India's largest selling luxury carmaker, Mercedes Benz India, on Wednesday announced a fundamental shift in how it will sell cars to its customers in the country, the first such decision by any automaker in India.
Forget the traditional dealer-inventory model, where a buyer's options were limited to the cars the dealer had available in a showroom or the inventory they were holding. Forget having to negotiate a good price. In Mercedes Benz India's new direct-to-customer retail model, dealers will now function as franchise partners, and the entire stock of cars will be held centrally by the company itself - not the dealer.
The buyer, in turn, will be able to now choose from a much wider product range that Mercedes Benz India has to offer, at one uniform price throughout the country, invoiced by the company itself, and not the dealer partner.
The franchise partners (or erstwhile) dealers will no longer need to hold any inventory, thereby reducing their financial risk, and will be compensated directly by the company. The Pune-based company is hoping this will drive additional sales for the carmaker, as customers will now be able to buy virtually any car from any part of the country through its franchise partners, or its online platform with complete price transparency.
"We will no longer be following the model where an OEM would wholesale cars to dealers and then the dealer would sell the car to the final customers. We are changing this process and our dealers will now be called franchise partners. They will continue to do everything they have been doing in the past - they will be brand representatives, provide sales consulting, operate the network, organise test drives and facilitate the sale. What they will not do is sell inventory by them, instead, they will be selling inventory owned by Mercedes Benz India," Martin Schwenk, managing director, and the chief executive officer said.
"The sales transaction will eventually be a contract and payment between the final customer and us, the company," he added.
Financing and cost-driven model to drive stronger sales numbers
Mercedes Benz India said a direct-to-customer franchise model optimizes inventory, costs, and processes for the company provides better choice and value to the customer and reduces the risk of carrying inventory for the franchise partner.
The customer will be able to access the full range of variants and model options that Mercedes Benz India offers, as opposed to being previously restricted to what was available at the franchise partner's location. This mismatch of demand and supply in different geographies is an issue OEMs grapple with often, especially now when supply chains and mobility are restricted in light of COVID-19.
"The other advantage to the customer is that they will always get the best price without having to negotiate with retail partners or retail partners. This is a massive advantage as it also protects the value of the vehicle in the future," Schwenk told CNBC-TV18.
Schwenk explained that a lot of retail-related costs currently sit with the company's retail partners. With centralised stockholding, Mercedes Benz India can not only optimize inventory itself but also finance it under different conditions.
"We have a lot of equity on our books, through which we will be able to leverage cheaper interest rates. So there is a lot of optimization possible around inventory holding. So while this is a cost-driven model, we are also doing this because the new process will drive stronger sales numbers", he said.
While there will continue to be more development in the digital sales and e-commerce platform for the company, Mercedes Benz India said it will need strong support from franchise partners, and that it has discussed the whole business case and the financials around it with dealers & investors. The change in strategy, MBIL said, will not change the physical footprint or structure of its partners.
Expect to start seeing bounce-back in demand in a couple of weeks
Schwenk said launching the new business model at this time was also based on the company's expectations that sales will improve in the next couple of weeks.
"We believe sentiments are starting to come back. We see more confidence and knowledge in dealing with the crisis now, even though the individual impact in this wave was stronger. But we see a quick rebound in the next couple of weeks, and we are also not changing our strategic plans in terms of product launches," he said, "We have a substantial order book even from the last couple of weeks, and hope to start delivering on our strong order book soon."