VW rewrites the rules with new retail agreement

A sweeping, 500-page rewrite of Volkswagen's agreement with its vast European dealer network alters the way VW brand retailers earn revenue and interact with customers and the factory.

The deal — a potential framework for upcoming negotiations with VW's U.S. retailers — lets the automaker build a more direct link to its customers. But it includes revenue-sharing arrangements and eases infrastructure demands to help dealerships remain profitable, particularly as they begin selling electric vehicles that generate less service business.

Dealers would earn incentives when customers buy upcoming "on-demand" performance software upgrades for their vehicles, such as a temporary 20-hp power boost or a post-purchase upgrade to LED headlights — even if they had no direct role in the customer's decision.

The agreement, set to take effect in April 2020, also will end brand requirements for expensive "glass palaces" in favor of leaner, more cost-efficient dealerships. It was shown to dealers in Europe this month after more than two years of negotiations.

The pact may form the basis for a new U.S. dealer agreement but won't transfer directly. One reason: The European agreement allows for direct sales of vehicles to consumers over the Internet, though VW expects them to comprise 5 percent at most. Negotiations in the U.S. have yet to begin and have not yet been scheduled, a Volkswagen Group of America spokesman said.

"This is a different market from Europe, and we will need to approach things in a manner that makes sense for the U.S.," Derrick Hatami, head of sales and marketing for Volkswagen of America, said in a written statement to Automotive News. "The changes that are coming in automotive retail represent an industry-wide opportunity, and all OEMs and their dealer partners will need to figure out how to best address these changes."

But in Europe, where VW will debut its fleet of EVs, the situation is more ominous.

"It's a matter of survival," Matti Porho, who owns a group of VW dealerships in northern Finland, told Automotive News Europe.

Porho, president of Volkswagen's European Dealer Council, played a key role in the European renegotiations, helping define new contractual obligations for dealerships and the factory. The council represents VW's 5,400 sales and service points in Europe.

The agreement will go into effect about the same time VW launches its new I.D. family of fully connected, battery-electric vehicles in Europe.

Pohro said the majority of profits his members earn are generated not from sales, but from service and repair work. "But electric cars will only need about half the maintenance of a combustion-engine vehicle," he said.

With the coming EVs and digitalization of retail in Europe, Porho said VW's European network had reached an inflection point: Either its longstanding factory-dealer business relationship had to change, with dealerships learning to live on lower revenue, or the stores would face a financial crisis.

"The current system has essentially been in place ever since General Motors first created it in 1915," Porho said.

Matthias Loebich, global leader for production industries at consulting firm BearingPoint, said automakers are finally realizing their need to mine customer data as well as Amazon or Facebook do. Traditionally, interacting with customers has been outsourced to dealerships, but they lack both the technology and resources required to learn a vehicle owner's preferences in real time.

Not only does the dealer "always have the wrong car" on the lot from the perspective of a customer, it is also becoming more difficult to offer meaningful advice given how informed customers are today, Loebich said.

To help fix that, VW aims to create a global digital platform for customers, regardless of market, to store their profiles and preferences as well as purchase products and services online. The platform, called We, will collect and analyze customers' data, with their consent, much like Amazon, Facebook or Google. But bridging that gap electronically threatens to sideline dealers, reducing their role to little more than delivering and servicing vehicles.

"One critical task could be to help clients navigate in that complex digital world, but currently, most dealers are not prepared to do that. They are selling hardware rather than selling software or educating customers," Loebich said.

In Germany, this dawning reality has dealers of all brands spooked. Average returns in the $200 billion market dropped to as little as 1.3 percent last year despite historically high new-vehicle sales and rising turnover, so profits that migrate to the automaker could pose a significant threat.

Paying dealers for upgrades handled over the air is a novel approach in an industry growing more concerned about the financial well-being of its retail networks. Yet top VW officials say the changes are necessary to protect their "system partners" in Europe.

"I have to admit, it may sound unusual, since this is entirely unlike the business model of the past 60 years, which centered on rewards in exchange for achievements," Jürgen Stackmann, head of sales for the brand, told reporters this month in Berlin at a briefing on the new plan.

In order to get paid, however, a dealership will have to be selected as a vehicle owner's "preferred service partner" in that customer's cloud-based digital profile.

"Our dealers are valuable to us as system partners, and we want to strengthen them," Stackmann said. "So we will provide compensation even when there is only an indirect accomplishment — that you're there and that you're available for the customer."

While some language from the European agreement won't cross the Atlantic because of strong U.S. franchise laws, other changes are likely to resonate. One example: dealership facility requirements.

Stackmann proclaimed an end to the "glass palaces" he says are obsolete in an age when shoppers do most of their pre-purchase legwork online. Instead, he believes smaller, more flexible retail formats that can be written off more quickly make better economic sense for his investors.

"We don't need any enormous showrooms, since a lot of models can be digitally presented," he said. "It's only consequential that if we use to replace hardware costs with software to replace hardware costs, then standards in certain cases have to be lowered. You won't be seeing any new temples from us."

Stackmann also believes that — at least in Europe — dealership groups with multiple stores in close proximity should be able to more easily share service facilities.

In the future, Stackmann said, only one full-service "mother ship" per group will be necessary, allowing some groups to scale back or close facilities that are less profitable. The agreement allows for new facility formats: city showrooms, pop-up stores, used-car centers and "service factories" that aim to take an industrial approach to repair work with high throughputs. A company spokesman in Europe said VW also is open to other ideas that a dealer may want to develop.

Stackmann said VW would relax, at least in Europe, standards dictating how mechanics must undergo additional training each year. And the brand will end inflexible quotas mandating, for example, the ratio of a dealership's administrative personnel to its sales team.

"We will no longer measure the inputs, but the outcomes to guarantee service quality," Stackmann said. "Entrusting our dealers with greater entrepreneurial responsibility might be difficult for some, though, since there are those that still think, 'VW will tell us what to do already.' "

VW's European dealership groups also have new obligations under the agreement. Each will need to improve its efficiency by at least 10 percent — in part by rooting out bureaucracy that has grown over the past few decades. Porho said the next meeting of VW's European Dealer Council will be a brainstorm on how and where minutes can be shaved off each administrative task.

The challenge will be formidable, Porho said, but it should mean a decent profit on the other side. "Times have changed, and we can't turn the clocks back. But it's a big opportunity, assuming we get it right," he said. "If we can manage to come out at the other end of this digital transformation with a 2 to 3 percent net margin, then we will be able to survive."