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Winners

Gulliver International Co., Ltd.

2006 6th Porter Prize Winner Used car sales business
Shifting the focus in the used-car sales business from sales to purchasing, thereby developing a new strategy that ensures a high level of customer satisfaction by offering a high purchase price for trade-ins and transparent pricing, while simultaneously achieving high profitability for the company.

Industry Background

The used-car sales industry in Japan faced various difficulties. First of all, used-cars are perishable merchandise with quick price erosion, which can occur in a very short period of time; therefore inventory management is the key to success in this business. This tendency is especially evident in Japan, where there is a short replacement or trade-in cycle for new cars and consequently an abundant supply of used cars in the market. As a result, if a used car which has been traded in is held for two or more weeks, the price must be lowered to attract buyers. At the same time, each individual used car is different from other cars of even the same model, and it may not match the needs of the customer who walks into a dealership. To solve this problem, used-car dealers keep many cars in their inventory so as to offer customers a larger selection and increase the likelihood of having on hand a model that meets their needs. However, this results in the need for a large display space and consequently pushes up landing lease fees and personnel costs. If used cars go unsold, the unsold inventory is then auctioned off to used-car wholesalers. The sales price of used cars at auctions should be lower than the retail price, but keeping a vehicle in inventory would invite a further deterioration in its price.

Another difficulty lies in the achievement of customer satisfaction. Each used car is different, and dealers have a major advantage over customers with regard to information concerning a vehicle's history. This lack of information puts customers at a disadvantage, and being unable to tell whether a car is reasonably priced they will not readily accept the offer price. Furthermore, under the conventional business model, used cars were purchased from the owner at the lowest possible price, and then resold at the highest possible price. This process, which fails to accommodate customers' needs, cannot deliver customer satisfaction.

Executive Summary

Gulliver International was founded in 1994. Since then, it has maintained its practice of holding used cars in its inventory for only 7 to 10 days to minimize price deterioration. This is an extremely short period of time, compared to the conventional industry practice of holding cars in inventory for 2 to 3 months on average. What made this possible was its decision to sell used cars at auction instead of selling them to retail customers, and Gulliver made the purchase of used cars from individuals a priority. Gulliver ensures a positive profit margin by offering owners a relatively high purchase price for used cars to build up its inventory, and then sells them as quickly as possible.

Gulliver expanded its sales channel from the conventional auctions for wholesalers to include online auctions, which Gulliver operates, and also online retail sales to individuals. Despite this sales channel expansion, the average duration of used cars held in inventory is the same (7 to 10 days), and this helps to improve Gulliver's profitability. In addition to improving its profit margin by selling to individuals, Gulliver receives handling commissions from auction operations. Furthermore, Gulliver undertakes the cross-selling of auto loans, auto insurance and quality guaranty services to used car buyers, which also helps it to improve profitability and achieve business growth.

Unique Value Proposition

The target customers of Gulliver International are car owners. With a brand strategy that emphasizes transparency in pricing and reliability through the full disclosure of purchasing assessment criteria, Gulliver earns the trust of sellers, and buying their cars at a high price wins their confidence. In this way, Gulliver successful attracts car owners who otherwise would have traded in their to new car dealers.

Gulliver's policy of ensuring pricing transparency and reliability is also fully practiced in their used-car sales. Information on a specific individual car, including its repair history, is fully disclosed to buyers. As a result, 150,000 used cars have been sold to retail consumers since Gulliver started retail sales operations in 1998.

Unique Value Chain

Procurement
Some 60% of the used cars Gulliver purchases are brought into its outlets by the car owners, while the remaining 40% are a result of Gulliver staff visiting owners' homes to conduct vehicle inspections. Although staff assigned to local outlets carry out the actual inspections, the headquarters determines the purchase price. Its headquarters collects information on the used car transactions made at 150 auction locations all over Japan, and updates the database twice a week, reviewing the most recent half a million transactions to identify which models and colors are selling in a specific region. Based on this information, Gulliver is able to set a purchase price that is higher than those offered by its competitors for popular models.

Sales
Gulliver has four different methods for selling used-cars. The first method involves sales to other used car dealers through 150 auction sites all over Japan. Because of the high transportation costs involved, most used car dealers usually do not participate auctions in remote locations. In contrast, Gulliver takes advantage of all opportunities to sell its inventory at a reasonably high price. It collects sales information on used car auctions held all over Japan, and identifies the local demand characteristics of each auction site (i.e. popular models, colors, and accessories, as well as the optional equipment installed), and draws on this knowledge of consumer preferences when making purchasing decisions. Based on an analysis of this data, the Gulliver's headquarters can find make a quick decision as to which auction site would be the best match for the used car it has purchased. As a result, the probability of a sale for the used cars Gulliver puts on auction is 70%, which is much higher than the industry average of 50%.

The second method is sales to individuals at Gulliver's outlets for a short period prior to the auctions. The details of Gulliver's inventory of 4,000 used cars are recorded and constantly updated on its database, and information for each car, including pictures, a detailed repair history, and notes about any scratches and dents, as well as the sales price can be retrieved on a PC at any one of the Gulliver's sales outlets. The third method is sales to other used car dealers using the same information platform as in the second method, through a "timed auction," in which the vehicle goes to the first bidder at a set price before a specified deadline. The fourth method is the real-time online auction also operated by Gulliver, and bidding is open to other used car dealers. The highest bidder wins the right to purchase the auctioned car. In any of these four methods, Gulliver's used cars are sold within 7 to 10 days from the date of purchase.

Delivery transportation
Gulliver has established a car transportation subsidiary, and internally handles physical distribution.

After-sales service
Gulliver contacts each individual customer who has bought a used car after 1, 3, 6, and 12 months from the date of purchase. It inquires about the car's condition, asks whether there have been any problems, and provides notification of the expiration date of the guaranty as well as offering periodic servicing.

Marketing
To create brand recognition, build a positive brand image, and to distinguish itself from other conventional used car dealers, Gulliver actively invests and advertises using TV commercials, magazines and Internet advertisements. For example, in one TV commercial Hideki Matsui of the N.Y. Yankees is featured, projecting a clean, upbeat and honest image. The design of the Gulliver's sales outlets also impart a clean and bright image, as a result of the use of lots of glass panels. This image is consistently employed by all the franchisee outlets as well.

Fit among Activities

Gulliver's activities are designed and arranged around the central objective of buying a large number of good-quality used cars and selling them as quickly as possible. To increase its inventory of used cars in good condition, Gulliver must offer an attractive price to the seller. To do this, it must have the ability to assess the value of individual cars and accurate forecast the likelihood of a sale. Furthermore, it is also important to develop a process and create an environment in which an owner of a used car can feel comfortable and happy about selling its car to Gulliver. To this end, Gulliver must ensure transparency through the open disclosure of information, ensure trustworthiness by assigning the inspection function to local outlets and pricing to the headquarters, and by actively investing in advertising to establish a positive brand image.

On the selling side, Gulliver prepared a number of sales routes, which operates on its own to ensure a rapid turnover in inventory. (Please refer to the attached "Activity System Map" for more detailed accounts of the relationship between these activities.)

Innovations that Enabled Strategy

  • Strategic positioning of Gulliver as a "Specialist in Used Car Purchasing" that does hold cars in inventory for very long
  • Centralization of pricing at the Gulliver headquarters, and a fair and transparent price
  • The first in the industry to be open with customers about the condition of a used car and the appropriate sales price
  • The first in the industry to launch an online used car sales system that enables general consumers to view photos of used cars and read written descriptions.
  • The first in the industry to launch a real-time Internet auction for used-car dealers
  • The first in the industry to extend an auto loan for used cars which covers the difference between the current sales price and the estimated resale price in three years, or the guaranteed remaining value set for the auto loan (with a guaranteed repurchase by Gulliver after three years as long as the vehicle is in good condition (showing reasonable wear and tear).

Consistency of Strategy Over Time

At the time of its establishment in 1994, Gulliver dubbed itself the "Specialist in Used Car Purchasing." It defined is business as the buying of used cars from general public, and the sale of these vehicles at used car auctions (attended by used car dealers), a market in which demand is constant. Since then, Gulliver has extended its sales routes to include individual consumers, and has also started operating its own auctions. The core concept, however, remains the same: a rapid turnaround time for all inventory. Although Gulliver has added new auxiliary services, such as auto loans, extended guarantees, and delivery services, it does not interfere with the existing core concept, but has created opportunities for generating additional revenue through cross-selling and enhanced customer satisfaction.

Trade-offs

  • Does not keep inventory longer than a certain period of time. Gulliver will sell the car at to other used car auctions if it exceeds the time frame.
  • Does not display cars at its dealerships.
  • Does not allow dealerships to set the price for used cars or decide at which auction site a car will be sold.
  • Gulliver does not recruit people as a franchisee if they have experience in the used car industry.

Profitability

Gulliver surpasses the industry average by a wide margin, in terms of both in return on invested capital and return on sales.

Return on invested capital (ROIC)   (Unit = percentage point)
Difference from industry averag
over 5 year period
Difference from industry average, by year
2001 2002 2003 2004 2005
60.1%P 62.5%P 55.4%P 48.8%P 66.7%P 44.6%P
Return on invested capital = Operating income / Average invested capital

Return on sales (ROS)   (Unit = percentage point)
Difference from industry average
over 5 year period
Difference from industry average, by year
2001 2002 2003 2004 2005
2.8%P 4.4%P 1.5%P 1.3%P 2.6%P 4.3%P
Return on sales =Operating income / Net sales

Activity System Map

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