No going back for Toyota NZ as it reflects on agency model switch
10 November 2020
It’s been over two years since Toyota New Zealand (TNZ) made the switch from a franchised dealer model to its Drive Happy agency model for retail outlets. What have been the successes and problems of the new agreement two years on?
Argued by its then chief executive officer, Alistair Davis, as being one of the boldest programmes of its kind in the world, the TNZ Drive Happy model replaced recommended retail prices with non-negotiable pricing in April 2018. Dealers became ‘stores’ and are now paid a handling fee for selling vehicles, only holding demos as stock, with new-vehicle inventory now held by TNZ in three locations across the country.
In terms of new-vehicle sales, Toyota still holds the top spot. As market leader for the last 32 years, the manufacturer has an overall market share (passenger vehicle sales) of 16% year-to-date, well ahead of Kia (10%) and Mazda (7%). This new arrangement doesn’t seem to have changed that. Comparing full calendar year retail sales in 2017 (not under Drive Happy) with 2019, sales are down just 2.7% with a strong 2020 year-to-date, despite having no stores open in April.
New TNZ chief executive officer, Neeraj Lala, says it was predicted that the transparent, upfront pricing would lead to positive results, and this has undoubtedly been what TNZ has seen in the past two years. “We are not trying to get too ahead of ourselves,” says Mr Lala. “Our results have been exactly as we forecasted. We can attribute this success to Drive Happy and also a raft of new products in the last 18 months, such as the Next-Gen RAV4, C-HR Hybrid, and Yaris.”
Hunter Mitchell, chief executive of the Bond and Rutherford Toyota store in NZ’s capital city, Wellington, couldn’t agree more. “It’s been a success,” he says. “It was tough at first; we took a drop, for sure. But we now have a tangible advantage over the opposition.”
Problems, it appears, have been few and relatively minor. As with any change of this magnitude it has meant some period of adjustment, particularly with the roll out of a new IT system. In general, though, profitability of stores has exceeded Toyota’s expectations.
One unexpected positive outcome for Toyota has been the patience of customers. “There was a theory that New Zealanders wouldn’t be prepared to wait for their new vehicle, but we have seen that if you have the right product, customers are prepared to wait,” says Mr Lala.
The switch has led to significantly more focus on logistics, to be more efficient in the order management process. “We thought we were efficient, but we’ve experienced more pressure to show transparency of where the vehicle is and when it will enter the retail stores,” says Mr Lala.
TNZ has experienced unprecedented demand post-Covid, creating stock delays, particularly on popular hybrid models. Vehicle orders in Quarter 3 of 2020 averaged 19-23 days for delivery, dependent on fuel type; 19 days for petrol and 23 days for hybrid. “For example, there has been a large demand for the RAV4 Hybrid; a demand that has exceeded our expectations,” says Mr Lala.
In addition, customers are entering retail stores more qualified than ever before. They are knowledgeable and ready to place an order.
Mr Lala concedes there is still a long way to go on the change process. “We’re on a journey,” he says. “On most occasions, we are delivering a promise of Drive Happy. Our challenge now is how to we deliver it for 100% of our customers.”
While the agency system has been described as a double-edged sword for retailers – due to increasingly market-savvy customers knowing pricing and yet the ability for dealers to stand by their pricing with minimal risk of holding stock – Mr Mitchell says he wouldn’t go back to the old model. “The transparency is a good thing. Customers know the pricing, so we have to immediately resonate with the customer on value and service. Toyota has a solid, reliable brand, so we can demonstrate this.” With an average of just 1.6 visits per purchase, according to Mr Mitchell, if the customer didn’t perceive any value in the product, they wouldn’t come into the store.
“Our biggest issue has been around getting cars,” adds Mr Mitchell. “There have been supply issues for the hybrids, but customers seem happy to wait.”
Mr Mitchell admits that handling trade-ins has been another of the most challenging parts of transitioning to fixed pricing. “Everyone else can artificially inflate pricing on trade-ins, but we can’t do that,” he says. “But ultimately we are still dealing with a changeover figure. We are lucky that Toyotas keep their value and have a strong presence in the market.” There’s no longer room to adjust the changeover price with discounting on the new vehicle.
There is also ambiguity around who ‘owns’ the customer under the new agreement: TNZ or the dealership. Mr Mitchell is clear about this, saying: “The customer relationship is with the dealer. I think it would be nearly impossible for any car manufacturer to deal with the customer directly.” Luckily for New Zealand, with its relatively high rural-based population and community-based mentality, customers seem to want to be dealt with by the dealer.
And what about dealer profitability? It seems to depend largely on location and demographic, but overall there is far more consistency for dealerships, which can only be seen as a good thing for managing cash flow. “It took us a while to get back to where we were on profitability, as we came to understand that we rely 100% on what we get paid per vehicle by TNZ,” says Mr Mitchell, “but it’s almost a flat line now.”
Mr Lala adds: “When we say we don’t haggle on price, that doesn’t mean we don’t offer special pricing for fleet customers. We have a tiered pricing structure that seems to be working well.” There is simplicity to the tiered pricing levels for fleet customers, which can be tricky, but overall it doesn’t seem to be denting sales.
In what has been an unprecedented year for the motor industry, there have been some unintended and positive consequences for TNZ. Continued good profits are mainly a result of landlords offering generous rental holidays, and staff wage subsidies, meaning the market can recover.
“With New Zealand’s borders currently being closed, people are not travelling, so they do have more disposable income for buying new cars,” says Mr Lala. “Our brand is resilient enough in New Zealand to withstand a very vulnerable time.”
Mr Lala is complimentary of his team at head office and of the stores to carry out this change process. “We’ve got to have the right culture to execute this. Our dealer satisfaction surveys and our staff engagement survey results have blown us away with how committed our staff are. There is still a huge amount of work to be done, but we are heading in the right direction, and we have the belief in what we are doing.”