mercedes: Mercedes Benz generates $100 million order in October under the new retail model
The country’s largest luxury carmaker has pumped in equity of Rs 1,700 crore to implement the new model called ‘Retail of the Future’ from October 1. It has already garnered an order book of over $110 million, or about Rs 850 crore, under the model in less than a month, finalising sale of more than 1,700 cars amid festive buying.
Under this model, Mercedes Benz sells cars directly to buyers, ensuring transparent pricing and best deal, and has taken charge of all the inventory, reducing the interest burden on dealers and taking away incidental or handling charges from the system.
The company said the new model brings in more flexibility in the overall operations and benefits all stakeholders – ensuring a better cost structure and profitable business for dealers, transparent pricing for customers, and closer connect between the consumers and the company.
“There is an upside on profitability for both dealers and the company, and the consumer gets a fair deal,” said Martin Schwenk, MD of Mercedes Benz India.
The new model protects dealers from any market-facing risks and allows the company to react quickly and aggressively amid dynamic business environments, he told ET.
“With a transparent system in place, the overall value chain right from factory to dealers will improve customer experience and that will help in customer retention,” he said.
Santosh Iyer, director and vice president, sales and marketing, at Mercedes Benz India, said this is a paradigm shift in the way automotive retail is done in India.
“It is a win-win for all,” he claimed. “The new set up will easily bring down the dealer’s cost structure by 15-20%, (and) the customer gets a uniform and fair price.”
Over the years, the cost of carrying inventory and discounting had played a big part in impacting the viability of dealerships operation and resulted in some dealerships shutting shop. With a new set up, Mercedes Benz promises a profitable operation from day one for dealers. The company has invested Rs 60 crore in implementing this business model.
So, how does it work?
Under the new system, a potential customer gets a final quotation inclusive of prevailing discount for any model on the company’s portal. With the inventory cost of holding cars being borne by the carmaker, a dealer’s entire focus will be on customer experience and boosting sales.
The capital infused earlier in the year will help Mercedes Benz fund the inventory. For future growth, the maker of S Class will be able to borrow from the market at a much better finance rates than what its dealer partner could in the past, officials said.
Under the traditional retail system, a dealer pays the entire money for vehicles parked at their depot to the automaker, mainly through inventory funding which typically happens at a higher interest rate. This exposes a dealer to bear higher liability in terms of elevated working capital requirement, high fixed cost structure, and to the vagaries of change in interest rate.
Typically, a conventional dealer works on a gross margin of 5-6%, but due to higher cost incurred on inventory and discount, they often end up with a negative margin of 1-3%. In order to recover the negative margin from sales of cars, the dealer tries to recover from the services at a much higher cost, particularly from labour charges and loading charges such as depot or handling charges, incidentals on registration, and selling insurance that offers little value during damage.
The Mercedes retail model will remove inventory cost and discount-related cost for the dealer, therefore the probability of making a positive gross margin will be higher. Given that the quote will directly be generated by customers from the company’s portal, there would be transparency in pricing and leave little room for customers to feel cheated as discounts will be auto-generated based on the profile of customer or if it is a repeat sale or an upgrade sale.