JUNE 08, 2021

By Karan Pandit, Partner, Vedya Partners & Advisors

LET's agree to disagree that the dealerships and distribution model is archaic and is in dire need of a facelift. And I am not talking of reworking the profit margins here. Imagine you buy a new car today. You plan a visit to the nearest dealership. Then visit two more dealerships (if available), haggle on the price, extras and shiny trinkets that you can obtain in the bargain. Discuss delivery timelines, financing and registration. But then the dealer drops the bomb that the electric blue color or the beige leather interior you want is not available. So… please wait for a month.

Nothing could be more frustrating today, for the customer. Dealerships in metro cities of a luxury car manufacturer carry inventory in excess of INR 1 billion (USD 13.72 million). This inventory is, of course, financed. Add to that the inventory at workshops. The interest and insurance cost of all dealerships in India alone could finance a small State.

This is not limited to automobiles only. Look at the white goods industry that maintains dealerships or brand showrooms. Now imagine all the financing cost behind that.

A possible solution

There is a significant brand awareness for luxury goods in India. Usually when one intends to buy a product (think cars above INR 3 million or some electronics above INR 100,000) one knows what the product is, or one has used the product in the past. In the higher price brackets (for example, cars nearing the INR 6 million mark or televisions above INR 200,000) the customers are discerning and, possibly, may not want to visit the dealership at all. If a customer shells that much moolah, the customer cannot be bothered with the dealership shenanigans.

So why burden the dealership with maintaining all the inventory? Instead, create a large warehousing facility, where the customers are serviced from. Create an interactive website which shows the product in minute details and provides an immersive experience. As a touch point one could create interactive displays at the retail stores. Customers may talk to the staff and exchange views, if they feel the need to do so. Customers' purchase should be fulfilled from the local warehousing facility.

In the new model, dealerships would be rewarded for purchases made in their territory. Price sensitivity and options

In a price sensitive market like India margins, at times, are like slivers. Thus, the companies are required to provide the best possible variants at the cheapest price (a sort of standardization of products). This means that the companies do not have the flexibility to provide multiple options to the customers. Try buying a red colored refrigerator in the specification you want to match with the accents of your kitchen.

A large number of options could mean increased development and manufacturing cost, followed by even higher inventory management costs. However, if the dealership is not required to maintain a reasonable inventory it frees up the money to service the customer better. Manufacturers can provide more options to their customers. Of course, this may entail higher delivery times, but imagine the option of having the air conditioner of our choice available in multiple colors rather than the drab off white.

Is it that simple?

No.

The revised model could create a logistics nightmare if not implemented correctly. Not to mention the exaggerated delivery timelines which would not go down well with the buyer. Manufacturers would need to clear out the existing inventory, create robust warehousing and last-mile distribution model which ensures timely delivery. Providing more options to the customers would mean investment in development and manufacturing facilities. It could also create a fierce competition amongst the sellers to service the customers better.

This revamp, of course, cannot be executed in all locations across the country. In case of companies with vast range of products and price ranges, multi-brand retail points in small towns may want to maintain inventory for walk-in customers. Furthermore, this model would not be applicable to products where the customer has to have the 'touch and feel' of the product. For example, buying a luxury bag or pair of shoes, one feels the need to be at the store and try out the product. Buying an expensive suit, you need to be at the store to iron out details.

The hidden losers

The distribution model margins would need to be reworked, obviously. If the manufacturer frees up the inventory financing and insurance cost of the dealership, substantial savings accrue at retail points. The margin percentages should be reworked to accommodate the savings. This could even result in reduction of prices in some cases.

In all of this, the banks and insurance companies could face loss of valuable customers and assured incomes. Since the retail points are not maintaining inventory, they don't have the necessity of loans and insurance.

So, while the customers enjoy reduced prices and more options, dealerships are free of financing costs and save on rentals, the banking and insurance guys get whacked in the deal. And this is just the tip of the iceberg. The manufacturers themselves could provide more lucrative financing options to customers (for high value purchases). So, the banks lose potential individual customers, as well. This model, in fact, is in practice today in the automobile sector. The manufacturers even provide assured buyback schemes luring the customers to go up the range few years down the line.

One a side note, commercial real estate consumed by all the brand showrooms and dealerships, their inventory locations would be freed up. Smaller logistics players could also be hit to some extent as their day-to-day deliveries should be impacted. The manufacturers would take up larger land parcels outside cities for their warehousing requirements. They would employ smart warehousing and logistics techniques to meet the delivery requirements.

What Covid has taught us

Nelson Mandela said, 'It always seems impossible until it's done'. Prior to March 2020, work-from-home seemed to be a nonstarter as a solution. In fact, employees saw it as a perk if their employers permitted so. Some internet and tech companies boasted of being employee friendly. Employers moaned and groaned when employees asked for such options. Now, everyone understands the acronym 'wfh' and employees are delivering.

An internet-based-non-showroom sales model seems impossible today. But a couple of home furnishing retail chains in India adopted an 'internet only' retail sales model. Such a model was unheard of and seemed implausible then. It works today.

One may argue that customers always have the option of buying on any e-commerce portal. But on the e-commerce portal it is the retailer who is registered as a supplier. Instead, manufacturers could move their entire retail model to an internet-only one. Instead of the retailers registering on e-commerce portals, the manufacturers should be registered with the entire portfolio. In the long run, manufacturers would not like to part with their profits with the e-commerce portals and make sales only from their own portals.

Revolution vs. evolution

On the face of it, the model seems like a minor tweak to the existing internet sales given that purchases over the internet are commonplace now. But if you look at the infrastructural changes and the impact it has on other industries, this could revolutionize how goods are sold. It cannot be overlooked that the sales model has come a long way since the advent of internet. But technology is obsolete faster than ever now. It's time that we move to an internet-only model. It's time we upgraded our buying-selling habits and the distribution model.

[The views expressed are strictly personal.]