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Low-cost and high-profits: business models reshaped

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In times of economic crisis it is well known that price sensitivity increases. One visible consequence is that low-cost business models like Ryanair, Aldi, Colruyt, Ikea and the like are doing very well. They outperform actually older players and you just have to look at European airlines to feel the disruptive power of low-cost players. The airline industry is further consolidating like never before; I dare to say that even the consolidation of US airlines is nothing compared to what we experience in Europe.

Not so long ago low-cost players were claiming that you had to be born with low-cost DNA to have a chance to apply this business model successfully. This may be right in some industry –like the airline- but Renault, the French car manufacturer, proves it’s false for the automotive industry.

Let’s first look frankly at the French car manufacturing industry. To be honest it’s a mess. PSA Peugeot Citroën lost 500 million Euros last year and Renault-Nissan produces only a quarter of its vehicles in France and failed miserably in the top-tier segment. French manufacturers thought the most profitable segment was the top one (because German manufacturers are so successful on it) and they were wrong. Let me give you two examples: Citroën’s flagship model, the C6, as sold at 500 exemplars last year (the production line was dimensioned for 30000 cars/year). On each car sold PSA loses 15000€. The second example is even more striking. Although Renault reported more than 2 billion in profits (1 billion alone from Nissan), its margin is a mere 2,4%. Interestingly its low-cost brand, Logan, gives a 6% margin making the low-cost brand the most profitable one of the Renault group. What a paradox.

 

My take:

Fiat Group’s CEO Sergio Marchionne announced that due to overcapacities there will no other choice than to close car factories in the future. To be honest this was not really a secret. It will however be very interesting to follow what groups like PSA and Renault will do. PSA raised its capital and GM is now a minor shareholder. It announces further partnerships to share components and platforms à la Volkswagen. But what will Renault do? Will it eventually close its factories in France to produce in eastern countries; or will it reinforce its capacities in eastern countries and disengage from its most unprofitable segments? The third option I see would consist in betting on the future of electric cars. Renault has made it a strategic priority to gain a competitive advantage on this segment. If it proves to be successful in a decade or so, the group may well choose to focus on electric car manufacturing in France and leave low-cost fuel-based car manufacturing for eastern and north African countries. Time will tell.

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Author: Pierre-Nicolas Schwab

Dr. Pierre-Nicolas Schwab is the founder of IntoTheMinds. He specializes in e-commerce, retail and logistics. He is also a research fellow in the marketing department of the Free University of Brussels and acts as a coach for several startups and public organizations. He holds a PhD in Marketing, a MBA in Finance, and a MSc in Chemistry. He can be contacted by email, Linkedin or by phone (+32 486 42 79 42)

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