The Challenges and Future of Direct Sales

What the future holds for the industry

The traditional dealer model is facing major disruption with the rise of direct sales from manufacturers. OEMs are attempting to transition to direct sales models to gain more control and customer data. However, this shift is proving more difficult than anticipated due to complexity of these organisations, entrenched buyer behaviour, and unforeseen external factors.

In this guide, we’ll explore the challenges OEMs have faced when transitioning to direct sales, the role of retailers in a direct sales future, implications if the direct sales model succeeds, whether the future will be direct or retailer-led, and best practices for managing the transition.

Challenges of switching to Direct Sales

Many major OEMs have begun transitioning to a direct sales model. Some manufacturers have gone all-in on this approach, while others have been more careful in their approach. 

There is no playbook to follow when making this transition, the OEMs are driving in the dark with only the visibility of their rear view mirror to course correct their strategy. One common theme from OEMs is that this transition hasn’t been easy. 

There are several key challenges manufacturers and dealers are facing:

Loss of customer relationships

Local retailers often have long standing relationships with customers spanning many years and vehicle purchases. Removing the human connection risks losing these loyal customers:

“You can’t underestimate the power of those relationships. It might be, in the case of my next door neighbour, for example, he’s had a relationship with his local dealer for 30 years.” – Tom Jenkins

Manufacturers are finding this dealer-customer relationship extremely hard to replicate directly. There is a risk that customers will take their business elsewhere if they can’t buy directly from a retailer. 

This is a huge risk to established OEMs who have spent decades attracting new customers and retaining them through the local relationships they’ve built with their retailer. For newer entrants to the market, they have less to lose as they don’t have this wide base of customers who are used to buying their vehicles from retailers. 

Hesitancy with purchasing online

For large, expensive purchases like vehicles, many consumers still prefer an in-person experience where they can negotiate and speak to salespeople before purchasing.

While the haggling nature of buying in person gets a bad wrap, many consumers like to be able to visit their local retailers and get advice on their purchase. Retailers who provide this trusted advice will continue to thrive as the market gets more fragmented with more choice. 

Consumer behaviour doesn’t change overnight. This is why OEMs should make this shift carefully as they don’t want to lose customers by forcing them to purchase online. 

Difficulty Educating Customers on Electric Vehicles

Another factor which has made this transition more difficult is the parallel switch to electric vehicles (EVs). 

This is not only a huge transition for the industry, but for consumers and society as a whole. Consumers are understandably unsure about this switch and what it means for them. Educating consumers about this transition and walking them through the process is a lot easier in person than trying to do it through a website. 

“The move to EV is challenging enough as it is. Trying to do all of that through a customer facing website and limited face-to-face interaction with a direct sales model is really challenging.” – Simon Porri

Many OEMs have started the transition to direct sales by selling new EV models. Many of them are hoping to follow and replicate the success that challenger EV brands have found with this channel. However, asking customers to adopt EVs and new sales models simultaneously is a tall order. 

Operational challenges of hybrid approaches

Many OEMs have halted full direct sales transitions in favour of hybrid models utilising both direct sales and retailer networks. But managing both sales avenues strains operations.

“Operating a hybrid model, while I agree it’s the right thing to do, is going to be incredibly operationally challenging. You’re basically doing three things all at once.” – Simon Porri

This hybrid approach requires clearly defining roles and processes to smoothly transition sales between the OEM and retailer. Having so many touch points and conversion opportunities throughout the process is difficult to manage. 

It’s easy to say that a hybrid approach is the best way forward, as in theory it has all the benefits of the transition to direct sales without the downsides. However, it requires operational rigour, close collaboration between retailer groups and OEMs, and defined KPIs and action plans that many OEMs don’t have in place. 

How retailers need to change​

To overcome consumer hesitance, most experts believe hybrid direct sales models will persist with both retailer hubs and direct options. However, retailer roles will necessarily evolve as the consumer buying behaviour changes. 

Focus on in-person experiences

With OEMs owning more of the direct sales process, retailers will shift focus to the parts of the process that can’t be replicated online. Their focus will be on building relationships with customers, offering test drives and experiences, and providing aftercare services. 

While historically buyers have relied on retailers to guide them through the different vehicle options, they are becoming increasingly educated due to the wealth of information online. While some may see this a threat to the retailer model, this presents an opportunity for retailers to focus on high value activities that drive sales and retention. 

New incentives structure

As the famous investor Charlie Munger quipped “Show me the incentive and I’ll show you the outcome”. 

As more sales transition to the direct sale model, it could be easy for retailers to get disenfranchised with the new way of working. Rather than the OEM and retailer working together, the direct sale model has the potential to fragment this relationship. 

It’s imperative that OEMs properly incentivise their retailer network inline with this new process. 

“If a dealer is just getting a kickback of a direct sale, then they’re going to do the absolute minimum to help. Whereas if they’re incentivised for a certain amount of assistance, or even walking them through the insurances and the kind of additional products that go along with that sale, then that’s gonna keep the dealer more engaged.” – Tom Jenkins

Increased importance of dealer service departments

With less customer interaction during sales, service departments become even more vital for building ongoing relationships and influencing future purchases.

“There’s even more importance in the quality of their after sales departments’ performance as well because the after sales experience will influence your decision whether to buy again from that manufacturer.” – Tom Jenkins

As more parts of the process get removed from the retailer, this gives them the opportunity to focus on these in-person experiences and deliver exceptional customer service. 

What happens if Direct Sales succeed?

If manufacturers are able to successfully make the direct sales transition, it will significantly reshape the market including reduced physical retailers, evolving job roles, and shifts in customer loyalty.

“Seeing what the data is saying around the success of the direct sales model will determine how far we kind of see that needle going towards 100% direct sales.” – Simon Porri

Potential decline of local retailer locations

As direct sales ramp up, the need for localised retailers may decline outside of metropolitan hubs. The potential cost savings and a reduced need to spend time at these locations could sway consumer behaviour. 

A consolidated retailer network offers a lot of benefits to the OEM and their retailer partners, however how far we see this shift will depend on how quickly we see consumers change their buying habits. 

Brand Loyalty and Retention May Decline

Without a personal sales relationship, customers can more easily jump between brands rather than remaining loyal. This improves acquisition as OEMs will be able to tempt new buyers but lower retention.

“Brand loyalty and behaviours are going to change massively.” – Tom Jenkins

OEMs would rely more on marketing and strong offerings to attract customers long-term over personalised dealer relationships.

Will sales be direct or retailer-led in the future?

Looking ahead 5-10 years, direct sales will likely have a strong foothold but dealership networks still play an integral role in most expert predictions.

“I think there will definitely be a hybrid. I can’t quite say in terms of proportions or percentage split but I just think there will always be customers who will want to buy from a dealer and not necessarily online.” – Simon Porri

Pure direct sales models will face too much consumer resistance in the short term. Maintaining both options gives the consumer the choice whether they want to purchase online or through their retailer network. 

Fringe EV manufacturers entering the market may push more mainstream OEMs to respond by growing direct sales investments. But a primarily dealership-led experience withstands evolving buying behaviours.

Best practices for managing the direct sales transition

Successfully transitioning to direct sales remains up for debate as arguably no OEM has achieved this. However, there are a few best practices that have helped OEMs get early traction and good results. 

Embrace a hybrid approach

As both pure dealer and pure direct routes faced hurdles, manufacturers should accept customer variances by offering both buying avenues. This eases the transition by limiting risk and providing options to the consumer rather than forcing them down a certain route. 

“I think the best approach will be a hybrid. It also depends on what you call a direct sale because if you’re buying the vehicle online but the order is placed at the dealer, on site at the dealer, it could still technically be a direct sale.” – Simon Porri

Maintain transparency across the hierarchy

Central to hybrid model success is transparent communication and coordination between dealers and manufacturers on sales, service, and evolving customer relationships:

“It’s imperative that touch points with the customer made by the dealer or the manufacturer, that information is passed to the dealer from the manufacturer and vice versa.” – Tom Jenkins

Arm retailers with technology and clear processes

With shifted sales responsibilities, dealers need specialised technology, defined procedures, and fresh compensation models to thrive in an assistive role.

“Software will just bring the two parties closer together. There’s lots of ways a software like Loop can support in the process to roll out a direct sales model” – Simon Porri

The future of auto sales

Major OEMs will continue balancing operational stability and consumer preferences through ongoing direct sales experiments. Finding the right balance is difficult as each OEM has their own nuances that they all must weigh up individually. 

The transition remains unclear but focusing on customer education, dealer alignment, and flexible options puts manufacturers in the best place to serve their customers.