Improving Dealer Profitability through Performance Reporting & Benchmarking

Manish Jar, Managing Partner & CEO, india7 Sewells

It is a common practice among auto dealers in the developed markets to submit their operational and financial data to a third party system and generate performance benchmarks. They use these benchmarks as strategic drivers of business performance. These benchmarks also help manufacturers evaluate their policies and resultant contribution to dealer profitability. The last few months have seen emergence of some similar initiatives in India, sponsored by manufacturers in some cases, and dealers on their own in some.

So where do such initiatives go from here? What are the opportunities and challenges? Are there specific cultural nuances that would cause dealer performance reporting take more time to evolve than in other markets? How will it impact the way dealerships are managed in India, or how will it drive the industry transformation?

Introduction

It is a common to hear discussions among the channel managers of auto manufacturers about a particular dealer making tons of money, other dealer losing or diverting cash to other businesses. Also, it is quite popular a claim of supposedly effective channel managers that they speak with their dealers in the language that the dealers understand; language, in this case being 'money'. Ironically, none of these discussions actually focus on dealer profitability or dealer performance measured by scientific variables. At best, these 'right language that dealer understands' discussions are qualitative deliberations on some of the monetary issues that dealers may be concerned about. Also, it is frequent to come across discussions among dealers and manufacturers about the business viability challenges and required remedies in fuzzy, qualitative terms. The net result is a manufacturer-dealership relationship that is driven only by obvious opportunities, emotions and many non-business variables. In my view, this may not be an ideal scenario for India - the world's most promising auto market of the future.

Snapshots   ▪  Dealer Performance Reporting and Benchmarking is a common practice in developed markets.   ▪  It helps dealers identify profit improvement opportunities.   ▪  Third party systems for their distinct benefits are preferred over manufacturer systems in developed markets.   ▪  Few manufacturers in India have already initiated the exercise among their dealers.   ▪  There are cultural and structural challenges to the growth of benchmarking platforms.   ▪  The challenges need to be tackled on a priority by the stakeholders as the opportunities presented by the platform are too good to let go.

 
Dealer Profitability: The Need for an Objective Platform

"It has been my experience that competency in mathematics, both in numerical manipulations and in understanding its conceptual foundations, enhances a person's ability to handle the more ambiguous and qualitative relationships that dominate our day-to-day financial decision-making," wrote Alan Greenspan once.

The way we manage dealerships in India does not seem to follow Greenspan's logic. Interestingly, in some cases it is done in a way that is exactly contrary to his dictum. Dealer Owners and Manufacturers use ambiguous, qualitative logic to hide the financial inappropriateness of their decisions. To be fair to them, though, this is more of a cultural and structural issue, and there are certain drivers of this behaviour:

▪	First, we Indians are known for our brilliant intuitive thinking, and in most cases we end up abusing this capability by justifying our fuzzy, non-objective decisions. This is aided by the fact that most dealership decisions are taken by the promoters and owners, who in turn are not accountable to anyone; there is a natural human tendency to rationalize the outcomes.
▪	Second, there is a serious lack of know-how among manufacturers about the science of dealer profitability management. The fast growth in the market and talent shortage has resulted in few resources being invested in skill development at the dealer development and channel management level. Meanwhile, the top management share of mind is largely given to other more important variables of strategy such as product and technology.
▪	Third, in India, the market leaders are companies with relatively less or nil global experience to draw this expertise from. Their success in the Indian market has bred some amount of apprehensions in their minds about the practices of global manufacturers who have not been so successful in India, Dealer Profitability Management being one of them.
▪	Last and probably the most important, the governance culture of the private business and SMEs in India is far from evolved. We carry the baggage of a socialist past. Most of the private businesses are products of a complex, non-transparent, economically inefficient system of governance.

 
Having said this, the future of auto retail in the country belongs to the manufacturers and dealers who can build a business model that will make them more efficient, transparent and scalable. Efficient so that they can be profitable and build value; transparent so that they can get access to cheaper capital; and scalable so that they can generate economies of scale and scope to become more competitive. All these three variables require a science to be at work. Dealers need to have a method of objectively analyzing their performance and taking their decisions on the basis of the real stories and not the assumed, visualized or planted ones. The idea should be to use the art of dealership management to complement the science of dealership management, and to not replace it.

What is Possible: Developed Market Scenario

In markets like North America, Europe and Australia, dealers use "dealer composites" to benchmark their performance against other dealers. Dealer composites are nothing but set of statistical benchmarks on performance parameters such as Sales, Gross Margin, Asset Turns, Return on Assets etc. The web-based systems that generate dealer composites are generally operated by expert third-party operators. Dealers upload their transactional data on these systems and receive various benchmarks such as market best, zonal best, national best, brand best or market average, zonal average, brand average etc. These systems are called performance reporting systems and are either sponsored by manufacturers or are subscribed to by dealers independently.

 
The benchmarks come very handy for dealers to evaluate profit opportunities for themselves. In most of the cases, the dealers participate in "Performance Groups" facilitated by expert consultants to evaluate their profit opportunities or improvement areas, and evolve methods to realize the same. These groups essentially bring peer dealers together to discuss their numbers and best practices for mutual benefit. Performance Group exercises help dealers understand what their profitability levels are, and how they are performing in those areas. Thus, with the help of these benchmarks, dealers are able to diagnose their challenge areas and are able to focus on them for better performance of the dealerships. Exhibits 1 and 2 demonstrate how dealer composites help dealers identify the opportunities, focus on them and make improvements. Another important aspect of benchmarking is its dynamic nature. Benchmarks, like living organisms, automatically adjust for market changes and therefore provide a very live & realistic picture.

 
Dealer performance reporting is done in different ways in different markets. For example, in South Africa, thousands of dealers independently subscribe to the Sewells system called E-SOS, submit their data and in turn get the performance benchmarks. In Australia, manufacturers have their own performance benchmarking systems that churn out within-manufacturer benchmarks, which are then used by Sewells in the dealer performance groups. Dealer composites are also used by manufacturers in these markets to understand real issues with dealers and to assist them with more conducive policies. A good example of this - one of the manufacturers in Australia, on the strength of a business case brought forward by dealer composites, agreed to investment in the Fixed Operations Profit Improvement program for dealers, which resulted in huge savings for dealers. Exhibit 3 shows how the dealers benefited from this program. Also, Exhibit 4 presents the case of a dealer of a different brand who individually targeted to improve on the basis of benchmarks and peer group learning and succeeded.

The dealer performance reporting systems are run and managed by third-party operators in most developed markets. This is done because these operators act as non-involved parties, and are therefore better positioned to do justice to the stories that data reveals. Third-party operators offer two distinct benefits over manufacturer-driven systems: First, being non-involved parties, they help build trust amongst stakeholders by ensuring that the data is used only for benchmarking purposes; second, they are able to offer inter-brand benchmarks which are far more powerful than single-brand benchmarks. Importantly, third-party operators bring invaluable experience and expertise from a cross section of manufacturers and dealers to the table, making them much more effective.

 
Where Are We: The Scenario in India

The current status in the Indian market is more of a beginner's story. A couple of global manufacturers such as Ford and General Motors have taken the lead with generation of dealer composites and running performance groups for their dealers. Others such as Maruti Suzuki have been doing basic, in-house exercises on the same. However, a lot needs to be achieved in terms of building an ecosystem where:

▪	Dealers are convinced about the strength of performance reporting and benchmarking as a strategic tool of dealership management.
▪	The cultural and structural issues of transparency, trust and objective decision making see some resolution.
▪	The stakeholders who probably 'do not know what they do not know' take a slightly more open view to the practices of developed markets even if they come from other 'not so successful counterparts'.

 
The Future Belongs Here: Opportunities and Challenges

"Whoever is first in the field and awaits the coming of the enemy, will be fresh for the fight; whoever is second in the field and has to hasten to battle will arrive exhausted," says Sun Tzu, The Art of War.

Growth is life. A high growth scenario is the best thing that can happen to players in any market. But like other good things in life, growth has a tendency to spoil the players. It sometimes leads to a feeling of complacency. In these times of high growth in India, it is natural for the successful players and beneficiaries to ignore non-critical issues. It is evident that many of us see dealer profitability as a non-issue and therefore ignore it. Or, it is possible that many of us write this off as an 'impractical' initiative in this market, for it is difficult to do. But the future will belong to those dealers and manufacturers who can proactively get the profitability piece right. A robust practice of dealer performance reporting and benchmarking will prepare them to survive in all scenarios. It will also present many opportunities for all stakeholders such as:

▪	Platform for a more equitable and fair relationship between dealers and manufacturers, thus, contributing to the vision of 'extended enterprise' that some of the manufacturers have for their dealer networks.
▪	Framework for the manufacturers to add real value to dealerships by offering them training, tools and techniques for better dealership management and profitability, resulting in a win-win for all parties - the manufacturer, the dealer and the customer.
▪	Catalyst for market consolidation and resultant evolution. A transparent system and availability of data will provide basis for objective valuations, thus paving way for mergers, acquisitions and entrepreneurial rewards beyond dividends.
▪	Opportunities for dealership groups to showcase their capabilities and tap capital resources such as private equity or stock markets and fuel growth.

 
Conclusion

"While you always looked for success in numbers, I found it in people," says the protagonist of the latest Bollywood flick, Rocket Singh-Salesman of the Year to his boss, presenting 'numbers' and 'people' as two mutually exclusive roads to success. People, i.e. moviegoers don't seem to have liked the movie, and ironically 'collection numbers' of the movie do not look good. The point is that business is not a fuzzy discipline. It requires assessment of the situation in quantifiable or objectively qualitative manner to take decisions - more so when you want to build scalable enterprises. We are one of the hottest auto markets in the world and the time has come for us to embrace an important best practice from developed markets which is 'Dealer Performance Reporting and Benchmarking'. I am sure that like everything else, we will give it our own unique twist and give it back to the world in a more refined and evolved form.

But it is time we got started!

Note: The author is the Managing Partner & CEO of idea 7 Sewells, Indian arm of Sewells Group, a global automotive consulting firm. He can be reached at jmanish@idea7-sewells.com.