Auto retailers gear up for digitisation

Auto dealerships in India are staring at an existential crisis amid a growing digitalisation, rapidly changing buyer behaviour and shrinking margins. This is making the need to scale up and re-invent by investing in people, processes and technology even more imperative, said auto industry veterans, top officials from insurance and finance companies and government functionaries at last week’s Federation of Automobile Dealers Association (FADA) Finance & Insurance Summit in Mumbai.

Unlike a decade ago, when a car buyer could stroll into the showrooms and rely on the sales representative for all the relevant information, 90 percent of the buyers who visit the showrooms come well prepared—they have done their research and are clear on what they want, pointed out Pawan Goenka, former managing director and CEO at Mahindra & Mahindra who is chairperson of the SCALE Committee, Government of India. He was one of the key speakers at the FADA event.

Given the fact that the potential customer may already be in the last leg of their decision-making cycle and visiting the showroom only to drive the vehicle,  the dealership needs to prioritise its resources. “You need not use too many resources, but quality resources that can use high-end data analytics, artificial intelligence and cement personal relationships with the customers,” Goenka added.

His thoughts were echoed by Ashish Kumar Singh, Maharashtra’s additional chief secretary, Transport & Ports, who said comparisons on the future of Indian auto retail can be drawn from the present state of domestic tour and travel operators, who in their heyday earned hefty commissions from airline ticketing, hotel bookings, car rentals and international travel packages in early 1970s to 2001-02.

In Singh’s view, “Today the online portals have completely replaced the travel agents and the same will be a reality for domestic Indian auto retail industry. Unless dealers break out of their comfort levels, adopt digitisation as a business process they will be unable to ride the digital adoption wave as the future of mobility unfolds and changes with time,” said Singh.

Shrinking margins
Dealerships are already facing the heat. From shrinking margins and high operating costs on the one hand and a reduced significance of auto dealerships on the other, dealers aren’t oblivious to the change. “OEMs seek to directly sell their vehicles through online platforms, thus decreasing their reliance on us, which could affect our business,” said Ajai Bathija, CEO,  KIFS Volvo Cars, based in Mumbai.

Most of the dealership agreements do not grant the exclusive right to sell vehicles manufactured by the OEMs within a given area. In addition, OEMs have all the rights to set up their own dealerships in the markets in which they operate and dealerships face competition from the unorganised sector. If the dealerships expand into markets where they do not have a leading position, margins and financials take a hit, he added.

Collaboration mantra
In addition, with discounts drying up for many a model due to a semiconductor shortage, the propensity among buyers to shop around for a “good deal,” has reduced. Customers are using the internet to compare pricing for vehicles and related finance and insurance services, which is putting more pressure on margins. “The need of the hour is not to compete but to collaborate with each other and also with co-dealers in your locality. Customers tend to go from dealer to dealer for deals, but if we collaborate to keep prices uniform, dealers have a chance to make money. Hence partnership is going to be the future,” said Ramesh Iyer, Managing Director, Mahindra & Mahindra Financial Services. The NBFC finances close to 700,000 vehicles annually.

Given the spate of changes and disruptions that auto retailers face, it is necessary to continue to invest in developing their own brands and in-house marketing and advertising to maintain a competitive position, said Vinkesh Gulati, President of FADA. “This is particularly true in the current environment where online sales and distribution channels have been successful in penetrating an otherwise mature market,” he added.

Scale up to survive and thrive
Even as auto retailers concede that scaling up corporatising and organising is the way to survive the otherwise tough scenario, getting funds hasn’t been easy. Auto retail is on the lowest bucket list for venture capital, angel funds and private equity players with only a handful tapping the market, industry sources said.

“Given the current market scenario, the profitability of dealerships has been impacted adversely and opportunities for expansion through acquisitions exist for strong players," said Ravi Bhatia, president and director of  JATO Dynamics India.

Some dealers are looking at tapping the capital markets. Maruti Suzuki dealer, Competent Automobiles, was one of the first domestic auto retailers that tapped the bourses in 2015 for an IPO for around Rs 10 crores that has a current market capitalisation of about ₹115crore. Mumbai-based car retailer Landmark Cars aims to raise more than ₹750 crore from the primary markets in what would likely be the biggest car retailer listing on D-street through an initial public offering (IPO) in India.

Alluding to the Landmark model, Mahindra Financials’ Iyer said, the road ahead for dealerships is a mix of multi brand, car leasing or subscription services, mergers and acquisitions in allied business such as used car and insurance.  But all of these dealerships need access to capital. In fact, in Iyer’s view, financers are chasing firms with strong valuation and good corporate governance. “Only those retailers who have a very high degree of discipline and appetite for strong systems and processes will be able to withstand the multiple pressures of running multi-brand relationships and raise money to grow big,” he said.

Shorter replacement cycles
On other fronts, it’s not the retail of the new vehicle alone that is seeing disruption. The pre-owned business too is going through a transformation, pointed out the dealers. The entry of digital platforms in the space has helped make an otherwise more fragmented segment more organised and this has led to a better price discovery and fair valuation for the buyers and sellers. Moreover, increased launches of advanced, feature-rich, trendy-looking vehicles at competitive prices has been pushing younger buyers to trade in their old vehicles for the latest offerings.

This has led to a shrinking replacement cycle—from six to eight years to four to six years now, pointed out Anuj Pandey, Director of Eros Hyundai, Nagpur. The proliferation of online digital platforms has organised the segment and aiding the shift. Additionally, the supply chain constraint-led high waiting periods is also prompting buyers to opt for used vehicles, adding heft to the used car business.

Vadodara-based Arif Vora of MM Vora Automobiles, said, “Digital platforms provide more choices, convenience, reliability and transparency which wasn’t the case in the unorganised pre-owned car market. 

Digital platforms are not only helping the market from the supply side but also providing a platform to dealers to showcase and sell their refurbished vehicles supporting demand growth. “The changing business model dynamics has prompted auto retailers to look around. There is competition everywhere." he said.

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