Why would the giant German auto manufacturer Daimler Benz purposefully set out to trash its own brand? There must be something startling happening in the new car sector globally to motivate the manufacturers of the up-market Mercedes brand to do this.
The observation of a self-induced brand attack is drawn from a very public dispute between Mercedes’ current dealers across Australia and Daimler Benz. Just recently DB decided to throw out its long-established contracts with its dealers. The dispute is now before the Federal Court, with the vast majority of Mercedes dealers suing DB, claiming $650 million in damages.
For decades Australian Mercedes dealers have purchased cars from DB, held these as stock and retailed the cars to the (luxury) market. Dealers would negotiate deals with potential buyers creating points of difference. The dealers are overwhelmingly family businesses investing large sums in up-market showrooms and employing highly trained ‘bespoke’ sales and service staff.
The image and market positioning of Mercedes is one of fine, leading-edge engineering, sophistication and luxury. Owning a ‘Merc’ is not just about owning and driving a car. It’s about who you, the lucky owner, are. Owning a Mercedes means you have ‘made it’. You’re special! This is branding at its best. It commands a higher purchase price and mark-up margins. And such brand positioning has been crafted over decades by DB, with its dealership network an intimate part of that strategy.
Now DB has thrown that dealer relationship out the door. The new contracts with its dealers effectively neuter the dealers as independent small businesses and turns them into employees of DB. DB will now own the cars in the showrooms and pay the dealers a commission on sales. The dealers say that those commissions are tiny in comparison to those that the dealers have been able to achieve under the previous contracts.
The dealers want compensation because the new DB commission structure will not cover the cost of their big investments in luxury showrooms, staff and so on. Further, the dealers say that DM has effectively destroyed the goodwill value of each individual dealership that has been built up over decades. The Courts will decide if compensation should be paid and, if so, how much. It’s set to be a big fight.
But here’s the issue with branding. All car manufacturers are under massive pressure to save on costs. Car parts suppliers have had their margins squeezed to almost nothing over the decades. Presumably, DB is looking to create cost savings through the dealership changes.
It’s worth speculating what this might indicate about DB’s thoughts on its Mercedes brand.
Perhaps DB thinks that the Mercedes brand is so solid and firm that DB no longer needs ‘old fashioned’ bricks and mortar retailing to sell. Further, that online sales are the way to go and that Mercedes marketing genius can keep the brand and margins high without face-to-face sales activity. All DB needs is a car delivery service. Hence the new dealer arrangements are just a delivery service.
Take that one step further, however, and maybe Mercedes showrooms are no longer needed either. Order a Mercedes online and a friendly person might deliver it to your home. Go even further to save costs. Perhaps you could order your Mercedes through Coles or Woolworths with your groceries. Have a Mercedes delivered with bread, milk, sauerkraut and bratwurst neatly packed in the boot! Wow, what a cost saver.
More sensibly, however, does DB see the future in the driverless car, a move that will smash all current ideas about car value? A key part of car branding is how the car ‘feels’ to drive. If the car becomes something that we sit in, without driving, while we read a book or watch a movie, the ‘idea’ of a car loses much of its driver appeal. The branding equation changes.
Further, the long-term business model of the likes of Uber is all about driverless cars. Does DB foresee a collapse in personal ownership of cars and sales due largely to Uber and other such companies? If this were the case, price will be everything as long as the driverless car is well engineered for reliability, comfort and safety.
Does DB have an edge on these issues anymore? Read any motoring commentator and they’ll regularly give high praise to South Korean, Japanese and other new vehicle products, equalling, often even exceeding, the standards of Mercedes and other DB products.
This is all speculation. Who knows what the thinking is in DB’s German headquarters? But the message is unmistakable. Its decision to kill off its previous relationship with its dealers is a powerful signal.
First, something must be happening with DB’s assessment of its branding and its future.
Second, DB has made a stunning statement about reliability. Maybe their cars really are reliable. But what about the reliability relationship between DB and its future retail customers in terms of service and support back-up? If DB will, seemingly without notice, walk away from its long-term relationship with its dealers, would DB do the same to Mercedes customers in the future? We can’t know. But the question remains.
Certainly, DB has a right to have whatever contractual arrangements it wants. But what the Mercedes dealers seem to be saying is that if you want to change those contracts and in the process harm people, then you (DB) should compensate. The Courts will decide on that issue.
Ken Phillips is Executive Director of Self Employed Australia.
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