Is There An Upside To Canada’s Dealer Downsize?

In May, General Motors announced they will be closing 42 per cent of their dealer locations over the coming months in an ongoing effort to control costs, reduce brand spread and focus resources on more efficient locations (this number may be even higher by the end of 2010). And with the contraction in the auto industry continuing, we may see additional closed locations across other vehicle manufacturers. Conservatively, this may represent as many as 5,000 dealer service bay closings across the country.

Mainstream media has focused largely on the impact to small and rural communities, despite the fact that some announcements have specifically stated that there would be an urban focus to the reductions. The mainstream media has also ignored the impact these closings may have on the independent aftermarket and for the surviving dealers.

Conversely, trade media has suggested there will be increased demand in the traditional aftermarket as orphaned vehicle owners look for alternative service providers. And while the traditional aftermarket as a whole may benefit, the impact on individual shops may not even be noticed. Because of this, it would be prudent to consider the entire environment surrounding this downsizing before jumping in with an active (and potentially expensive) customer recruiting program.

Here are some factors to consider:

It is true that there will be upheaval.

Service demand is not what’s contracting. Demand is driven by vehicles on the road and, the fact is, that demand is currently fairly stable. While some feel the economic downturn has reduced demand recently, these customers will eventually return to service their vehicles. As well, anecdotal evidence would suggest the global economic downturn has not affected the independent aftermarket as severely as other sectors. This contraction is driven by factors outside of the “servicing” sector -namely new vehicle sales. So there will be ‘orphaned’ customers who will have to find a service provider.

Orphaned vehicle owners will not act en masse. In fact, they could be categorized into three broad fragments:

Dealer dependants -Those who feel compelled to return to dealers for in-warranty vehicles

Dealer loyalists -Those who have always preferred to return to the dealer even after their warranty has expired

Floaters -Those who are ambivalent about choosing their service provider but who may find any number of shops to service their vehicle in the future

Some in-warranty customers will want the dealer experience, and will be reluctant to take their vehicle to the independent channel. Conversely, out-of-warranty customers who have been loyal to the OE channel may find it inconvenient to travel to a dealer for service. These floaters may consider another dealer but just as easily choose a local general service and repair facility outside the OE channel.

Surviving dealers will be operating at capacity.

Surviving dealers will now be handling their current customer base (both warranty and non-warranty) plus orphaned customers from those closed dealers. One of the consequences of operating at or above capacity is the stress placed on customers’ satisfaction levels. An upside to this is that a contraction ‘echo’ may occur if OE dealers are unable to schedule, service and satisfy their expanded base of customers. This would be caused by dissatisfied customers moving from one dealer to another and then to the independent aftermarket looking for a better “service” relationship.

More important from the perspective of the independent aftermarket is that dealers may face scheduling challenges and some of these customers may look for an alternative, non-OE service providers. These vehicle owners may be forced directly into the traditional aftermarket out of a “capacity” squeeze.

Fewer OE Service departments but … not necessarily fewer high-tech service departments.

Many of the dealerships closing are now looking at their options for redefining their own businesses. Some of those options include continuing to sell used cars as well as staying in the repair business. This means that local competition may not go away -they may just trade under a different sign, but with a built-in customer base for service.

The question remains –Can these former dealers attract the clientele they need to sustain their repair facility business when they no longer have warranty work as their anchor? In order to do this, they will have to continue to invest in their relationship marketing programs to attract customers back for regular maintenance -including some of your existing customer base. Without the massive spend of the OE Manufacturer behind them, they will need to compete for the attention of consumers just like the rest of the independent aftermarket.

The forgotten casualties.

One of the most ignored consequences of dealer contraction will certainly be the vehicle owner. Vehicle owners who have been returning to dealers will have to re-establish a relationship with unknown owner/operators.

Repair facilities may want to consider employing their own highly targeted marketing strategies to pull in orphaned customers who may be sitting on the “fence” of indecision about where to go to have their vehicles serviced. Making the decision to attract these “fence” sitters should happen carefully -and sooner than later.

How do you determine if you can attract any of these orphaned customers?

Is your local area affected by the closing of an OE dealer?

Remember, you don’t need a list of all dealers closing across Canada, but you do need to find out if the dealer down the street is closing its doors after 40 years. Most shop owners have a good sense whether a local dealer is closing.

Will other OE dealers within your area be able to pick up the slack?

After the dust has settled, remaining OE dealers may be working hard just to satisfy his or her current customer base. Therefore, taking on an additional 10 bays worth of demand from a neighbouring dealer may cripple their current service levels and satisfaction scores, and may result in dissatisfying a customer base that might very well be “highly satisfied” — and so, in this particular instance there may be an opportunity here for you.

Even if you can handle the demand, can you handle their demands?

Not only do the OEs provide a wide range of services, they have also had easier access to technology and training for the newer car park. The orphaned customer base will come with high expectations based on their past OE service experience — from courtesy car programs, shuttle service, and access to diagnostic information, knowledge and parts availability. On the upside, the increase in demand is more likely to come from domestic vehicle owners, so factors like parts availability and access to repair information is probably already available to you. A little different than if Volkswagen was closing dealerships.

How much demand are we talking about?

Only one automaker so far has announced a major dealership consolidation. But as restructuring continues across the industry we could see as many as 500 less dealer locations across all manufacturers. This could represent as many as 5,000 service bays being removed from the OE dealer network over the next few months and into 2010. At about 2.5 service incidents per day, and over a 250-day year, this would mean that just over three million service incidents per year have been “orphaned.”

Inside The Numbers

While this may seem like a very large chunk of business that potentially could flow into the independent aftermarket, consider that 20 per cent of the car park is in the one-to three-year age range, which would place it in the in-warranty “dealer dependant” category. So there is a low likelihood that many of those vehicle owners will change their current habit of visiting a dealer for repairs and service.

Moreover, the remaining vehicle owners in the “out-of-warranty” category have already exhibited a preference for dealer servicing. So, even if they are now “on the market” they may seek out an OE dealer first before considering the independent aftermarket. If 50 per cent of these Dealer “loyalists” travel that extra mile to establish a relationship with a new OE dealer, we could be looking at only 40 per cent of the market considering the independent aftermarket. Spread these “floaters” or remaining one million plus service incidents across major urban centres and we could see a significant up-tick collectively in business for the aftermarket.

When looking at the top 10 urban centres in Canada, over 90 per cent of general service shops are within 4 km of at least one OE dealer. So competition is localized around dealers. And as dealerships close, the competition can be intense. In Toronto alone, dealers have an average of 30 shops within two km of their locations -and 50 more shops if you consider a simple drive time radius of four km from dealer locations.

If a dealer closes within close proximity to your shop, then one can assume this may represent six to seven thousand service incidents per year. However, just to bring in your fair share of these orphaned incidents, when spread across 50 other repair facilities within four kms of the dealership may mean an increase of 150 service incidents per year or about three incidents per week -if you can attract the average. Better to aim high, if you take action so that another shop in your area doesn’t beat you to the punch.

If there is a concentration of dealer closings in your area, then take advantage of it. Urban concentration of the consolidation may be enough to drive increased demand right into your shop. Employing a highly targeted mail drop campaign can help you build your business in this area. But careful analysis of your customer data, your strengths and weaknesses in local neighbourhoods around your shop, and the strength of your word of mouth marketing will all be determinants of your success in acquiring these customers.

And with lower satisfaction scores for all OE service departments (not just the domestics), orphaned customers are just one other reason for you to consider acquiring customers at this time.

Whatever you do to attract these new customers, always remember that this is a special situation where these customers, while looking for a repair facility, are still highly committed to their previous technician -the OE dealer. Their previous technician just happens to be closed now. In their mind, the only casualty of contraction of the OE dealer network is themselves as they are forced to search for a new service centre. So ultimately they will be looking for the same amount of service and respect that they received elsewhere.

SSGM