Mercedes Benz India's Retail of the Future (ROTF)- what could work, what might not.

Mercedes Benz India announced their new initiative ‘Retail Of The Future’ (ROTF) - a fresh business model (literally) in the industry where Mercedes Benz is the entity invoicing its customers. This essentially makes it an industry-first direct to customer sale, at least on the books. 

With ROTF, Mercedes Benz India also owns inventory, which shifts the entire cost burden of inventory away from the dealer. The dealer essentially now moves into the zone of sale facilitation from that of ‘selling’ and does not retain ‘margin’, but earns a commission.

These are great initiatives and very radical moves, but with this article, I’m attempting to get deeper and explore a little in detail above how this model could play out (the good and the bad ways).

Redefining the role of the dealer (in my current understanding)

With ROTF, the role of the dealer essentially changes. Dealers won’t be ‘selling’ anymore but will be giving customers the Mercedes Benz experience and the Mercedes Benz way of doing things.

The dealer, or franchise partner, in the ROTF model, is responsible for three things:

1. Product Presentation, customer success

The dealer, with Mercedes trained salespersons, still represent Mercedes Benz when they give test drives, convince the prospect about why Mercedes is better than the competition. But the salesperson isn’t selling, She/he is merely convincing the prospect and sharing the prices, with a ‘take it or leave it’ approach.

2. Insurance, Finance and vehicle exchange

Once the prospect is convinced, the dealer extends assistance for financing options and could potentially also be involved in closing other Daimler Finance product offering like Star Agility, etc.

The biggest involvement of the dealer is in the exchange of a pre-owned vehicle.

With ROTF, every Mercedes Benz dealer becomes more of a Pre-owned car dealer with a new car sales set up.

3. Last mile tasks

Once the vehicle is billed to the customer by Mercedes Benz India, it is then sent to the dealer to complete the last mile activities like Pre-Delivery Inspections, registration and a ceremonious delivery experience. 

ROTF essentially makes Mercedes Benz work like Tesla but with the dealer approach where showrooms function as an experience centre with extended assistance.

While it radically shifts the role of the dealership, it also opens up a few bottlenecks in the industry. 

1. Pricing Consistency

Luxury brands and dealerships have a near-ugly experience when it comes to deal closures, especially where there are two dealership groups operating in a particular geography. This is where discounting kicks in and entices the customer to opt for a dealer who’s giving a better price - the car is the same anyway.

Discounting occurs because dealers have their respective financial pressures of rotating inventory and capital. More the stock, the heavier the pressure and the bigger the discount. Essentially, discounts are a function of the quantum of stock availability. This gives dealers a not-so-pleasant experience as one dealer, though financially better off with inventory, still loses out on potential sales to another.

But with ROTF, the inventory is now removed from the dealers’ books and is in the hands of Mercedes Benz. This means, that Mercedes Benz controls the pricing and discounting.

2. Short term disadvantage, long term gain - loss of price hunting prospects, but filtered out Mercedes Benz customers.

While implementing ROTF, there are very likely to be some prospect losses as customers are conditioned over years to negotiate with the dealerships. With Mercedes Benz taking control of the end pricing, customers could sway to dealers of other brands having ready inventory and looking to make the sale with considerable discounting.

While brand loyalty is a completely addressable factor when it comes to Mercedes Benz, ROTF could work negatively for 3-6 months. But what ROTF does is filter out the serious Mercedes Benz buyer from the rest.

Over the long term, ROTF stabilised prices could be a huge benefit with a no non-sense approach to the car buying process for a Mercedes Benz prospect. The bigger advantage could be the inventory factor since we are effectively looking at extensive plant stock that is much, much more than any particular dealer’s inventory.

By stabilising selling prices, ROTF also helps indirectly stabilise resale value to a fair extent.

3. Inventory Optimisation - easier, faster and better understanding of region-based retail demand

In the case of every manufacturer, there’s an ex-showroom price and there’s a model-wise discount bulletin for the month. This is based on multiple parameters - competition, stock availability, retail demand, etc.

With Mercedes Benz now controlling the act of selling, we are looking at Mercedes Benz better understanding the data of geography-based retail demand that pre-determines the advanced production queue.

Mercedes Benz now has the opportunity to optimise inventory as lean as possible with a demand-oriented approach.

4. Centralised Inventory - Inventory at plant supplies for retails across the country

Mercedes Benz has been piloting a supply-demand approach as early as last year, while still operating with the inventory at dealerships. For ex., a customer in Mumbai opting for a select model, powertrain, trim level and colour need not wait for a car for the local dealer (not having stock) to get one. Instead, Mercedes Benz diverts dealer inventory even available in a different geography, say a dealer in Chennai to be sold to the Mumbai customer with logistics taken care of.

The Mumbai dealer’s maximum work scope would be to assist the customer with finance options, registering and delivering the car.

This shows that Mercedes Benz has been silently trying out the ROTF model last year with the existing model in place.

With ROTF in place, inventory across the country gets centralised. There’s no dealer inventory, there’s only plant inventory. Any customer logging in gets an idea of inventory availability and how soon a car of their choice can be delivered. Mercedes Benz sales and production coordinate and get things through.

Mercedes Benz is likely to be careful with the production of vehicles since inventory is now under their books. 

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In short, ROTF declutters a lot of links in the operational chain of the inventory by taking a simple and omni-channel direct to customer approach by effectively using pre-established distribution. 

But just like in every other business, a solution to a problem can bring about other addressable problems:

• ROTF could be a Doubled edged sword when it comes to pre-owned cars - the negotiation and deal-hunting game isn’t over yet.

While ROTF successfully removes the burden on new car inventory from dealerships, it still doesn’t take the pre-owned cars into its scope.

With pre-owned vehicle exchange in the dealers’ scope - dealers now forcefully compete with the entire used car dealer market to close a prospect’s sale, including other Mercedes Benz dealers in the geography. This is because the pressure of acquiring the sales commission falls on the valuation of the existing car for exchange.

• The burden of pre-owned cars with higher risks now sits with the dealer

Since the vehicle exchange value is imperative to win the prospect, dealers would start to offer valuations higher than the average market price. With this move, the pressure to push off inventory of used car becomes higher.

With the loyalty factor at a high, Mercedes Benz dealers get back their existing customers looking for upgrades. And this is where the pressure of pre-owned inventory could start rubbing off. Cross-selling tends to crop up, dealers being touch points are likely to pitch a pre-owned E-Class to a new C-Class prospect. 

I’m fairly certain there are protocols that Mercedes Benz has in place to avoid these scenarios, but there’ll always be a way.

• Maintenance costs

The dealership’s responsibility in facilitating a sale now doesn’t include margins, but commissions as mentioned earlier. This means that a dealership has to try its best to squeeze out everything possible revenue-wise from a customer. What’s next after a sale? Maintenance. 

ROTF could trigger small yet consistent markups in labour costs (if not spares) across dealerships once the novelty dies out and dealerships get further conditioned to this working model. 

Digital / Virtual dealerships

Beyond these, ROTF paves a path where Mercedes Benz could start going strong on digital retails for sales.

By removing the inventory based financial pressures, ROTF brings the brilliant opportunity of having digital or virtual dealerships addressing and fulfilling Sales, without an experience centre or a retail outlet. 

Having virtual dealerships, in my opinion, is the true Retail of the Future. 

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Thank you for reading.