Munich – Aug. 30, 2019 – The automotive industry is undergoing fundamental transformation and manufacturers are bracing themselves for the "automotive endgame.” Five megatrends –what Bain & Company calls “the five races” – are driving this disruptive change, resulting in major implications for both car manufacturers and the traditional sales model through auto dealerships.  While these trends create considerable risk for the industry, they also unlock new opportunities.

According to new research on the European car market from Bain & Company, A Survival Guide For Europe’s Car Dealers, the impact of these megatrends will fundamentally transform the profitability of Europe’s auto dealerships.  The study estimates an approximate 1.2 percentage point reduction in return on sales (ROS) – a measure of how efficiently a company turns sales into profits – by 2025 as a consequence.  For many dealers, this means a profitability drop of more than 50 percent.

At the same time, new earnings opportunities will allow dealers to add up to 0.8 percentage points in ROS, trimming the profitability gap to around 0.4 percentage points. Developing new business models based on mobility services, such as maintaining and operating car sharing fleets, offer a particularly attractive source of future income. Manufacturers and dealers can improve their efficiency by merging servicing operations and digitalizing core processes. Finally, big data analysis can help automakers acquire customers more efficiently and better address their needs, ultimately strengthening loyalty.

“Car manufacturers and car dealers need to act promptly to mitigate the risks and exploit these opportunities.  It’s the only way for them to maintain their current profitability levels,” said Dr. Marcus Hoffmann, a partner in Bain & Company’s Automotive practice and co-author of the study.  “The pressure to act is particularly high in cities, where disruption is already having an impact. The task of realigning sales and marketing will lie for the most part with the car manufacturers and their national distribution companies. But independent car dealers will also have to leap into action - ideally in close coordination with their respective car manufacturers - and consistently adapt their business models to the new challenges.”

Bain & Company identifies the five “races” and resulting scenarios that it expects will occur by 2025:

Megatrend #1: Connectivity/Digitalization: Bain estimates that the number of cars sold at traditional brick-and-mortar dealerships in Europe will fall 37 percent by 2025. This will inevitably result in a consolidation of today's dealership structures - albeit within limits, since dealers will continue to play a key role in other areas such as test drives, car deliveries and car maintenance. Online purchases will account for 37 percent of new car sales to individuals in Europe, and car manufacturers will dominate online retail sales. 

Megatrend #2: Shared mobility: Shared vehicles and networked mobility will continue to reduce demand for new cars in cities. Fewer and fewer urban households will own cars.  Although shared mobility will squeeze sales volumes and margins, especially for urban car dealers, it will create new opportunities in areas such as maintaining and operating car-sharing fleets, which could become a significant source of income.

Megatrend #3: Powertrain electrification: By 2025, around 30 percent of all new cars sold and 6 percent of all vehicles on the road in Europe will have an electric powertrain (battery vehicles, range extenders or hybrids). The electric powertrain in full battery-powered vehicles will significantly reduce maintenance intensity.

Megatrend #4: Autonomous driving: In 2025, around 2 percent of newly registered cars in Europe will be fully automated (level 4). Autonomous driving and particularly driver assistance systems will lower the accident rate, thus impacting the car repair business. The number of car owners will also be in decline.  Bain expects new car sales in Berlin, for example, to fall 12 percent by 2030 in response to the increasing use of driverless taxis.

Megatrend #5: True customer focus: Customer-centric business models will unlock new ways to enhance customer satisfaction.  Increasingly, offerings will be tailored to individual customer needs.

To lessen the impact of the risks associated with the five races and exploit emerging opportunities, car manufacturers and car dealers need to take prompt action.

“Car manufacturers will be the lead architects of a new distribution model,” said Karl Strempel, a partner in Bain & Company’s Automotive practice and co-author of the report. “To increase sales and service efficiency and enhance customer experience and loyalty, successful manufacturers will take a rigorous approach that addresses each point of interaction with the customer.  This includes developing innovative retail formats; modeling future distribution activities on cutting-edge process management; creating new business models for dealers; and adjusting bonus and incentive plans.”

Under a new distribution system built around central online elements (sales and marketing, software updates, help desk), national sales companies will also interact directly with customers. They will operate national online shops, including offering customer advice and online purchase financing. At the same time, they will help car dealers implement the new distribution model, concept, including training measures for their employees.

The new distribution concept and the different retail formats and business models will also necessitate a prompt mindset shift on the part of dealers and employees. To survive and prosper in this new landscape, leading car dealers will have to invest in IT, digital processes and additional employee skills.

“There are no two ways about it: swift action is needed to transform the current car distribution model and ensure it will remain profitable. Car manufacturers, their national distribution companies and car dealers must address these challenges now,” said Dr. Eric Zayer, a partner in Bain & Company’s Automotive practice, and one of the report’s co-authors. “By developing innovative ideas and laying the groundwork for radical new concepts, they can set the course for the future.”

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