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The Changing Structure of the Fleet Vehicle Channel in Australia

A model proposed by Stern, El-Ansary and Brown (1989) suggests that environmental forces generate supply and demand for channel services which in turn lead to changes in channel structure and behaviour. This research finds that, contrary to that
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  See discussions, stats, and author profiles for this publication at:  The Changing Structure of the Fleet Vehicle Channel in Australia Article CITATIONS 0 READS 33 2 authors , including: Some of the authors of this publication are also working on these related projects: World Class Logistics ANZ   View projectG. Peter DapiranUniversity of Melbourne 15   PUBLICATIONS   470   CITATIONS   SEE PROFILE All content following this page was uploaded by Marion Steel on 16 October 2014.  The user has requested enhancement of the downloaded file.  The Changing Structure of the Fleet Vehicle Channel in Australia Marion Steel and G Peter Dapiran, Monash University Abstract A model proposed by Stern, El-Ansary and Brown (1989) suggests that environmental forces generate supply and demand for channel services which in turn lead to changes in channel structure and behaviour. This research finds that, contrary to that model’s view, legislative forces affect not only supply but also demand for channel services. Thirty-five in depth interviews were carried out to study the forces at work in the fleet vehicle channel. The changing tax regime, the increasing complexity of occupational health and safety regulations and the change in customer needs are the key forces bringing about change in the channel structure. New intermediaries are appearing to fulfil the expectations of the fleet customers for a one-stop provider. The role of the fleet buyer in fleet customer organisations is changing; and in some instances disintermediation of the dealerships is occurring. Introduction The study reported in this paper was designed to form an understanding of the changing channel structure for new vehicles to fleet customers. New vehicles are distributed in Australia through franchised dealerships. Fleet vehicle customers and private vehicle customers constitute two different segments of the market whose needs are quite different in a variety of areas – product attributes, information needs, pricing, financing, servicing - yet the industry has used the same franchised dealership channel through which to sell and deliver to  both segments. The findings of this research suggest that this is changing. The total Australian passenger motor vehicle market has grown from an annual average of 450,000 units in the early to mid 1980s to an average of 650,000 units per annum for the five years to 2001. With nearly 50% of all new passenger motor vehicles acquired by business and government organisations, the fleet segment is a critical segment of the Australian vehicle market. This study explored the current channel structure for the distribution of new fleet vehicles to  business and government customers, the forces acting on the current channel and the changes occurring as a result of those forces. Research Scope and Methodology The research questions posed are: • What are the external forces working on the existing channel system? • What are the channel structure changes occurring as a result of these forces? The role of the Internet and e-commerce was not addressed specifically in this research. The complexity of the structures under study and the aims of the research make a qualitative approach most appropriate (Yin, 1989). Data was collected for this study from secondary statistical data sources, and face-to-face and telephone interviews. ANZMAC 2002 Conference Proceedings 2561   Thirty-five interviews were held with a range of organisations in the channel including manufacturers / importers, dealerships, finance and leasing intermediaries, specialist intermediaries and suppliers, business and government fleet customers. The interviews covered organisations in the Australian states of New South Wales, Victoria and Queensland. Forces Impacting on the Channel Understanding channel behaviour and structure is a major challenge for marketing scholars and practitioners (Stern and Weitz, 1997). Channel structure changes occur as a result of a number of forces that impact both supply and demand for channel services in the distribution system (Stern, El-Ansary and Brown, 1989). The environmental contribution to changes in retail distribution (Morganosky, 1997) and export channel structure (Yeoh and Jeong, 1995) has been developed while recognising that the specific environmental causes of change are not easily identified. Competitive pressures and consumer demand for outlet variety and retail services have given rise to format diversification and the growth of retail floor area (Morganosky, 1997). A study of the Saudi distribution system in terms of operating elements, structural characteristics and behavioural aspects found that shopping practices are affected by the unique demographic, economic and socio-cultural factors in that market (Leonidou, 1995). More generally, the relationship between channel structure and economic development (Mallen, 1996), and between structure and the institutional environment (Grewal and Dharwadkar, 2002) have been well researched. These studies have limited their investigation to a restricted number of environmental elements. A conceptual model based on transaction cost analysis has been developed to explain how channel length is affected by a nation’s economic evolution (Sharma and Dominguez, 1992). A more comprehensive model suggests that the supply of channel services by firms depends on technological, competitive and  political environmental factors while demand for channel services is affected by social, cultural and consumer forces (Stern, El-Ansary and Brown, 1989). This framework is more appropriate for the preliminary examination of the fleet vehicle channel reported here. A detailed study on the future structure of channels of distribution for new vehicles excluded fleet customers from the analysis (Dapiran, 2001). In this research the key forces emerging were legislative forces, changing customer needs and emerging environmental / vehicle safety issues. Legislative Forces The legal environment is a key factor in influencing the supply for channel services. Two major changes to the Australian tax regime have influenced the behaviour of the fleet channel - the introduction of the Fringe Benefits Tax (FBT) in 1987 and of the Goods and Services Tax in 2000. Although they have not had any significant lasting impact on the total volume of sales into the fleet market, they have changed the way fleet customers acquire and dispose of vehicles. The immediate impact of the Goods and Services Tax (GST) on the total passenger motor vehicle market was a reduction in prices due to the removal of the 22% sales tax and the introduction of the GST at 10%. A more significant impact was the effect on finance leases. Leasing in its various forms is a major method of vehicle acquisition for fleet customers. The lease payment became subject to GST effective from 1 July 2000, increasing the cost of the finance lease and reducing its attractiveness to the fleet market. Prior to the introduction of the GST, finance leases could be prepaid and the expenses claimed as a tax deduction. The double ANZMAC 2002 Conference Proceedings 2562  impact of the cessation of the prepayment rule and the imposition of GST resulted in a significant drop in finance leases between 1999 and 2000. A new approach to leasing known as novated leasing was developed by financial institutions to take advantage of the tax changes. A novated lease is a lease in the employee’s name with the employer executing a sub-agreement to meet the financial obligations of the lease.  Novated leasing has been the fastest growing acquisition method in the last five years (Waller and Steel, 2002). The increased focus on vehicles as part of an employee’s remuneration  package, and the concessional treatment of FBT for company vehicles have contributed to the rapid growth of novated leasing. Current trends indicate a growth rate of 15% per annum for novated leasing by employees, and a 50% increase per annum in the number of organisations offering novated leases. Customer Needs In practical terms a fleet sale covers one or more vehicles acquired using non-private financing methods. Customer segments include the three tiers of government, businesses with national fleets, car rental companies, taxis and special vehicles, and small fleet owners. For private use customers, customer lifestyle and vehicle price are the key factors that affect the purchase decision for new vehicles (Haire, 2001). For fleet customers the choice of brand,  product, and dealership are only part of an overall set of purchase decision criteria including the acquisition and financing method, access to discounts and organisational levels at which negotiations take place (Waller and Steel, 2002). The acquisition of commercial vehicles is characterised by more objective professional  procurement practices compared to the more emotive decision making process of the private customer (Waller, 2000). There is a spectrum of behaviour from rental fleet customers - where there is no end-user involvement in the purchase decision - to novated lease and small  business purchases - where the end-user has a very direct involvement in the process and is acting more like a retail customer. The growth of novated leasing has introduced a level of complexity that did not exist before for the fleet customer. Environmental and vehicle safety issues The importance of safety features and environmental issues is growing for both business and government fleet customers. Also, public liability has risen on the agenda of the employer in relation to the employer-supplied vehicle as a place of work. Government customers are especially sensitive to these issues as their priorities are set by  perceived demands of the community they serve. A government fleet therefore has to balance social demands with the need for a lowest cost option. Many government fleet policies explicitly state that they aim to provide the “safest car possible”. This applies particularly to tool-of-trade vehicles where employee liability insurance may be a relevant concern. Safety of employees influences model choice, selection of options, and therefore the manufacturer-offered price of safety options. Occupational Health and Safety legislation covers the use of tool-of-trade vehicles and therefore the employer has to demonstrate that due consideration has been given to minimising the risks to the employee. ANZMAC 2002 Conference Proceedings 2563  Channel Structure Changes The issues discussed above are creating structural changes in the channel of distribution. Procurement functions once performed internally by customers are being increasingly outsourced. Outsourcing is giving rise to new intermediaries at the same time that it is changing the roles of the internal fleet buyer. The changing needs of the fleet customers are forcing the manufacturers to reassess the role of the dealerships in this market with consideration being given to moving to direct distribution for fleets, giving rise to disintermediation of dealerships in the channel. These changes are discussed below. New Intermediaries Dealerships are clearly the sales channel for small and medium sized fleets. Progressive dealership groups have built up dealerships specialising in fleet sales. These tend to be larger sites with the sizable infrastructure required for processing of fleet deliveries. A proliferation of intermediaries such as finance providers, fleet management companies,  brokers, consultants, fleet management organisations, salary packaging specialists and novated leasing businesses, are taking advantage of the lack of competitiveness of the traditional channel. The intermediaries are succeeding by either offering a one-stop service for all fleet requirements, or by specialising in particular services providing a solution to one element of fleet acquisition or management. These intermediaries aim to simplify the process in a way that a dealership is unable to. Manufacturers and importers are unable to deliver the single point of contact for the whole acquisition, sales and supply process that the fleet customer wants. Intermediaries are managing the whole fleet acquisition process and are forcing the dealerships into becoming simply vehicle ordering and delivery points. These are low margin activities for the dealership, which accounts for the lack of profitability of fleet sales for dealerships. The result of these changes has been a move away from sourcing all vehicles from a dealership and using ancillary finance services, to using the finance and leasing organisations as primary points of contact for sourcing and managing vehicles, and outsourcing the administration of fleet needs. Outsourcing and Disintermediation As the new intermediaries grow in scope traditional intermediaries are progressively  performing functions of the fleet manager. In some instances the fleet management function is migrating to the fleet customer’s human resources department. The changed role of the fleet buyer especially with the advent of novated leasing is seeing a shift of focus to: • Policy formulation • Education: taxation, liability and benefits advice to employees • Consultation: salary sacrifice calculation • Vehicle selection, purchase and funding • Fleet management This changing role away from operational management requires a new application of expertise in policy development and negotiation. ANZMAC 2002 Conference Proceedings 2564
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