An evaluation of direct sales of new cars online in the UK

Imagine with Uber that once you had selected your destination on the app, you were then presented with an indicative price as high as a black cab price and the contact details of the three nearest drivers, and that you were then directed to call them individually to negotiate the best price prior to your journey.

Uber would not be the $100bn business it is today with such an approach, but that is effectively the current approach of most automotive OEMs (Original Equipment Manufacturers) when it comes to selling new cars online.

The announcement earlier this year by BMW and Mercedes of a new mobility joint venture demonstrates that the OEMs see direct relationships with end customers as being a fundamental element of business in the future, as does JLR’s recently reported interest in buying Addison Lee, a UK taxi and courier business. This direction is also being followed by Volvo, which in March announced the creation of a brand-new board position responsible for their “Direct Consumer Business Cluster”.

If the OEMs’ desired destination is clear – albeit a destination at odds with the current relationship between OEMs and dealers – then what is not so clear is:

how do they plan to get there?
what progress have they made so far?
what are the key success factors and key risks in this transformation towards dealing directly with customers?
what are the implications for dealers, customers, and other interested parties?

One place to start to answer these questions is to review the quantity and quality of the new car online buying experience of car brands here in the UK.

MYSTERY SHOPPING RESULTS

Many of the vehicle brands currently offer an online buying service, including BMW, Dacia, Hyundai, Mitsubishi, Mazda, Peugeot and Ford. So how good is the online buying experience? After mystery shopping many of the websites available and filling virtual baskets with several tonnes of automotive hardware, the conclusion is that there are no clear leaders, and that all, bar one, share the same two fundamental flaws.

First, buying a car is jargon-ridden and overwhelming for many, complex even for an industry professional. The perfect environment one might think, for intuitive navigation, powerful compare functionality, extensive FAQs and a live chat facility. With one or two exceptions, these features are missing or very limited. This user experience can only result in high levels of consumer frustration. The resulting lack of engagement with the brand and products inevitably reduces the decision-making process to the questions of price… and less price.

Second, the most serious drawback with all the sites relates to pricing. It is the classic digital challenge for manufacturers of any product wanting to sell direct online: how to give customers who want to buy direct a positive customer experience that includes reasonable value for money, but without excessively disrupting your existing retail sales channel? For example, Samsung, Apple, HP, Sony and many other leading brands now have an online pricing strategy whereby buying direct from the manufacturer no longer implies paying a significant premium. Indeed, Dyson have gone so far as to offer a price match promise for their online shop, ensuring that customers don’t have to worry about shopping around or about meeting a neighbour who bought the same product cheaper from his favourite discount retailer.

Concerns about price fixing might spring to the automotive executive’s mind, but no lawyer would argue that consumers have lost out as a result of Dyson’s policy.

Let us consider what would happen if an OEM decided to offer the same price match promise as Dyson. They would certainly eliminate the current situation where two minutes spent by a consumer on Carwow, Broadspeed or DrivetheDeal highlights the fact that trading directly with the manufacturer typically results in paying a hefty premium.

In the small sample of cars we ’bought‘ online, the range was from a 5% to a 13% price premium over buying from a dealer. A 5% premium on a mobile phone is less than £50, whereas on these cars we are talking over £1,000.

For a company wanting to be your preferred mobility provider for the years ahead, it’s an unusual way of starting the relationship. Indeed, one manufacturer’s website offers cars without finance for the full Recommended Retail Price (RRP) (do they give with it a free t-shirt saying “I’m the one in a thousand who paid full list price for my car”?) For the record, a noted exception here was Dacia, where dealer prices are pitched at roughly the same level as the direct online price.

So, what progress has been made so far in terms of actual online sales? It will come as no surprise to learn that all OEMs report extremely low online direct sales, at a rate of one or two per day being as good as it gets. What will change that?

A BROKEN BUSINESS MODEL

Given that establishing an online retail environment appears to be a top priority for OEMs over the next few years, how can they address these two issues of pricing and the online sales process? Starting with the pricing issue, offering online prices with a large four figure price premium over franchised dealers will simply undermine trust in the OEMs and fail to deliver meaningful levels of sales.

A recent ruling by the UK’s Advertising Standards Authority (ASA) further undermines the current approach. The ASA effectively forbade the advertising of savings relative to RRP, and by inference the On the Road price, on the basis that no consumers ever pay RRP and to advertise a saving relative to RRP is artificially inflating the true saving of the offer and therefore misleading. A Finance Deposit Allowance offered by many OEMs on their websites also falls under the ASA ruling. When even the ASA is telling consumers that they would be mugs to buy at the prices offered online by OEMs, something is clearly broken.

A knock-on effect of presenting high ’ready to haggle‘ prices on OEM websites is that it forces consumers to actively shop around amongst dealers, brokers, and other manufacturers. This time-consuming and complex process is reflected in the overall conversion rate from website visit to successful purchase, which is a staggering low 0.8%**. Turn that around, it means that on average for each car purchase there are 114 visits to websites. In addition to the customer frustration, imagine the inefficiencies, duplication and wastage in such a process, because behind those web visits are emails written, emails read, quotes created, reviewed, revised, quotes followed up by email, phone, text, and in person.

If all OEMs took the Dyson approach to pricing , just imagine what that would do to the speed, simplicity, customer engagement, and cost of the new car sales process?! Furthermore, the role that service and reputation play in the dialogue with the customer would increase dramatically.

FUTURE BUSINESS MODELS

If we accept that neither the OEM’s online pricing policy nor the overall sales process are fit for purpose, then how should these two issues be tackled? The obvious suggestion is that manufacturers must work with their dealer bodies to define the online customer experience they want to jointly deliver, and then be prepared to modify their pricing structures, their dealer contracts and their ways of working together to enable this.

With regards to amending dealer contracts, Volkswagen made a start last year, but it is surprising that there is not more noise around and dialogue about this topic across the industry.

Let us imagine now that an OEM and its dealer council have fixed the issue of pricing (and margins, and profitability) and defined a seamless, engaging consumer purchase experience: next they have to agree on who does what. OEMs appear to want to do more, and to become significant online retailers, but in general they don’t currently have the skills set, the people, and the career paths to become world-class digital retailers and maximise digital customer conversion rates.

Considering the customer conversion rate, if you review the overall sales funnel from a consumer landing on an OEM’s website through to making a transaction on a vehicle, studies** show that a typical end-to-end conversion rate is 0.1%**, which is made up of two main elements. 2%** of visits end up as leads passed on to dealers, and dealers typically convert 5%** of those leads. There is however a large variation in performance around this median average, with the conversion rate for the upper quartile of dealers being around 66%** better than the average dealer.

Simply put, good dealers are very good at selling cars, and any move by an OEM to partially or completely cut them out of the customer’s purchase process would be highly risky in terms of the brand’s sales.

Given therefore the high stakes and given that online retailing is a brave new world for OEMs, they need to consider their options for how to implement a successful solution:

use current in-house resources, or
outsource this operation to a third party
outsource to one or more dealer groups
recruit senior managers from outside the industry with experience in online retailing

The first two options represent a classic evolutionary approach and are both likely to be inadequate for the scale of the change required. The last two options are not mutually exclusive and will both be likely to be utilised frequently in the coming years.

CONCLUSION

Customers want to complete more and more of their new car acquisition process online, OEMs want to control more and more of that interaction directly and many are investing heavily in the websites and technology to enable this. However, direct online sales remain very low, and mystery shopping has confirmed that the consumer experience is poor and time-consuming.

Further progress will not be driven by technology or marketing, but rather by the willingness and determination of OEMs to confront and change two elements at the very bedrock of the successful and enduring relationship between dealers and OEMs:

pricing and margin structure
division of roles and responsibilities within the sales process between OEM and dealer

Until those changes are made, the old guard who are resistant to change will be able to point to the low levels of direct online sales as proof that customers just aren’t interested.

Does it matter if OEMs keep their heads in the sand, and don’t address urgently the issue of direct selling online? The answer is yes, as they risk permanently missing out on the opportunity to play a dominant part in the customer’s online journey, due to threats from two areas.

First of these threats is that the trend towards private leasing creates a huge opportunity for businesses currently focused on business leasing, salary sacrifice schemes, or short term rental to build a strong consumer brand and win mainstream private customers. Companies such as Tusker, Zenith, LeasePlan and Enterprise could create the go-to mobility portals of the future.

The second threat is the array of price comparison websites itching to expand from car insurance into the financing element of car-related expenditure, regardless of whether that is for a new or a used car. Confused.com has already linked up with Motors, and if you have £250 a month to spend and are not worried about the car having 5,000 miles on the clock, then even today it is not a bad place for a consumer to start.

Now is the time for OEMs and dealers to rapidly learn from Uber and to design simple, intuitive online customer journeys that deliver reassurance and transparency, that encourage engagement with the brand and its products, and that remove the perceived need to scour the web for the best deal, or even just for a fair deal.

If they fail to do this, OEMs risk becoming tier 1 suppliers of commoditised vehicles to the mobility providers of the future such as Uber, or Enterprise, or Google, or even Confused.com.

(**source: Sophus3, a London-based multi-national team analysing all volume and premium car brands’ web traffic in Europe, providing insight, analysis, advice, tactics and tools that support car brands in improving online consumer journeys.)

Author: Andy Carroll

Andy Carroll entered the automotive sector in 1991 and has held senior leadership positions with vehicle manufacturers, traditional dealers, online retailers, and service providers. As COO at OneSwoop he launched the first UK website to sell new cars online with published haggle-free prices. As managing director of GM Daewoo he had a front-line seat to assess Daewoo’s direct selling of pioneering mobility contracts. As managing director of Glass’s he played a leading role in initiating the industry’s journey from editor-crafted used car prices exclusively for industry professionals towards AI-enhanced pricing readily available online.

After 6 years in a parallel sector, running a group of industrial distributors including several e-commerce businesses, he is again active in the automotive sector, on a consultancy basis.