31 October 2018

When Toyota New Zealand (TNZ) switched from a franchise to an agency model called Drive Happy for its retail outlets in April this year, it caused national headlines.

In terms of new-vehicle sales Toyota is still the biggest automotive brand, with an overall market share of 17% year-to-date, well ahead of Ford (11%) and Mazda (8%). Last year TNZ celebrated its 30th year of market leadership; it has 63 outlets nationwide.

But TNZ is also a huge part of automotive culture generally. With new-vehicle sales and decades of used-imported vehicles from Japan (some of those also sold by TNZ through approved-used programmes), one in four cars on New Zealand roads is a Toyota. So when TNZ talks business, everybody listens.

Because of its dominant position in the new-vehicle market, heavy reliance on fleet/rental business and reputation for large discounting, the move to a radically different retail model seemed like a high-risk strategy to many commentators.

Dealerships have become ‘stores’. The stores are agents for TNZ, paid a handling fee for selling vehicles, and no longer owning or holding stock. They only hold an increased range of demonstrators, which are made available for longer test drives (including overnight).

All new-vehicle inventory is now held by TNZ in three locations across the country, meaning customers can choose from a national pool of vehicles rather than just those owned by a single dealership. TNZ’s website has been upgraded substantially to allow customers to build vehicles online and view what is in stock nationwide.

Non-negotiable prices

Recommended retail prices have been replaced by the non-negotiable ‘Toyota Driveaway Price’ (TDP). TDPs are significantly lower than the previous retail stickers, to reflect actual transaction prices previously paid. A discounting structure has remained for fleet sales, based on the type of vehicles and size of the purchase. But again, this is on a “no haggle” basis.

TNZ chief executive officer Alistair Davis says the change was a long time coming – even though Drive Happy took both industry and public by surprise when it went live. The company started talking about a big restructure 10 years ago, committed to settling on a formula by 2014, and spent the next four years developing it in consultation with dealers.

“We realised the world was changing,” says Mr Davis. “Electrification, autonomous vehicles and car-sharing were big trends. The Internet was going to have a big impact on car retailing.

“The retail model was stable but there was a lot of dissatisfaction from both dealers and customers. The Internet makes it challenging for a business model based on haggling because eventually everybody gets down to the lowest common denominator, brand by brand.

“Customers were dissatisfied because they were never really sure whether they got the best deal. Or that they couldn’t get the vehicle they wanted because there was pressure to buy what the dealer had in stock.

“But we still think dealers are an important connection to the community and customers. We’re seeking a model that is sustainable for a network of community based businesses.”

Mr Davis said TNZ went it alone in developing Drive Happy: “We took no input other than my personal connections with the US, Australia and Japan. It’s a New Zealand initiative. But I have been inundated with enquiries as far away as Ireland, from many English-speaking distributors and individual dealers. Even competitors.

“Most retail experiments around the world are done by small, emerging companies who haven’t got a lot to lose. It’s very rare for the dominant player to change things. But if the dominant player doesn’t change, it can get eventually run down by the new players.”

Mr Davis argues that Drive Happy might be the boldest programme of its kind in the world: “We’re the most comprehensive and brave and probably the only really big player proportionate to its market doing something like this.”

The agency model wasn’t entirely without precedent for mainstream brands in New Zealand. Back in 2000, Honda instituted what it called the Price Promise and has stuck with it.

Notwithstanding the fact that Honda is a small player (3% market share in 2017), Mr Davis says Drive Happy is outwardly similar but much more radical: “The no-haggle price and legal [agency] structure are the same. But we are much more comprehensive in how we handle stock, money-back options and website build.”

There was much media attention given to a Toyota sales slip in April, the first full month of the Drive Happy project. TNZ slipped from 17% in both February and March to 13%. While this was significant, Mr Davis says it was not unexpected: “April was a fairly poor month, but we were restocking the supply lines because we’d take the inventory away from the dealers.”

In the months following, TNZ’s share ranged from a low of of 16% to a high of 18%.

Network involvement

From a dealer perspective, Drive Happy was a big change but hardly a shock to the system, because the network had been involved from the ground up.

“Yes, there was nervousness,” says Hunter Mitchell, chief executive of the Bond & Rutherford Toyota store in NZ’s capital city, Wellington. “Things were going well for us, profitability was good and then – we’re changing everything.”

Bond & Rutherford’s business is dominated by a mix of standard TDP sales and smaller fleet customers belonging to the first of three discount tiers: Bronze. Mr Mitchell says profitability from pure new-vehicle sales is “a little backwards” compared with the pre-Drive Happy months, but argues that will change as sales staff come to terms with the fee structure for different cars.

“It’s a new system; most cars are at a different value of fees and then you have different tiers. It’s impossible to get it right first go.”

Mr Davis agrees that Drive Happy has changed the focus for the stores: “Because they are now sure about fees for sales, it’s on them to ensure a steady flow of volume.

“But their costs are significantly reduced because they don’t get stuck with inventory. That risk now lies with TNZ.”

Drive Happy hasn’t fundamentally changed the way Bond & Rutherford operates in other areas, but Mr Mitchell says it’s currently putting more emphasis on used vehicles and finance to make up some of that new-vehicle profit shortfall.

“I don’t mean make more money from individual cars – the public can easily see what a used car is worth. But we’re trying to sell more of them.”

Part-exchange vehicles are handled exactly as they were before, but their true value has become a more important issue because there’s no longer room to adjust the changeover price with discounting on the new vehicle.

“We’ve done a lot of training around how we explain trade-in value,” says Mr Mitchell. “We’re finding that the opposition is throwing more money at trades to try and counter what we’re doing.”

Overall Mr Mitchell says sales staff have embraced the change, with the only dissent being from a few of the veterans. “Toyota had been at the forefront of discounting. You get to the pointy end of the month or quarter and we had a big incentive to reach our targets, so we did what it took to get there. It’s a big change to get out of that mindset.”

Nationally, there have also been some logistical issues, says Mr Davis. “NZ infrastructure is challenging due to congestion and truck availability. When things are going well it’s about three days between a customer ordering a car and it arriving at the dealership.

“But next month [October] for example, there are lots of rentals being delivered for the holiday season and that will slip back to 5-7 days.”

Customer satisfaction

Post-sale surveys show customers have generally embraced Drive Happy says Mr Davis, although he agrees that there will be many who view haggling as essential and will therefore now not bother visiting a Toyota store.

“We were concerned about some ethnicities that have a cultural predilection to bargaining. But what has been explained to me by our Indian and Chinese salespeople is that what people are seeking in a bargaining situation is respect. If you show respect, they’re happy.”

Mr Davis says some in the company were also concerned about Drive Happy’s money back guarantee. But in fact there have been only 10 instances of customers taking that offer in five months. One was an elderly customer who found the switch from her Honda to a new Toyota confusing (she couldn’t work out the switchgear) and returned to reclaim her old car after one weekend.

Another switched from a new Toyota to a Signature Class (TNZ’s approved-used brand) vehicle. All the rest changed from the Toyota they had initially purchased into a different model – but still a Toyota.

Overall, the project is about an improved customer experience and therefore sustainability in the Internet age, rather than a specific endgame, says Mr Davis. “There was never a sales goal in our planning for Drive Happy.”

Author David Linklater is an automotive sector journalist and expert on New Zealand’s automotive industry

Tags: agency model, retail, Toyota