic focus areas and create alignment within the organization Investigate direct and online sales models Consider transaction-price steering as a truegame changer Define measures and leaner formats toreduce retail costs Build the necessary capabilities and adapt theorganization.Each of these topics will be explained in more detailin the following chapters.While each of these retail strategies appearsfundamentally different from the others anddifficult to implement at first sight, we stronglybelieve that a combination of approaches maybe best for any given OEM or dealer. Specifically,a region-by-region and brand-by-brand approach to a future retail strategy means that asingle OEM or dealer may adopt two or moreof the archetypes defined above. Our researchhighlights parts of the different natures of automotive markets in terms of maturity regardingACES trends, legislation for direct sales, andaffinity for online sales – as these determine notonly the speed, but also the direction of change.In addition, OEMs’ market positions differ strongly by region, as do the ecosystems they face.6A future beyond brick and mortar – disruptive change ahead in automotive retail

1The traditional automotive retailmodel is under severe pressureAutomotive retail as we know it is facing a radicalchange that is largely driven by shifting customerexpectations and technology trends. Customerexpectations for buying a car vary strongly; however, common points of joy (e.g., test drives) andcommon pain points (e.g., online experience orprice negotiation) can be found along the journey.On the technology side, digitization and key ACEStrends will fundamentally influence the retail landscape and are described in more detail in Chapter 2.The myriad ongoing efforts and approaches totransform automotive retail reveal the intenseuncertainty associated with both what today’sand tomorrow’s car buyers actually want and howdifferent players are responding to the changingautomotive retail landscape. In light of COVID-19,OEMs and their retail partners are at a cross-roadsand should use the rising momentum to acceleratetheir transition into the future of automotive retail,which goes far beyond simply moving their operations online.In light of COVID-19, OEMs and theirretail partners are at a crossroads andshould use the rising momentum toaccelerate their transition into the futureof automotive retail, which goes farbeyond simply moving their operationsonline.Analysis of data on the car-buying journey fromvarious information sources – consumer surveys,industry expert interviews, car-buyer “ride-alongs” –reveals a comprehensive picture of a diverse set ofrealities in terms of customer expectations, needs,and behaviors, and shows some interesting developments over time (Textbox 3). Becoming expertsin customer-centric and multichannel journeys willbe crucial for OEMs and dealers to be able to servea wide range of individual customer preferenceswhile seamlessly sharing information betweenchannels and retail partners. This diversity becomesclear when asking car buyers about their ideal carbuying experience, with about one fifth hoping fora fast, efficient, no-frills experience, while morethan one in ten expect a personalized, and hightouchinteraction.7

Textbox 3:Change of car-buying preferences over timeConnecting our recent and historic research reveals a change in car-buying preferences overtime. While the number of sources used along thecar-buying journey stayed relatively stable, themix has further shifted towards online sources withan increasing influence of third-party websites.This trend is also reflected in the rising importanceof innovative retail formats such as brand storesin convenient city locations as well as online sales.In return, the need for physical in-store equipmentsuch as expensive virtual reality or digital technologies has dropped, driven by a high share of carbuyers who use digital and mobile offerings insteadand focus their dealer visit primarily on the physicalexperience of the car.Number of sources used along the car-buying . phaseDecision phaseInformation phaseDecision phaseDealerSource: McKinseyImportance of innovative retail formats and elementsAverage score 1 (low) to 6 (high)201313Brand showrooms inconvenient locations(e.g., malls or city center)s)3.7Technology in the showroomto self-explore products(e.g., information terminals)Online sales with full endto-end car buying process63.93.93.2Technology in the showroomto simplify purchasing decision(e.g., 3D car configurations)Source: McKinseyMcKinsey Automotive Retail Consumer Survey (US, China, and Germany)84A future beyond brick and mortar – disruptive change ahead in automotive retail4.33.63.820194.0

1.1 The current retail model does notsatisfy customer expectations anymore –pain points across the car-buyingjourney persistWe find a stable pattern of persistent pain pointsacross all geographies and customer groups inthree particular stages of the journey: the onlineexperience and configuration of a car, securingvehicle financing, and the selection of add-ons. Ourresearch also shows that customers who heavilyuse the research, experience, and shopping platformsof automotive e-commerce start-ups in their carbuying process are, on average, more satisfied thanothers with their car-buying experience, particularlywith the digital experiences (Exhibit 1).To better understand the car-buying process, wefollowed over a dozen people from the US everyweek for two months throughout their car-buyingjourneys. These “ride-alongs” gave us additionalinsights from a customer point of view. It turned outthat moments of real excitement as well as painpoints are highly individual but can be grouped alongfour distinct groups of car buyers (Textbox 4), whichwe will further characterize in the subsequent chapters. The wide range of car-buyer preferences andbehaviors underlines the need for a customer-centric and omnichannel setup that provides a deepunderstanding of the customer along the entire carbuying journey and beyond.Exhibit 1:Automotive retail disruptionUS, China, and EU exampleAll respondentsUsers of automotive e-commerce start-upsShare of respondents who rated each stepwith “satisfied” or “very satisfied”InformationFind the right car and brand50%75%100%Compare different specificationsCompare reviewsConfigure the car onlineConsiderationExperience the car online 9%Book and conduct test-driveExperience the car offlineSales consultation at dealershipNegotiate final pricePurchaseSecure vehicle financingChoose add-onsVehicle handoverAverage duration of a customer journey: 6-8 weeksSource: McKinsey Automotive Retail Consumer Survey (US, China, and Germany)9

Textbox 4:We accompanied a dozen car buyers in theUS over a two-month period to gain deeperinsights into the emotional experience andconsumer behaviors of buying a vehicle.Will always need to see the car up frontRoxanne50 years oldLives in metropolitan area“I am a preparation perfectionist and love to doonline research; however, I will always needthat feeling of driving the car and touching,feeling the materials.”Wants to lease via online contractNiloo30 years oldLives in urban area“The financing decision part is the most challenging for me – I don’t really know how tohandle the different options; online could bea solution.”Key findings from the ride-alongs include:Would consider buying a car onlineStephen25 years oldLives in suburban area“I do feel nervous about the journey as it is amajor purchase and I’m on and off about thevehicle type, brand, and model; however,I’m also excited to get a new car.”Is excited to see and test new carsRita46 years oldLiv

vation in automotive retail is the imperative – and the time to get started is now. Against this backdrop and based on our extensive research and analyses (Textbox 2), we will provide a comprehensive perspective on three key questions that are currently a top priority for automotive OEMs and dealers: 1. Why exactly is the traditional automotive retail model so severely under pressure at .

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