Sir Richard Branson, the boss of Virgin Cars, has an image as a cuddly, sweater-wearing deal maker. For someone with such an image, he has an unfortunate habit of upsetting people.
Until Branson came along, new cars in the United Kingdom often carried prices that were 30 percent higher than in continental Europe. First, Branson imported cars to the United Kingdom and sold them at a discount on the Internet. Next, he started selling used cars. Now, Branson has hinted that Virgin Cars will complement its fledgling Website by setting up his own network of dealerships. He also wants to persuade automakers to sell him fleets of new cars.
Auto executives greeted Branson's plans with considerable skepticism, since it would appear to defeat the purpose of a low-cost dotcom venture. If Branson is serious about having his own dealer network, he is gambling that the European Commission will make major changes to the 15-year-old block exemption scheme that allows manufacturers to sell cars only through franchised dealers. The car industry has argued that the exemption protects consumers by offering specialized service and sales outlets.
Consumer groups, Virgin Cars and other Internet retailers reject that argument. 'Anybody who comes into an industry and shakes it up is bound to face challenges,' said Branson. 'We feel we should be able to work with manufacturers to help sell their cars.'
But the European Commission is expected to modify the block exemption rather than kill it. Under one proposal, automakers would continue to select their dealers. But each dealer would be free to sell cars to anyone, anyplace, any time. No longer could automakers impose strict sales territories on their dealers.
The loss of territorial restrictions would allow dealers to freely market cars on the Internet in competition with Virgin Cars and other e-retailers. Internet sellers such as OneSwoop and Virgin Cars are 'pilfering sales from other people's territory,' says Elaine Hardy of automotive consultancy Hardy and Associates. 'If you take the whole issue of territory away, you will have a level playing field. At that point, it will be interesting to see who survives.'
When Branson launched Virgin Cars in May, his plan was to persuade car buyers that his company would give them a better deal than other retailers. But it has not been a startling success. Branson asked his sales staff of 150 to sell 10,000 new cars by year end. By mid-October, only 2,000 orders had been taken and 250 cars delivered. Ian Lancaster, chief executive of Virgin Cars, remains optimistic.
The company's sales are approaching 300 million or $426 million, he noted, and Virgin expects to sell 25,000 to 50,000 units next year. To break even, the company must sell at least 20,000 units. To boost sales, Virgin Cars decided in October to sell late-model used cars. Virgin claims its prices are 5 percent to 10 percent lower than traditional dealers' used-car prices. Virgin's cars come from rental and remarketing companies.
If Branson was looking for a fight, he found one. Since May, manufacturers and importers in the United Kingdom have slashed prices of new cars. Most major automakers also have started selling cars via the Internet. If nothing else, Branson can take credit for pressuring the auto industry to embrace Internet sales. Lancaster claims that it was the launch of Virgin Cars that pushed Ford Motor Co. to launch its sales Web site in the United Kingdom.
Virgin has additional competition from Vauxhall. On November 14, General Motors' United Kingdom operation put all models for sale on the Internet. It was a bold move for GM, which has sold only 1,200 units in the United Kingdom via the Internet in its first year.
Now Vauxhall pledges to deliver any car, any color, with any option to the customer's door within a week. That promise is subject to availability. Vauxhall says it offers savings of $1,230 on a 1.8 liter-Vectra SXi over the $20,404 price that would be paid at a dealership.
To do so, Vauxhall needed the support of traditional dealers who feared they would lose customers to the company's Internet operation. Under the new plan, dealers will complete the sale after customers place an order online. Lower marketing and distribution costs will allow Vauxhall to offer discounts to customers. 'Working with our dealers will ensure that we can fully support our customers who are attracted by the prospect of buying online,' said Paul Confrey , Vauxhall's new-media manager.
Vauxhall's new Internet program is a direct challenge to Virgin Cars, which offers new cars as built-to-order imports from continental dealers. Virgin offers delivery times of 12 weeks for 80 percent of the popular models available in the United Kingdom.
With a price war looming and rival Internet sales pitches, does Virgin Cars have a future? 'Price leadership is not the cornerstone of our business,' says Virgin CEO Lancaster. 'Value will be, and that must be proved not only at the point of sale but throughout the ownership experience.'
Traditional dealers have a reputation for failing to meet customers' expectations, Lancaster said. 'Car retailing is an area where marketing is confusing to the consumer,' he noted. 'The trade is riddled with jargon, and there's a lack of transparency in what is on offer.'
Branson is building his used-car operation on the twin pillars of low price and customer convenience. On each used-car sale, Virgin offers a seven-day refund or 30-day exchange. The company offers an inspection by the RAC motoring organization, a one-year warranty and roadside assistance. The car is delivered on a covered transporter to the customer's home. Customers are allowed to schedule repairs through a call center. On the appointed day, Virgin collects the car and sends it to one of 1,500 franchised dealers. The car is returned serviced, washed and interior cleaned.
But does Virgin Cars really pose much of a threat to the big carmakers? Despite his charisma, Branson's business ventures have had mixed results. Failures include Virgin Cola and Virgin Express, a Belgian low-cost airline that has seen its shares collapse. Victory, a clothes and cosmetics company, and V2, a music business, are struggling.
Sir Richard might boast of Virgin's transparency, but financial journalists have complained about the privately held company's lack of financial information. When investigating journalists examined available financial data two years ago, they learned that nearly all of his companies except his airline and holiday travel businesses were posting losses - and still are.
There will be those in the British car industry hoping that he fails with this one. Yet Branson plans to spend $142 million on his numerous Internet ventures this year - money he received from the partial sale of Virgin Atlantic Airways Ltd., Branson's airline operation. But he will need more money than that if he really wants to grow. His Internet business is not listed on the stock market, so he cannot use stock to buy other Internet businesses.
So Branson must decide whether to float his Internet business on the stock market, or develop his own business in-house, a route that has been the downfall of many Internet ventures.
As Elaine Hardy notes: 'Existing dealerships aren't just going to roll over and die because of the arrival of new Internet players.'
Breaking down the auto industry's hierarchy will be tough - even for a brand with the power of Virgin.
You can e-mail writer Anthony Lewis at [email protected]