Subscription plans have automakers walking a fine line

Automakers are treating vehicle subscription programs like startups: new, innovative and filled with potential — but economically and operationally unproven.

And more of the programs pop up seemingly every month. So far seven automakers, mainly through luxury brands, have launched or announced plans for vehicle subscriptions. The programs, aimed at consumers who balk at the long-term commitment a lease or loan requires, package car ownership into a monthly fee that includes insurance, routine maintenance and the option to frequently switch vehicles as their needs change.

But automakers are walking a fine line in trying to avoid getting passed by competitors without alienating the franchised dealers who have been the foundation of their retail operations for more than a century.

The programs operate mainly as concierge services, delivering and picking up vehicles that customers have requested via an app or website. Some programs have announced partnerships with dealerships to handle such tasks or maintain the vehicles, while others deliberate what role retailers should play in vehicle subscriptions.

"Technologies are going to change the way that we consume automobiles. The forms of ownership are going to change; the megacities are not going to get any smaller," Cadillac President Johan de Nysschen said in an interview last month at the New York auto show. "Automation is going to dramatically change the use case for cars. We need to think about how all these things will impact our business."

Cadillac was the first auto brand to market with a subscription program — Book by Cadillac, which began in March 2017 as a pilot in New York and has since expanded to Los Angeles and Dallas. The program is expected to add cities this year.

Porsche followed in October with Porsche Passport in Atlanta. Since then, Volvo, Lincoln, Hyundai, BMW and Mercedes-Benz have launched or announced plans for vehicle subscriptions.

Pricing, mileage and minimum length of the programs vary by automaker. There are also differences in what kinds of vehicles customers can use and how often they can switch vehicles.

Automakers say interest in many of the programs has outpaced availability. Cadillac and Porsche say most members in their programs are new to the brands, affluent and younger than their average customers — all achievements that other automakers would love to replicate.

Despite early enthusiasm, the long-term viability and profitability of vehicle subscriptions remain uncertain.

Klaus Zellmer, CEO of Porsche Cars North America, said the German luxury brand likely won't know until this fall, a year after launch, if it can scale Passport profitably.

"We have to find out," he told Automotive News last month at the Geneva auto show. "It will be decided when we resell those cars employed in that fleet … into the used-car CPO market. … We think it can be profitable, but that is when we are going to find out, once we have cycled the cars back into the market."

Determining when to sell vehicles in the fleet is among the largest challenges, in addition to logistics and keeping customers engaged enough to keep paying for the services.

Book by Cadillac is not measuring its short-term success by being in the red or black, said Melody Lee, the program's global director.

"Right now, it's important to us to keep this like a true startup and invest in understanding what this market and this business really look like," she told Automotive News. "My goal is to make this a profitable business unit for Cadillac."

This year, Lee said, Book started testing a "multicity access" program that lets some subscribers access vehicles in different cities. She said that program could expand to include all members within the next year.

Book plans "further geographic expansion" this year, Lee said, though she did not disclose potential locations, which could include international markets. Cadillac also has been running a small pilot in Munich.

Lee said Cadillac is using Book as a test bed for the maintenance, service and logistics of operating autonomous vehicle fleets. Parent company General Motors has said it plans to commercialize autonomous vehicles through its Cruise Automation subsidiary by 2019.

"Book functions like an autonomous vehicle would," she said. "Expect Book to be our way of learning what customer behavior is really like as we move into this new automated, autonomous future. I think it's going to give us a lot of insight."

Cadillac has increased the monthly fee to $1,800 for new members, from $1,500 originally, and imposed a 2,000-mile monthly mileage limit — changes made roughly six months after Book launched in New York.

Cadillac increased Book's service range from a 50-mile radius to pick up and drop off vehicles in New York to 75-mile radius in Los Angeles and Dallas because of the urban sprawl surrounding those cities. The popularity of the brand's vehicles also varies in each of the markets, Lee said.

"We've been able to learn a lot about our customers in a different way," she said, citing greater demand for V-series performance models in the "more driver-centric towns" that don't get snow.

Cadillac says the average age of Book members is 41 — 22 years younger than the brand's traditional owners — and about 75 percent male, with the vast majority never previously owning a Cadillac. Porsche has had similar results from Passport, with about 80 percent of subscribers between ages 25 and 44, and 78 percent new to the brand.

Book subscribers aren't switching out of vehicles as often as the up to 18 times a year the program allows. The average member is keeping a vehicle for nearly four months at a time, according to Cadillac.

Lee said the price increase was a result of Cadillac noting that customers were willing to pay more for the service and came out of discussions with dealers who wanted to ensure that the program wouldn't encroach on their conventional model of selling and leasing vehicles.

Cadillac on March 1 launched a dealer referral initiative that financially rewards retailers for directing customers to the service — the first step in getting dealers involved in supporting the program.

"We think we can leverage the power of our 900-plus dealers to make Book even more powerful in the future," Lee said. "We've just got to find the right role for them."

Lee said Cadillac wanted to launch Book initially without significant dealer involvement as a way to test the model and keep the costs on the company's books.

Will Churchill, chairman of the Cadillac National Dealer Council, said it would be logical, as the service expands, to involve dealers more in servicing and maintaining the vehicles.

"They don't want to go put in the infrastructure to service these cars, and we already have the infrastructure," he said. "It makes sense to make us part of that partnership."

So far, dealers have had a limited to nonexistent role in many subscription programs, depending on the automaker. One exception is Access by BMW, launched this month in partnership with Sonic Automotive's BMW of Nashville store in Brentwood, Tenn. That dealership, the lone BMW outlet in a metropolitan area of nearly 2 million people, will manage the vehicle fleet, providing maintenance and delivery service to customers.

"Dealers need to have confidence that as we go down this road of subscription and membership that we actually make it viable for them, that they can participate with confidence and that this is a growing part of their business," Ian Smith, CEO of BMW Group Financial Services USA and Region Americas, told Automotive News.

BMW of Nashville will receive a set fee for each service it provides, such as customer delivery or vehicle detailing. Smith declined to provide examples of those fees. The dealership will also get the first chance to sell a vehicle after it's removed from the subscription fleet.

It's unclear what role Porsche dealers will have as Passport evolves or expands to new markets.

A prominent member of the Porsche Dealer Board of Regents is against the automaker interacting directly with customers.

"I'm not for it," Todd Blue, CEO of IndiGO Auto Group, which has Porsche stores in St. Louis, Houston and Rancho Mirage, Calif., said in February. "I think retailers need to be retailers, and I don't think manufacturers should have a direct connection to the consumer in that way."

Zellmer, at the Geneva auto show, said long term he would like to get dealers more involved in the program.

"We talked to our dealers, our dealer council and explained it to them," he said. "Of course, we've still got some dealers from the 189 that then asked after they heard about it, 'Are you trying to sell direct?' No we're not. We're not selling direct. We're not trying to sell direct."

Richard Johnson and Amy Wilson contributed to this report.