See the Roland Berger Strategy Consultants (http://www.rolandberger.us/) 2014 study on The Next Challenge Of The US Auto Industry. http://tinyurl.com/NPAutomotive http://www.linkedin.com/in/TonyLy https://www.facebook.com/MechanicalMarketer

1. ROLAND BERGER STRATEGY CONSULTANTS
STUDY
In-depth knowledge for decision makers
-3,800
OUTLETS
-200,000
JOBS
22%
DEALERSHIPS
AT RISK
RE:THINK AUTOMOTIVE RETAIL NETWORKS
The next challenge for the US auto industry

3. STUDY 3
RE:THINK AUTOMOTIVE RETAIL NETWORKS —
THE NEXT CHALLENGE FOR THE US AUTO INDUSTRY
US automotive retail networks are stuck in legacy structures.
Transformational change and further consolidation is needed to
reflect the realities of a changing automotive landscape.
A study by Roland Berger Strategy Consultants
CONTENTS
EXECUTIVE SUMMARY
4
RETURN OF AUTO RETAILING?
8
Time for fresh thinking about dealer networks
Dealer profits have been restored to healthy levels…but will it last?
NEW REALITY
12
TIME TO RE:THINK NETWORK
20
Current network structures are not sustainable — 3,800 dealers at risk and further consolidation needed
OEMs need transformational change to address market challenges
INSIGHT FROM AN INDUSTRY THOUGHT LEADER
Interview with José Muñoz
Executive Vice President of Nissan Motor Co., Ltd and Chairman Management Committee Nissan North America
28

4. ROLAND BERGER STRATEGY CONSULTANTS
EXECUTIVE SUMMARY
THE RECOVERY OF AUTOMOTIVE DEALERSHIPS POST-CRISIS
HAS CERTAINLY MADE THIS INDUSTRY LOOK ATTRACTIVE AGAIN.
BUT IS THIS REVIVAL BASED ON SOLID FOUNDATIONS? ARE THE
CURRENT DEALER PROFITS TRULY SUSTAINABLE OVER THE
COMING YEARS AND DECADES?

5. STUDY 5
According to a recent study by the National Automobile Dealers
Association1), the average automotive dealer in the US made over
USD 840,000 in profit in 2012 – a historic comeback for an industry
plagued with bankruptcies just four years earlier. The recovery of
automotive dealerships post-crisis has certainly made this industry
look attractive again. But is this revival based on solid foundations?
Are the current dealer profits truly sustainable over the coming
years and decades?
We believe – contrary to popular opinion – that things are not as
positive as they seem. In our view, the massive consolidation of the
recent past was not the end, but the beginning of the change
needed for dealers to maintain healthy profit levels and for OEMs to
transform their distribution networks. In fact, we estimate that an
additional 22% — or 3,800 outlets — would need to be closed and
approximately 200,000 jobs eliminated to maintain current profit
levels through 2020. In a nutshell, it is time for OEMs to rethink the
current structure and set-up of their dealer network.
What lies behind our controversial viewpoint? Our belief that dealer
margins will soon come under attack again. It is true that volumes
are quickly recovering, but these volumes are less profitable than in
the past. We are witnessing an inexorable shift toward smaller, less
profitable cars. In addition, service and aftersales revenues are
harder to come by as independent shops continue to take a larger
share of the pie. And, last but not least, the internet is making the
auto retail market a smaller place, with more and more dealers
fighting for the same customers. The combination of these factors
leads us to believe that the next wave of consolidation is just around
the corner.
In fact, it may hit much sooner than later. As the digital age rapidly
evolves, it is creating a new type of car buyer that comes armed
with deep product knowledge and full price transparency – not to
mention they also have a radically different demand and
expectation of the retail experience. Today's consumers look online
for information rather than making multiple visits to their local
dealerships. They arrive at the dealership with a clear expectation
for the price they should pay. They expect a world class brand
experience – the sort of experience provided by the likes of Neiman
Marcus or Apple. These rapid changes will put additional pressure on
dealers' margins and will make it difficult for the "mom-and-pop"
outlet to survive given complexity and resource requirements.
Of course, the auto manufacturers are not blind to these challenges
and are responding in various ways. However, their actions do not
go far enough and keep current structures un-touched. Instead of
using the opportunity of a changing automotive landscape to
transform their retail networks, OEMs are stuck in legacy structures
and only remain focused on making incremental updates to their
business model – a model that is effectively obsolete. They have
been slow to adopt radical measures in today's stringent legal
environment, afraid of the risk and cost of making such changes.
We believe that transformational change is both essential and
needed. In the following pages, we look at what OEMs can do to
make the radical alterations needed to put their dealers' profits back
on a sustainable basis – changes that will ensure that they remain
winners rather than losers in the fast changing retail game.
1) National Automobile Dealers Association, NADADATA 2013

6. ROLAND BERGER STRATEGY CONSULTANTS

7. STUDY 7

8. RETURN OF AUTO RETAILING?
DEALER PROFITS HAVE BEEN RESTORED TO HEALTHY
LEVELS…BUT WILL IT LAST?

9. STUDY 9
Dealer profits are
back to healthy levels
The recent economic rebound, release of pent-up demand, network
consolidations, and increasing OEM financial support measures
have led to record profits for automotive dealers in 2012 and 2013.
Those that survived the crisis have emerged looking better than
ever: Average dealer profit margins increased from 1.5% to 2.2%
between 2007 and 20121). To all intents and purposes, the industry
has recovered from the financial crisis with a positive outlook on
the future.
RETURN OF STRONG
DEALER THROUGHPUT
From around 2007, the financial crisis began to hit the automotive
retail network structure hard. In 2009, the industry hit rock bottom
with a meager 10.4 million new car sales in the US – a drop of more
than 38% from a few years prior. Several dealers were driven into
bankruptcy as there was not enough volume to cover fixed costs.
Future viability of the auto retail structure was brought into
question. By 2009/2010, automakers were massively consolidating
their networks, led by the Big 3 – GM, Ford and Chrysler. Their
reasoning was logical enough: Reduce the size of the network to a
healthy number of outlets and dealers' profits will go up, as higher
average throughput increases profitability. This led to a reduction of
more than 4,000 outlets across the network structure. Even though
this represented over an 18% net outlet reduction, many still
questioned if the cuts went deep enough.
F1 As the recovery began to finally come around in 2011, these
pessimistic views regarding the future outlook quickly dispelled.
Volumes were rapidly recovering as all the potential buyers who had
delayed purchasing a vehicle due to the financial strain began
returning to the market. This quick recovery in volume plus the
outlet consolidation helped increase average dealer throughput for
volume brands by 249 units or 43% between 2009 and 20123). While
the increase in volume has played an important role in the return of
profits, it is only one piece of the puzzle.
1) National Automotive Dealers Association, NADADATA 2013

10. ROLAND BERGER STRATEGY CONSULTANTS
REBOUND OF THE PROFITABLE
TRUCK SEGMENT
F2 Another key element that shouldn't be overlooked is the strong
return of the profitable truck segment. During the downturn the
truck segment's share of new vehicle sales went below 50% for the
first time since 2000. This development was extremely painful for
dealers because in a time where volumes were drastically declining
so was their most profitable sales segment. In fact, dealers often
lose money on several segments within their portfolio and depend
on truck sales to make up a significant part of their profit. Without
truck sales, more pressure is put on aftersales and service to carry
the load. In 2010, the sales levels for trucks returned above 50% and
has been well received by dealers and OEMs alike. The boost in
volume per dealer combined with the strong return of the highmargin truck segment has played a significant role in the profits
that are being seen today.
INCREASE IN OEM SUPPORT
HELPS FUEL PROFITS
The other driver of recent dealer profitability has been the increase
in financial support provided by the OEMs. Manufacturer dollars
have helped fuel profitability by reducing the required investment
F1
US retail networks – Outlet development ['000]
-18%
21.8
14.8
21.5
14.2
20.5
13.2
18.6
11.3
17.7
17.9
18.0
10.2
10.1
10.0
6.9
7.3
7.2
7.3
7.5
7.8
7.9
2007
2008
2009
2010
2011
2012
2013E
Source: Automotive News Dealer Census 2005-2012; Roland Berger
Total
Big 3
Import

11. STUDY 11
by dealers and providing large incentive bonuses for volume targets
achieved. Many OEMs continue to subsidize dealer operations to
ensure that they remain solvent, focused on the business, and keep
facilities up-to-date – in a time where competition is fierce and
consumers expect a differentiated retail experience. For example,
Ford announced in early 2012, that they would be guaranteeing
dollar-for-dollar match of up to USD 750,000 for facility upgrade
projects. Other OEMs, such as GM, Hyundai, Kia and Nissan have
committed cash incentives for participation ranging from USD
50,000 to 1 million (and in some cases even more) per outlet.
Mercedes Benz, Audi and others are offering dealers an extra bonus
for every new car sold as an incentive for dealers that take on
facility capital projects. In addition, volume based bonuses have
been increasingly used to incentivize dealers to drive volume and
gain market share. Many dealers have become heavily reliant on
these incentives as they represent a large proportion of their yearend profits.
HAPPY DAYS ARE HERE
BUT THEY WON'T LAST
All in all, the industry appears to have pulled through the crisis and
rebounded with new energy. But does the recent recovery have
solid foundations – or is it built on sand? In this paper we set out to
understand the future trends and the corresponding implications …
and it does not look promising.
F2
US retail networks – Network profitability [%]
2.1%
1.5%
2.3%
2.2%
2.2%
1.5%
1.0%
2007
?
2008
0.8%
2009
2010
Source: National Automotive Dealers Association, NADADATA 2013; Roland Berger
2011
2012
2013E
2020F

12. NEW REALITY
CURRENT NETWORK STRUCTURES ARE NOT
SUSTAINABLE — 3,800 DEALERS AT RISK AND
FURTHER CONSOLIDATION NEEDED

13. STUDY 13
Current margins will
soon come under attack.
As volumes begin to
stagnate, margins will
quickly erode.
Our investigation of the auto retail industry found that the current
record margins enjoyed by dealers will be short lived. This is not a
view widely shared by the industry, but we base it on solid facts,
insights from industry leaders and our own model of the market.
Based on results from our analysis, we estimate that return on
sales will in fact drop from 2.2% in 2012 to below 0.8% in 2020 –
a reduction of over 64% in the coming years. Without significant
change these low profits will in turn put tremendous stress on
dealers as auto retailing is already low margin business. It is clear,
any downward pressure placed on margin will challenge the future
viability of dealers and the overall network structure. In fact, we
estimate that 22% — or 3,800 outlets and approximately 200,000
jobs — are at risk and a continued consolidation is required to
maintain today's profit levels.
Our estimate is based on a specially developed model of the US
automotive retail industry through 2020. In the model we evaluate
the development of new vehicle demand, price, and model mix along
with aftersales revenues and infrastructure costs to better
understand how dealer profits would be impacted – the results are
less than positive. While the recent growth has been encouraging,
new vehicle sales are quickly approaching mature levels. Once
these mature levels are achieved, dealer profits will come under
pressure again, driven primarily by four key issues:
>> Downward pressure on new vehicle prices through increased
transparency and thus intra- and inter-brand competition
>> A shift toward less profitable product mix driven by increases in
consumer demand for smaller less expensive vehicles
>> Competition in aftersales and service driven by penetration of
large national specialty and discount automotive repair chains
>> Rising facility and infrastructure costs through increased focus
on standards, brand identity, and customer experience

14. ROLAND BERGER STRATEGY CONSULTANTS
DOWNWARD PRESSURE ON
NEW VEHICLE PRICES
The digital age has radically changed the way customers shop and
ultimately has led to a systemic decline in prices customers are
willing to pay — a trend that will continue as more and more of the
purchase process moves online. Customers are taking advantage of
online accessibility; nearly 80% of buyers now use the internet as a
primary source of information when researching vehicles.
In response to shrinking margins in the showroom, many dealers
look to boost profit through online channels. Early adopters have had
great success selling online as it expanded geographical reach,
drove volume, and increased profit. Today, every dealer is online
selling through a branded website – albeit at lower margins than in
the showroom. Dealers are typically losing 20-30% of their standard
in-store margin when selling online because of additional price
transparency; they lose the commission provided to OEM for lead
generation – typically $50-100 per lead, and the ability to upsell
because the customer has already determined the exact vehicle
configuration they want to buy prior to stepping into the showroom.
The web spreads the territory across which a potential buyer can
shop and compare prices by an infinite amount. In this process
the dealer is less important as customers have all of the
Increasing dealer usage of 3rd party retail websites like eBay
information they need to make a decision. In fact, this trend is
Motors is further damaging margins by as much as 30-40%. On
particularly apparent in the US, where 58% of customers only visit
these sites, dealers are competing directly with one another
one or two dealerships prior to making a vehicle purchase as the
primarily on price – driving down margins even further. Since the
primary research has already been done online1). In an effort to
whole transaction happens virtually other revenue streams are also
attract consumers, price has become the primary mechanism
F3 lost. Dealers lose out on the highly profitable service revenues and
which has created problems – mainly intensified competition –
used car trade-ins sales that typically make up for the low margin
manifesting in two ways: Competition between dealers over sales
on new vehicle sales.
of one brand ("intra-brand competition") and competition between
different vehicle brands ("inter-brand competition").
Further complicating the issue, is the emergence of Truecar, a
company that provides detailed pricing information and helps
Intra-brand competition has intensified over the last years and led
customers find a dealer that is willing to sell at a discounted price.
to a significant erosion of dealer margin. Even with the recent wave
In certain markets, for example, the arrival of Truecar has led to a
of franchise consolidation, different dealers selling the same
systematic decline of dealers' profits by as much as 90% when
brand – often within a single geographical area – are competing
compared to in-store sales3). Once a single dealer within a given
with each other over the sale of new vehicles because customers
market signs up for the service the discounting process begins. The
are more easily able to shop larger territories by leveraging dealer
initial partner begins to generate leads through the website, which
websites and online tools. This gives customers the perfect
translate into sales, ultimately stealing share from those within the
opportunity to pit dealers against each other and drive down the
local market selling the same brand. As a competitive response,
price of a new car.
many dealers have resorted to honoring or even beating the price
provided through the website. Once again leading to a volume game
In many cases, this sort of competition results in a dealer selling at
that many dealers are not equipped to participate in.
very low or even negative margins in hopes to make it up with used
car sales, future service revenues, and volume-based bonuses
At the same time, competition between different volume brands is
provided by the OEM. This game is particularly dangerous for the
growing fiercer by the day, especially in the small car segment.
small "mom-and-pop" dealers because they are rarely able to reach
These vehicles are being increasingly commoditized – a problem
the volumes needed to be successful. Large professional dealers
that luxury brands are essentially immune to. The commoditization
that play the volume game will drive the smaller dealers to either
of volume brands is driven on the one hand by the fact that today's
sell their franchise or be at risk of going out of business.
consumer preferences are shifting away from vehicle ownership
towards being mobility oriented, and on the other by the limited
1) AutoTrader.com "Have Internet, Will Travel," 2012

15. STUDY 15
scope for differentiation between vehicles in this segment with
regard to quality, safety, and technology. This inter-brand
competition has led to a battle between manufacturers for the
number-one spot – as illustrated by recent comments by Toyota
about trying to reclaim the sales crown from Nissan's Versa, in the
entry-level subcompact segment. To compete, Toyota plans to bring
out a new generation of North America-made small car selling at
lower prices. This intense inter-brand competition transcends to the
retail landscape as well – where dealers are once again forced to
compete on price.
F3
Impact on dealer gross margin
Primary sources of information
AutoTrader.com
Cars.com
Costco Auto Program
Kelley Blue Book
CarMax
Edmunds.com
TRUECar
ebay
Purchase
method
Acquisition
costs
In-store
>> No additional costs for dealer
Dealer
website
>> Commission to OEM
>> Choice of incentives
>> Limited upselling
3rd party
website
>> Commission to 3rd party
>> Choice of incentives
>> Limited upselling
>> Indirect competition with other dealers
Aggregator
website
>> Commission to aggregator
>> Choice of incentives
>> Limited upselling
>> Direct competition with other dealers
Source: Roland Berger
Loss of dealer's
gross margin
0%
-20-30%
-30-40%
-80-90%

16. ROLAND BERGER STRATEGY CONSULTANTS
F4
Vehicle segment1) development — 2000<1% 1%
24%
52%
22%
<1%
17,323,585
2000
<1% 1%
25%
55%
18%
16,956,218
2005
3%
31%
54%
12%
11,590,367
2010
1% 3%
33%
52%
11%
15,648,151
2013
<1% 4%
34%
50%
12%
16,421,229
2015F
<1% 7%
34%
48%
11%
16,835,886
2020F
A
<1%
B
C
D
E
F
1) Does not include HVAN
Source: IHS Global Insight, Light Vehicle Sales, January 2014; Roland Berger

17. STUDY 17
A SHIFT TOWARD LESS
PROFITABLE PRODUCT MIX
F4 Dealers will also be challenged to sustain profitability as the average
margin per vehicle is expected to drop based on the types of
vehicles consumers are demanding. The general shift toward
smaller vehicles poses a problem for profitability. In 2005, for
example, the B and C segments represented 26% of total sales in the
US; today they represent 36% and are expected to grow to 41% by
20201). As noted, prices for small cars continue to come under
pressure, while consumers are demanding more and more costly
technologies such as electronics, safety, and performance features
to be integrated into new vehicles as standard. To make things
worse, share is declining from what is the most profitable segment
at the moment: trucks and SUVs. Small cars are already at a margin
disadvantage compared to larger vehicles, so as small cars start
representing a larger portion of dealers' product mixes, the average
margin per unit has nowhere to go but down.
Adding fuel to the fire is the fact that premium brands are moving
downstream into volume segments. Luxury manufacturers are
developing high-end products at entry level prices – the BMW X1
and 1 series, for instance – and using their low price as a means to
gain market share and draw younger buyers to the brand. All the
major premium brands are following suit as they race to introduce
concepts or production vehicles in the compact segment. As a
result, volume brand dealers will need to sell even more volume in
the future to maintain anything like their current level of profits. And
with volume growth expected to stabilize in 2015, this will very soon
become problematic1).
COMPETITION IN AFTERSALES
AND SERVICE
F5 Strong aftersales parts and service revenue is critical to dealer
sustainability; and dealers' continued loss of market share has huge
impact on profitable operations. It is no secret that dealerships get
a disproportionate amount of their gross profit from parts and
service operations. In the first six months of 2013, for instance, 12%
of total dealership revenue but a massive 40% of total gross profit
stemmed from parts and service. The opportunity is still
available – average age of light vehicles increased from ten to
almost eleven and a half years between 2007 and 2013 (stated in a
recent Polk study) – having older vehicles on the road is good for
service revenues and the industry's service revenues have
benefited. But, at the same time, according to the National
Automotive Aftermarket Industry Association, dealers are getting an
ever smaller share of service sales: dealers' share of service and
parts has fallen five percentage points since 2000, from 32% to 27%
of the total aftersales market2).
A number of reasons lie behind dealers' loss of share. First,
traditional dealers are experiencing increasing competition from
independent repair shops. We have seen the continued growth of
specialty auto stores (i.e., tire discounters, brake shops, quick oil
change) and emergence of superstores like Wal-Mart. Additionally,
vehicles and parts simply do not require as much maintenance as
in the past: Cars have become significantly more reliable and need
fewer repairs. For example, dealer brake services for recent vehicles
(zero to three years) fell from 10% to 6% between 2006 and 2011, a
hefty 40% reduction2). This trend may be profitable for OEMs as it
reduces warranty costs, but it puts an additional strain on the
dealer network, which is seeing its traditional basis for its business
model undermined.
1) IHS Global Insight, Light Vehicle Sales, January 2014
2) AAIA Factbook, Automotive Aftermarket Industry Association, 2013
F5
Aftersales are under pressure
Dealers are losing ground in this very profitable market
2000
2012
32%
68%
Dealer
27%
73%
Other
Source: Automotive Aftermarket Industry Association (AAIA), Factbook 2013

18. ROLAND BERGER STRATEGY CONSULTANTS
RISING FACILITY AND
INFRASTRUCTURE COSTS
F6 As competition is pressuring gross margins at the top, customers'
desire for a superior retail experience is increasing facility costs
affecting the bottom line as well. Inevitably, people's expectations of
auto retailing have evolved based on their other retail experiences.
More and more of today's customers are attracted to brands that
reflect their personalities, expectations of the future, and dreams.
That is not news in itself: The car industry has been selling lifestyles
since its earliest beginnings. Yet, the industry has been slow to
evolve to the new ways consumers are interacting with their
preferred brands and channels. The investment needed to
differentiate and compete to attract consumers will further pressure
margins and dealer sustainability.
Dealers must be able to offer on-demand products and services
and a consistent brand message across all channels. Today's
customers are accustomed to physical retail sites being tailored to
the desired brand experience – as successful consumer goods and
service retailers such as Starbucks, Apple, and the Ritz Carleton
and others have shown. Convenience is still important, but it now
goes beyond the traditional sense. While OEMs and dealers are still
fixating on minimizing metrics such as "miles to customer", nearly
58% of purchasers — many aided by the internet — are willing to
travel more than 30 miles to buy their cars1).
Convenience now encompasses personalized service, touchscreen
kiosks, email reminders, product expert sales associates, mobile
applications, consistent and seamless integration between digital
and physical experiences and other activities aimed at making the
consumer experience more individualized. Against that background,
dealers that do not evolve in line with the changing habits of
consumers inevitably will lose sales.
One of the things dealers aim to achieve through investments is
differentiation in the eyes of customers, however, commoditization
and speed at which competition is making similar investments
creates a need to continuously upgrade and invest. There is evidence
that service upgrades – Internet cafés and children's play
areas, – do lead to better sales1). Still, the required investments are
sizeable, including facility upgrades, mobile and Web presence,
inventory and CRM improvements. Cultural shifts regarding
personnel, too demand recruiting and training — time and expense.
Dealers have become increasingly skeptical about the business case
for modernization, standardization and expansion even in today's
improving market as the memories from the economic crisis have yet
to fade. Thus far, dealers have therefore taken a cautious approach
and still lag far behind comparable service-based retail businesses.
Dealers need to make the investments to remain competitive in the
long run. These developments put dealers under a lot of financial
strain, especially if they lack the support of OEMs. OEMs continue to
request investment be made quickly and some OEMs such as
Toyota have made facility upgrades mandatory. Independent dealers
with only one dealership – the "mom and pop" dealers – have a
particularly hard time coming up with the necessary capital to
implement the changes called for. Going forward, these dealerships
appear most likely to fall victim to further consolidation.
UNHEALTHY PROFITS
PUT DEALERS AT RISK
It is our belief, the combination of the above mentioned factors will
put tremendous pressure on net income margins and ultimately
leave dealers at risk. However, the impact of these trends will not be
felt equally amongst dealers. Small family owned franchises are
more at risk as they do not have the resources or tools needed to
manage the complexity created by these trends, ultimately leaving
them vulnerable to bankruptcy or being acquired by a larger, more
professional auto group. Several large auto groups have already
begun this consolidation, albeit at a slow pace. This pace will begin to
change as the pressure mounts. To maintain, what we believe (or
what the industry believes) to be a healthy profit margin, the network
will have to further consolidate or massively revamp how it does
business – 3,800 outlets are at risk of being closed or taken over.
1) AutoTrader.com "Have Internet, Will Travel," 2012
2) Polk Dealer Reviews Study, Dealer Rater, 2013

19. STUDY 19
F6
Other industries are raising customers'
expectations regarding experience
Address all senses
Consistent appearance and
customer service
Everywhere
(convenience)
Luxurious
surroundings
Exclusive service
Pampering convenience
Example: Ritz-Carlton Hotels
Example: Starbucks
Virtual
experience
Simplified POS
(on demand)
Where I want,
when I want
Example: Amazon
Source: Roland Berger
Personalized experiences
Deep product knowledge
Exclusive locations
Interconnected personal profile
Example: Apple Store

20. TIME TO RE:THINK NETWORK
OEMS NEED TRANSFORMATIONAL CHANGE
TO ADDRESS MARKET CHALLENGES

21. STUDY 21
Today's retail networks
need a transformational change.
What can OEMs do in response to these challenges? With the trends
unlikely to abate in the near future, OEMs need to enact
transformational change to protect the financial health of their
dealer networks. So far, OEMs have been slow to adopt the radical
restructuring measures needed to respond to the evolving retail
landscape. Networks have been consolidated to some extent, as we
have seen, but rather than making a deep change, OEMs remain
focused on small, incremental improvements to the traditional
model. Many have held off from taking a more aggressive approach
to restructuring due to the perceived legal constraints, investment
requirements, and risks to brand image. However, at this point a
more comprehensive approach, given the new market realities,
would show an awareness of the changing environment and the
need to manage the increasing complexity.
Traditional network restructuring methods that focus on closing
outlets to drive dealer throughput and reduce costs are less
effective. These methods often negatively impact the brand image
and market coverage as underperforming dealerships are pulled
from the market. In many cases, such actions have made it difficult
for OEM to return to the impacted market for several years with any
level of success. To avoid these issues, we recommend an
alternative approach that focuses efforts on creating bigger and
stronger retail partners [eliminating 50% or more of current
partners] rather than closing outlets. Bigger and stronger retail
partners are established by providing top performers with large,
adjacent, multi-outlet territories within a given market. Experience
shows that this approach will help top partners yield higher volumes,
mitigate intra-brand competition, while also reducing their cost
base – ultimately leading to higher and more sustainable profits.
According to our model, if each dealer group (those with more than
one dealership) were to acquire one additional standalone franchise,
only a 5% reduction in outlets would be required to maintain the
current 2.2% profit margin, saving roughly 3,000 outlets or ~85,000
employees through new ownership. This estimate is mainly derived
based on cost savings from synergies which have been achieved in
markets where this approach has been adopted.

22. ROLAND BERGER STRATEGY CONSULTANTS
F7 Synergies are achieved once the professional dealer group is able
to complete the consolidation and optimize the financial and
organizational structure across all locations. We calculate the
savings to be around 12% on average dealer expenses of USD 4.4 m1)
and is comprised of the following areas:
Marketing: Approximately, 14% of the total savings is
achieved in marketing by eliminating redundant
advertising spend within given territories. For an average
dealer, this equates to approximately USD 75,000.
Dealers would typically need to spend significant dollars
to compete with adjacent dealers of the same brand,
where now, this is removed and dealers can instead
focus on other competitive brands.
Inventory: As a dealer is able to leverage inventory
across multiple locations, significant savings can be
achieved – an estimated 30% of total savings or around
USD ~160,000 comes from expenses related to
inventory. They can reduce the total number of vehicles
needed while still providing a service level that
customers desire and manufacturers require (in terms of
options and types of vehicles). Rent and other related
expenses are thus decreased as dealers can consolidate
lots. Though not included, dealers also have the ability to
provide a more diverse range of product options across
facilities creating positive revenue synergies as well.
Headcount: The biggest savings, approximately 46% is
due to labor synergies achieved across dealership
locations. Dealers can save significantly through
headcount reductions. The average dealership spends
roughly USD 2.9 m in labor expenses; consolidating
shared services, such as accounting, IT, and even
management can allow dealers to lower overhead
expenses by roughly USD 250,000.
Other synergies: Other synergies account for the
remaining 10% of cost savings, or roughly USD 52,000.
These synergies include having centralized parts
inventory and other back office functions such as legal,
insurance, etc.
Reduction in the cost structure decreases the amount of breakeven
volume required for the average dealer by approximately 20% which
triggers an overall increase in network profit of between 0.7 and 1.5
percentage points annually — rewarding partners and keeping
them motivated and committed to the brand.
OEMs that move forward with this approach have a real opportunity
to take action and gain first-mover advantage. While this approach
seems very simplistic and straight forward, it actually requires a lot
of careful planning and detailed analysis to design. We have
identified four key focus areas that are integral to the successful
planning and execution:
1. Restructuring the network for profitable growth
2. Choosing the right partners
3. Enhancing partner performance and customer experience
4. Enhancing the internal organization and changing the
mindset of field force
1) National Automotive Dealers Association, NADADATA 2013

23. STUDY 23
RESTRUCTURING THE NETWORK
FOR PROFITABLE GROWTH
One of the first steps in restructuring the network structure is to
define the design principles. These principles provide guidance on
the magnitude of change needed per market and are tied closely
with business objectives. OEMs must determine what volume and
profit levels are needed to capture and maintain the attention of
professional dealer groups. However, this opportunity needs to be
equally distributed across partners in a given market territory to
ensure a balance of power. From these guidelines OEMs are able to
determine initial estimates for volume per partner, outlets per
partner and relative market share.
The next step is to design the sales territories incorporating
customer convenience or average driving distance to nearest outlet
and shopping patterns with the design principles in mind. Customer
convenience is looked at to ensure adequate coverage exists within
a market. In the US, most dealerships are situated in auto malls or
clustered in tight geographic areas; when large discrepancies are
apparent it indicates a gap in representation and should then be
addressed. Customer shopping patterns define the territory
customers travel when making a purchase. When sales territories
are incongruent with customer shopping areas, cross-shopping can
create a bidding war amongst neighboring dealers. To the extent
that adjacent territories can be joined it minimizes the consumer
cross-shopping affect and reduces intra-brand competition. The
result of this process is the ideal network design; the design will
take into account partner selection, implementation timeline and
the cost of execution.
CHOOSING THE RIGHT PARTNER
Partner selection is fundamental to the success of the network
re-design, both in choosing the right growth partners and
transitioning away from low performers. Similar to the network
territory approach, criteria is defined on a number of qualitative and
quantitative factors.
While this baseline performance alone would seem an indicator of
partner success, we have found that absent a predominant share of
the dealer groups portfolio they do not perform well for the brand in
the long-term. Predominant share in this context refers to the
volume and profit contribution a brand has in a dealer groups' given
portfolio. This is important to keep in mind because it is becoming
more and more common for large dealer groups to have a diverse
set of brands in their portfolio of outlets. Brand diversification
becomes a major challenge for the OEMs as dealer groups begin to
focus on portfolio optimization (i.e., "riding the hot hand") rather
than driving sales for a specific brand where they are fully
committed. Achieving a dominant brand share with retail partners is
the key to establishing a strong relationship which leads to healthy
profits and a sustainable dealer network structure.
ENHANCING PARTNER PERFORMANCE
AND CUSTOMER EXPERIENCE
Transforming the retail network relies on well-conceived
performance management processes. OEMs cannot implement
further changes without reducing performance variability among
the network: Better measurement and rewards for dealers will allow
OEMs to create incentives for top-performing dealers and change
franchise management when needed.
In many cases, the process of transformation can follow a standard
pattern. The first step is for OEMs to develop business plans side-byside with dealers, with the ultimate goal of improving performance.
The performance goals will vary from dealer to dealer, based on the
current situation and local market dynamic. The targets should also
reflect the OEM's objectives for the market in question – profit,
market share, or whatever it may be.
Once the business plan is finalized metrics and measurement of
progress should be jointly decided between OEM and retail partner.
Transparent communication of processes and measures is critical
to the success of a performance management strategy. Ongoing
discussions between dealers and OEMs must be integrated into the
periodic evaluation and development of the performance plan. Our
experience working with clients shows that implementing this
approach leads to an average improvement in dealer sales between
15% to 27% in the first two years.
In addition to sales performance, retail partners must be capable of
delivering tomorrow's customer experience expectations — both
inside the dealership and beyond. All communication channels and
touch points need to be integrated into a consistent brand
experience which customers are used to for other retail industries.

24. ROLAND BERGER STRATEGY CONSULTANTS
F7
Cost savings — Metropolis,
2012
2.2%
net profit
margin
Status quo
2020
0.8%
net profit
margin
Drop in network
profitability
Outlet
Source: Roland Berger
Territory per retail partner

25. STUDY 25
2020
2.2%
Consolidation
net profit
margin
Sustain current
profitability
Average dealer savings through
consolidation 2020 [USD]
Inventory
Marketing
Headcount
Other
synergies
160k
75k
250k
52k

26. ROLAND BERGER STRATEGY CONSULTANTS
ENHANCING INTERNAL ORGANIZATION/
FIELD FORCE AND CHANGE MINDSET
Developing a strong leadership team that has a shared vision for the
dealer network transformation is imperative. The strong leadership
is needed to help facilitate the change management that is required
to alter the legacy mindset of the organization. Often people get
stuck in the old traditional ways of working with dealers and are
unable to take the necessary steps needed to transform.
Implementation can also get sidetracked by the Marketing and
Sales organization's short-term volume objectives therefore it is
important to keep the restructuring team separate. Which is why we
view this change process as being as important in a network
restructuring as the tactical restructuring itself.
Aligning the cultural mindset of both dealers and the field force can
also be a major hurdle. The field force has been historically trained
to largely focus on pushing volume rather than providing process
improvement ideas. Under a new retail model, this role needs to
change and become more of a consulting function, with the idea of
working together with the dealer to improve profit and volume levels
through more efficient operations.
To change a cultural mindset OEMs need to put together a strong
team and develop a comprehensive communication strategy with
consistent messaging across internal and external (dealer)
channels. In order to support this change OEMs must invest in tools
and resources to help its field force measure dealer performance
and recognize areas of improvement and opportunity.
WINNERS AND
LOSERS
Transformational change is possible. Even given the complex legal
framework, OEMs in our experience are able to improve their
networks and create sustainable profits for their retail partners.
OEMs that are able to transform their retail network effectively have
the opportunity to gain significant competitive advantage. Radical
alterations are needed to maintain profitability in the long-term.
Restructuring to create synergies aroaund bigger and stronger
partners is one possible way. But to do so, manufacturers need to
choose the right partners that will stay engaged with the brand and
develop performance management structures that align with
business objectives and can motivate partner performance.
Lastly, OEMs must align the culture around the changes to ensure
sustainability. In enacting these changes, OEMs have the added
benefit of being difficult to copy by competitors, ensuring that those
who make them enjoy longer periods of leadership. And in a fastevolving world, winning is everything.
METHODOLOGY
We developed a comprehensive model to analyze the potential risks
and implications of the emerging industry trends on dealer profits in
the United States. We took into account several drivers that account
for dealer profitability, including: product mix (segments as well as
aftermarket), internal and external competition, transaction pricing,
and input costs such as labor, marketing and real estate.
The data for this study is mainly from industry sources: National
Automotive Dealer Association, IHS for sales and labor information,
and Automotive Aftermarket Industry Association as well as project
experience collected working with OEMs on a global basis on
network related topics. From this set, we analyzed the
development of these trends and on how they relate to the number
of dealerships.
On this basis we were able to identify the relationship between
variables to make projections for future expectations of dealer
profitability and network sustainability. These projections are
consistent with IHS estimates of future growth in each segment and
in keeping with a conservative assumption on what a target
profitability level should be maintained.

27. STUDY 27

28. ROLAND BERGER STRATEGY CONSULTANTS
INSIGHT FROM
AN INDUSTRY
THOUGHT
LEADER
JOSÉ MUÑOZ
Executive Vice President
of Nissan Motor Co., Ltd
and Chairman Management
Committee Nissan North America

29. STUDY 29
We spoke to José Muñoz, Executive Vice President of
Nissan Motor Co., Ltd and Chairman Management
Committee Nissan North America, and former President of
Nissan Mexicana, where he developed key dealer network
initiatives. Under his leadership, Nissan became the
absolute market leader in Mexico for an unbroken period
of more than five years.
Mr. Muñoz, dealer networks in the US are at their peak regarding profit margins right now. What is
your view on the auto retail industry in the US today?
JM: The structure of retail industry has not evolved to the extent that it should have in light of the
increasing competition. When the market is growing and everybody is selling more cars, it's relatively easy
to make money. But there are a number of dealers in all networks who are not making money, and the
standards in many networks – including top networks – are not really at the level that customers would
expect. This spells bad news for manufacturers when the market becomes less favorable.
During the financial crisis, we saw a rightsizing of dealer networks, especially for domestic brands.
Do you believe that this consolidation went far enough?
JM: The legal limitations meant that OEMs could not receive the same protection as other companies in
other sectors facing the same financial crisis. Experience tells us that every five years or so there is a
market decline, and I believe that this might lead to further consolidation. This sort of forced
consolidation is not necessarily ideal, as you can lose presence where you didn't want to lose it.
"Consumers enjoy full
transparency on margins. If they
know that the dealer can give a
1% discount, they expect to get
the entire 1% discount up front."

30. ROLAND BERGER STRATEGY CONSULTANTS
"Most dealers have most brands, so they've
created their own consolidation, so to speak."
What is driving the current high profitability levels in retail
networks, apart from the market upswing?
JM: There are a number of different reasons. For instance, one of
the segments that has grown the most is full-size pick-ups. Here,
transaction prices have increased more than for other vehicles
because the competitive offer is limited. Conversely, in the compact
segment there is more competition and prices have not grown at
the same pace, translating to lower profits. Another thing is that
dealers are making more and more of their margin in the backend
of the business – areas such as insurance, aftersales and
financing. The huge number of first-time buyers with low credit
ratings means that manufacturers and dealers can make money
here on commissions.
How sustainable is this situation?
JM: When full-size pick-ups stop growing so much, margins will be
eroded. Likewise, if first-time buyers stop getting credit, we will
suddenly see stabilization or even a drop. The market reality is that,
with the exception of full-size pick-ups, there is not much growth in
terms of Consumer Facing Transaction Price: Manufacturers are
launching new models with significant new content but with only a
small price increase. In simple words, Customers are getting more
content for less. In the long run, this will constrain margins for the
distribution networks.
How is increasing pricing transparency impacting dealer
networks and their margins?
JM: The impact is huge. Variable aspects relating to pricing and
pricing structure are visible through different websites in the US.
Consumers enjoy full transparency on margins. If they know that
the dealer can give a 1% discount, say, they expect to get the entire
1% discount up front, which can sometimes become a very tough
arena for the Dealers business.
Customer behavior is changing and the demand for an excellent retail
experience is increasing. Is the industry able to adjust fast enough?
JM: Not always. There has been a lot of investment in new
technology over the last years, but not so much progress in terms
of people. At the end of the day, no matter how good you are on the
technology side, when it comes to delivering the vehicle and
explaining how the vehicle works (the moments of truth when it
comes to human contact) it is all down to the people that you have
in place, their involvement, skills, training and motivation.
Can you give an example?
JM: Well, it is common for dealers to use negotiation and bargaining
at the very end of the sales process as a way of differentiation. Our
information shows that this is not something that customers
appreciate. As an industry, there is a mismatch between the level of
technology that is available and the level of human interaction. We
lag behind with regard to other industries that are much more
advanced in customer handling and customer satisfaction –
airlines, hotels, and so on. In automotive, people at the end of the
funnel are thinking more in terms of volume than in terms of
customer satisfaction and real differentiation.
How does the US retail environment compare to other countries?
JM: In Europe, the environment is highly regulated, although you
are in most of the cases allowed to implement changes, which
sometimes are necessary to bring additional growth and profit to
Dealers and better attention and service to Customers. From that
point of view, Europe is more advanced than the US. As a result,
Europe has been able to evolve in a way that is more driven by the
market, while the US has been highly constrained by legislation.
When it comes to business management, however, the US is more
professional in my opinion. This is because the business is bigger:
Markets where Dealers operate are bigger, there are more business
opportunities and margins are still there – as you can even see
from the compensation levels of the executive managers, dealer
principals and executives of dealer groups.

31. STUDY 31
And Latin America?
JM: Latin America is a mixture. Every market is different depending
on the local legislation. In some ways, Latin America enjoys the best
of both worlds: Some markets are big, so they can enjoy high
margins like the US, but regulation is more like in Europe, so they
can be much more market-oriented. Where you have no limiting
factors, you can have more impact and profitability goes through
the roof. Some of the big dealer groups in the US have spotted this
opportunity and are investing in Latin American markets.
Turning to your own company, what is Nissan doing in the US to
support dealers and keep the network profitable?
JM: It's interesting: For almost my entire career, I've been
transforming networks by bringing in new blood – constantly trying
to attract high-performing dealers to the brand. In the US, by
contrast, the dealers that we have are really good. Most dealers
have most brands, so they've created their own consolidation, so to
speak. We have the best dealers in the markets: The best private
and public are part of our Network. Where we haven't been so good
is in increasing our "share of mind" with those dealers – the extent
to which they focus on Nissan. And improving that is taking a very
important place in our agenda.
Have you had any initial reaction from dealers?
JM: Yes – a very positive reaction. Everybody wants to be a part of
the team, part of a winning brand, part of making more profits. We
managed to be the fastest market share growth brand year on year
(YoY) in this Fiscal Year to Date (Apr-Dec) in the USA. We grew our
sales volume YoY by 18%. The average profit of the Nissan dealer
network is at all-time record, with an increase YoY of 19%. Our
transaction prices have increased. The equation is working: We are
winning dealers' share of mind. But we still have a long way to go.
We are trying to improve every day, challenging conventions and
developing best practices.
Some OEMs – Tesla or BMW, say – are taking a completely
different approach. What do you think about this?
JM: If you are a new entrant like Tesla, for example, you have no
limitations other than your own business plan. However, when you
start achieving bigger volume, you find a great help in your Dealer
Network. Dealers are crucial not only to ensure a fully satisfactory
Customer management, but also to assist OEMs sharing the
enormous financial burden that the automobile business means. As
a manufacturer, when you hit a certain volume you can no longer
cope neither with the financial burden of that number of cars nor
with the complex and very necessary processes to provide the right
service to the Customer: You need dealers to help you, and be
together a much stronger player.
Finally, what does the future hold for automotive retailing,
specifically in the US?
JM: Well, due to the reasons that I have just mentioned, I believe
that dealers will continue to be important in the future.
Nevertheless, consumers would make their decisions on the
Internet, and then come to pick up the vehicle and get some
explanations in a friendly, pleasant environment. We would also see
a highly equipped, high-tech advanced aftersales network; at the
end of the day, this will always be necessary. Whatever happens, I
believe that we can do a better job in optimizing profits in the
distribution network.
"The equation is working: We are winning
dealers' share of mind. But we still have a
long way to go. We are trying to improve
every day, challenging conventions and
developing best practices."

32. ROLAND BERGER STRATEGY CONSULTANTS
AUTHORS
Thomas F. Wendt
Partner, Chicago
Roland Berger Strategy Consultants
Thomas.Wendt@rolandberger.com
Marc Winterhoff
Partner, Detroit
Roland Berger Strategy Consultants
Marc.Winterhoff@rolandberger.com
Brandon Boyle
Principal, Detroit
Roland Berger Strategy Consultants
Brandon.Boyle@rolandberger.com
Rebecca Wilson
Senior Consultant, Detroit
Roland Berger Strategy Consultants
Rebecca.Wilson@rolandberger.com

33. STUDY 33
AUTOMOTIVE COMPETENCE CENTER WORLDWIDE
BELGIUM
>> Didier Tshidimba
Phone +32 (2) 6610 317
didier.tshidimba@rolandberger.com
>> Philipp Grosse Kleimann
NORTH AMERICA
philipp.grossekleimann@rolandberger.com
>> Marc Winterhoff
>> Dr. Thomas Schlick
CEE
Phone +49 (89) 9230 8737
>> Rupert Petry
thomas.schlick@rolandberger.com
Phone +43 (1) 53602 101
rupert.petry@rolandberger.com
CHINA
>> Jun Shen
Phone +86 (21) 5298 6677 890
jun.shen@rolandberger.com
>> Junyi Zhang
>> Dr. Marcus Hoffmann
Phone +49 (89) 9230 8037
marcus.hoffmann@rolandberger.com
INDIA
>> Dr. Wilfried Aulbur
Phone +49 (89) 9230 8108
wilfried.aulbur@rolandberger.com
Phone +86 (21) 5298 6677 890
ITALY
junyi.zhang@rolandberger.com
>> Roberto Crapelli
CZECH REPUBLIC
Phone +39 (02) 29501 257
>> Constantin Kinsky
roberto.crapelli@rolandberger.com
Phone +420 (2) 10219 552
constantin.kinsky@rolandberger.com
>> Roland Zsilinszky
rene.seyger@rolandberger.com
Phone +49 (89) 9230 8511
>> Alberto de Monte
Phone +39 (02) 205011 0
alberto.demonte@rolandberger.com
Phone +1 (248) 729 5116
marc.winterhoff@rolandberger.com
>> Thomas Wendt
Phone +1 (248) 729 5116
thomas.wendt@rolandberger.com
POLAND
>> Krzysztof Badowski
Phone +48 (22) 32374 62
krzysztof.badowski@rolandberger.com
RUSSIA
>> Dr. Uwe Kumm
Phone +7 (495) 287 92 46
uwe.kumm@rolandberger.com
SCANDINAVIA
>> Per I. Nilsson
Phone +46 (31) 75755 14
per-i.nilsson@rolandberger.com
Phone +420 (2) 10219 551
JAPAN
>> Per M. Nilsson
roland.zsilinsky@rolandberger.com
>> Dr. Satoshi Nagashima
>> Phone +46 (31) 75755 10
FRANCE
Phone +81 (3) 35876 385
>> Max Blanchet
satoshi.nagashima@rolandberger.com
Phone +33 (1) 53670 946
max.blanchet@rolandberger.com
>> Sebastien Amichi
Phone +33 (1) 53670 946
sebastien.amichi@rolandberger.com
GERMANY
>> Ralf Kalmbach
Phone +49 (89) 9230 8314
ralf.kalmbach@rolandberger.com
>> Marcus Berret
>> Keisuke Yamabe
Phone +81 (3) 35876 695
keisuke.yamabe@rolandberger.com
>> Dr. Martin Tonko
Phone +81 (3) 35876 697
martin.tonko@rolandberger.com
Phone +49 (89) 9230 8511
juergen.reers@rolandberger.com
>> Norbert Dressler
Phone +49 (89) 9230 8511
norbert.dressler@rolandberger.com
Phone +65 6597 4566
thomas.klotz@rolandberger.com
>> Stephan Keese
Phone +60 (3) 2203 8611
anthonie.versluis@rolandberger.com
>> Michael Wette
wolfgang.bernhart@rolandberger.com
joost.geginat@rolandberger.com
>> Thomas Klotz
>> Anthonie Versluis
marcus.berret@rolandberger.com
>> Jürgen Reers
Phone +65 6597 4566
SOUTH AMERICA
MIDDLE EAST
Phone +49 (69) 29924 6301
>> Joost Geginat
MALAYSIA
Phone +49 (89) 9230 8737
>> Dr. Wolfgang Bernhart
per-m.nilsson@rolandberger.com
SINGAPORE
Phone +973 (17) 56795 0
michael.wette@rolandberger.com
NETHERLANDS
>> René Seyger
Phone +31 (20) 7960 608
Phone +55 (11) 3046 7124
stephan.keese@rolandberger.com
>> Martin Bodewig
Phone +55 (11) 3046 7111
martin.bodewig@rolandberger.com
TURKEY
>> Doruk Acar
Phone +90 (212) 358 6401
doruk.acar@rolandberger.com

34. ROLAND BERGER STRATEGY CONSULTANTS
SOURCES
IMAGE CREDITS
Automotive Aftermarket Industry Association (AAIA)
Digital Automotive Aftermarket Factbook 2013
Page 2: © iStockphoto.com/Henrik5000
Pages 6-7: © iStockphoto.com/chinaface
Page 27: © iStockphoto.com/yangphoto
Pages 28-29: Courtesy of Nissan Americas
Page 35: © iStockphoto.com/chinaface
Automotive News
Dealer Census 2005-2012
AutoTrader.com, Knowledge Systems & Research, Inc.(KS&R),
R.L. Polk & Co.
"Have Internet, Will Travel: Research Shows Online Car Shoppers
Travel Farther to Make Vehicle Purchase," 2012
IHS Global Insight
Light Vehicle Production and Sales Forecast 2009-2019,
January 2014
Investor Place
Ford Makes Big Push for Dealership Renovations, February 2013
National Automotive Dealers Association (NADA)
NADADATA 2013 — State of the Industry, June 2013
R.L. Polk & Co.
Polk Dealer Reviews Study, Dealer Rater, 2013

35. STUDY 35
IMPRINT
Publisher
Roland Berger Strategy Consultants, LLC
Authors
Thomas F. Wendt
Marc Winterhoff
Brandon R. Boyle
Rebecca Wilson
Partner, Chicago
Partner, Detroit
Principal, Detroit
Senior Consultant, Detroit
Design
Stephanie Tortomasi
Graphics Coordinator, Detroit
Copyright
The contents of this report are protected by copyright law.
All rights reserved.

36. ROLAND BERGER STRATEGY CONSULTANTS

37. BLAH BLAH BLAH BLAH BLAH

38. Roland Berger Strategy Consultants LLC
71 S. Wacker Drive, Suite 1840
Chicago, Illinois USA
+1 312.662.5500
www.rolandberger.us
www.rolandberger.com
January 2014
ROLAND BERGER STRATEGY CONSULTANTS

39. STUDY 39

40. A study by Roland Berger Strategy Consultants