Martin Schwenk: 'We are not bypassing dealers. Our network is our biggest competitive advantage.'

After revealing its new 'Retail of the Future' (RoTF) sales strategy last week, Mercedes-Benz India has assured that its dealers (who are now called franchise partners) will continue to hold key importance in the company's business operations in the country.

The new retail dynamic, which is similar to a direct-to-consumer model and involves elimination of inventory costs for retail partners by the luxury carmaker itself holding the entire stock across the country and billing cars directly to customers, is going to maintain a distribution channel for delivery of cars to customers through the existing network.

"We don’t have a plan to deliver a car directly. We are not bypassing the franchise partners. The RoTF format would not be possible without them. They continue to be the prime representation of the brand in the market and will continue to facilitate the entire purchase journey," said Martin Schwenk, MD and CEO, Mercedes-Benz India, in an interview with Autocar Professional.

However, instead of the current dealer margin on every unit sold, franchise partners would earn a commission on every new sale going forward as the strategy kicks in starting Q4 CY2021.

"This would cover their cost of operating the showroom, remuneration of the sales staff and on top, also have a profit margin. It is a bit lower than the per-unit margin but is strong enough to make them more profitable than what they are today," pointed out Schwenk.

The company will also introduce a target-oriented component to the commission, thereby incentivising franchise partners on the basis of their performance.

As per industry experts, dealer margin on a new luxury car sale is to the tune of 8 percent of the ex-showroom cost, whereas it might come down to 5-6 percent in Mercedes' new regime.

"Since they would not have to bear an inventory cost or the cost of offers/discounts to dilute their profitability, we are confident that they will be able to make better profits now," said Schwenk.

"Overall, we have done an extensive cost analysis with our franchise partners, jointly reviewed the cost base and accordingly, we have devised the commission that would give them suitable and good returns over time," he added.

Aiming for online-offline balance
As regards a customer in a remote location being able to get a new Mercedes-Benz home delivered, Schwenk explained that it's the case even today and within franchise partners, there's a regional allocation to service the remote areas through online sales as well as arranging test drives and services at the customer's doorstep.

"Franchise partners will also be remunerated for a car being sold from the online channels as we believe that a customer is not likely to be online 100 percent of the time. There has to be a balance between online and offline. In the end, we don’t want to compete against the network. We have the strongest dealer network in the luxury segment in India and it is one of our competitive advantages," he remarked.

While a centralised stock would incur logistical challenges, Mercedes-Benz India is rather optimistic at the opportunity it throws to optimise inventory and reduce delivery lead times.

"We should be able to ship cars to any franchise location in the country within a few days of getting an order. What we need to avoid, however, is multiple shipments to save costs as well as avoid the risk of damage during transit. Therefore, our job would be to have the right mix of vehicles at franchise partners, and supply the ones which are not readily available, either directly from the plant in Pune or from other showroom locations across the country," Schwenk said.

IT infrastructure overhaul
In order to execute this disruptive retail model, the company is currently undertaking several IT and compliance projects to harmoniously practice what it's preached.

"At the end, any offer will come out of a sales transaction system, which means we would need an integrated system that is able to manage inventory, logistics, offers and also handle actual offer-and-contract documents generated between customers and Mercedes-Benz India.

"This is quite a substantial change compared to the current IT infrastructure, wherein we are limited to executing only wholesale transactions. The new retail system would also need to seamlessly work by conforming to the specific tax regulations of every State as well as GST compliances, which doesn’t make things easier. This is also one of the reasons for our delay in introducing this strategic move which was in the works for the last two years, as Covid slowed down the entire process."

But will it bog down as it scales more volumes in India? Schwenk said the RoTF model is not limited by numbers and will offer similar advantages even if Mercedes-Benz India sells quite a bit more than the 15,000-odd units sold in CY2017 and CY2018.

While the company clearly acknowledges the risk it is undertaking with this transformational approach to selling cars, it is also wary that both mass-market and premium players will be eyeing how the dynamic new strategy unfolds in the market. "Personally, I am convinced that it is a very good model for the premium segment," Schwenk signed off.

Full interview in Autocar Professional's June 15 print edition