Volkswagen to reduce dealer-partners in India to 50

Mumbai: German carmaker Volkswagen will bring down the number of its dealer-partners in India to 50 from 60 as it seeks to improve their profitability, a top executive said.
The company is, however, encouraging its existing dealer-partners to open more outlets to increase sales, leverage economies of scale and improve profitability.

Steffen Knapp, head of Volkswagen Passenger Cars, told ET that larger dealers can better leverage economies of scale and are generally more profitable.

“We are going for less investors (dealers). When I started (three years ago in June 2017), we had 84 investors, we currently have 60 and we will go down to 50,” Knapp said.

Some dealers ET spoke with said the biggest competition in the automobile retail business is not from competitors of other brands but from rival dealers of the same brand in close vicinity. Rival co-branded dealers within a city often fork out steep discounts to gain market share, denting their margins in the process.

“The biggest challenge being faced by dealers is multiplicity of dealerships,” a leading passenger vehicles dealer said requesting anonymity.

If the same dealer owns multiple outlets in a city, internal competition will be eliminated, the person quoted above said. They can then also spread business expenses like the human resources and accounting departments over a wider network, thus benefiting from economies of scale. There can also be a transfer of stock between outlets, resulting in better utilisation of working capital, this person said.

Volkswagen is encouraging its dealers to buy out the businesses of their fellow dealers within the same geographies whenever an opportunity comes, said people in the know.

The automobile dealership business has become a difficult one as of late due to high rentals, increasing salaries of employees and low sales volume. In such a business environment, where scores of dealers have shut shop due to poor sales and inventory accumulation, bigger dealers of Volkswagen are making good business, Knapp said.

“Our big (dealer) partners are absolutely profitable. Even today, a Volkswagen dealer on average is earning more money than a Maruti dealer. Because we are selling high-ticket items, the turnover per car is much higher,” he said.

While the company prunes its dealer network, it is looking to increase the number of customer touchpoints to 150 from 132 at present by the end of 2019, Knapp said.

“150 is enough for us to cover the whole country. At the end of the day, I am not asking for 20% market share. I am going for 3% market share, which is on average 120,000 cars (a year),” he said, adding that the new touchpoints will include smaller, less capital-intensive pop-up stores.