On Air Now

Listen

Listen Live Now » 106.1 FM Lansing, Michigan

Weather

Current Conditions(Holt,MI 48842)

More Weather »
56° Feels Like: 56°
Wind: SE 0 mph Past 24 hrs - Precip: 0ā€
Current Radar for Zip

Tonight

Clear 48°

Tomorrow

Sunny 75°

Thurs Night

Mostly Clear 50°

Alerts

Mercedes dealer review opens home front in luxury war

Mercedes-Benz cars are displayed in a dealership of German car manufacturer Daimler in Munich May 17, 2013. REUTERS/Michaela Rehle
Mercedes-Benz cars are displayed in a dealership of German car manufacturer Daimler in Munich May 17, 2013. REUTERS/Michaela Rehle

By Christiaan Hetzner

FRANKFURT (Reuters) - How many Mercedes staff does it take to sell a car? The answer, in the luxury carmaker's German showrooms, is more than it takes to shift an Audi - just part of the cost gap Daimler wants to close with its premium rivals.

Among the top three, Mercedes depends on its unprofitable company-owned dealerships for a bigger share of domestic sales than either Volkswagen's Audi or BMW, which rely more on franchises.

Now, according to documents seen by Reuters, Chief Executive Dieter Zetsche is targeting the company's "own retail" operations as part of a promised 2 billion euro ($2.6 billion) savings drive.

Daimler, already in talks to sell four German outlets, could mount a bigger sell-off if those transactions go well, a person familiar with the company's thinking told Reuters.

"Management wants to try this out to see exactly how it would work in practice," said the person, who asked not to be named.

"They are gathering experience that could serve as a blueprint," he said, adding "Zetsche is no fan of own retail."

The rethink opens a home front in Daimler's battle to lift profitability to the 2013 operating margin target of 10 percent it set three years ago, only to shelve it in October.

Zetsche, 60, has so far failed to put Daimler on course to keep its pledge to overtake Audi and reclaim the crown from BMW by 2020 - or even trim their lead in sales and profit. Daimler further cut its guidance late last month.

PRICEY PERKS

Germany is the second-biggest car market after the United States for Mercedes, which reported a 7.1 percent margin last year, compared with 10.9 percent at BMW's car business and 11 percent at Audi's.

Not including Smart, Daimler owns 98 Mercedes car showrooms that account for about half of all the brand's German car sales.

By comparison BMW's 43 owned dealerships contribute only about a quarter of its volumes in Germany, and Audi's 16 in-house outlets account for less than 10 percent.

Daimler is already in talks to sell two dealerships in northern Germany and two more in the west to existing franchise holders, sources said.

By selling off more outlets, Mercedes could cut its 16,000-strong German retail staff and associated costs including vacation pay, Christmas bonuses, corporate pensions and profit shares - perks that most franchise staff can only dream of.

"Our own retail showrooms naturally have to be competitive when benchmarked against franchise dealers," Daimler said in an e-mailed statement, adding this had become "ever more challenging" in its weakening domestic market.

"There is currently no final concept for restructuring the group's own retail network in Germany, but different options are still being evaluated," the company said. It declined to comment specifically on disposals.

Car dealerships are typically a 2-4 percent margin business at best, which drags down overall margins for luxury manufacturers.

Daimler said its own German sales staff - a third of which sell commercial trucks and delivery vans - "watered down" group profit with a negative 0.3 percent return on sales last year, according to an internal presentation.

That would amount to a loss of more than 30 million euros on 11 billion in revenue.

Based on available data, it took an average 3.8 employees to sell a Daimler car each week last year, while it took only 3.2 to get an Audi off its in-house forecourts.

BMW needed roughly 4.5 employees, however, though companies warn such comparisons are only approximate because staff numbers can include servicing and other non-sales personnel.

INTERNAL OBSTACLES

Daimler isn't the only one unhappy with its low-margin retail business. A job guarantee for the roughly 6,200 high-wage BMW sales staff in Germany expired in December, and unions fear management views some of the 43 retail stores as excess flab.

"There are no concrete closure plans in the desk drawer, but we are permanently examining the efficiency of our own dealerships," a BMW spokeswoman said.

BMW may have provided a clue about its future strategy, after acquiring an insolvent Munich dealer during the 2009 financial crisis. In a break with the past, BMW chose not to integrate the business with its retail network, preferring to keep it a separate unit that offers fewer employee benefits.

Sometimes luxury carmakers need wholly owned showrooms - particularly in fashionable downtown areas where independent dealers struggle to run a viable business - to give faster, unfiltered customer feedback to aid product development and take on slower selling models other dealers won't order.

But Daimler's heavy reliance on them may become a problem as the Internet changes the way people buy cars, and company dealerships typically underperform better-run franchises, said Pieter van Rosmalen, automotive retail specialist with MSX International.

Van Rosmalen cited companies like Penske Automotive Group among possible interested parties for any Mercedes showrooms that are put up for sale.

"I bet you if a German premium carmaker put its own showrooms up for sale, then some of the larger retailers like Penske would buy it," he said.

Penske, which describes its general acquisitions policy as "opportunistic", declined to comment on Daimler outlets, but the company has recently expanded into crisis-hit Europe by buying up some Italian BMW dealerships.

Other observers are skeptical that Daimler could clear the internal obstacles to selling off its dealerships, including a supervisory board where staff are heavily represented.

"Management wants to do something," said London-based Credit Suisse analyst Erich Hauser.

"But I ask myself whether this is going to be another of those Daimler stories where the goodwill is there but nothing happens in the end."

($1 = 0.7778 euros)

(Editing by Laurence Frost and Will Waterman)

Comments