Mahindra War Room 2017 Aftermarket - MFCS Caselet

MAHINDRA AFTERMARKET - SERVICES BUSINESS CASELET

STRATEGY FOR CUSTOMER FOOTFALLS & SPARE PARTS EFFICIENCY

Mahindras After Market business comprises 2 companies - Mahindra First Choice

Wheels - for buying and selling pre-owned cars of all brands, and Mahindra First
Choice Services (MFCS) which oers Automotive Repair and Service solutions. This
case let pertains to the MFCS - the service business, of Mahindra AfterMarket Sector.

BUSINESS BACKGROUND

Mahindra established the First Choice Services business in 2008, to oer customers
servicing, accident repair and insurance products under one roof at value-for-money
pricing. The objective was to bring greater quality and service eciency to the
unorganized Car Servicing industry in India. MFCS oered value-added services such
as picking up and dropping o the cars, towing the cars in the event of accident or
breakdown, fixing service appointments online and greater transparency in costing.
During the first decade of operation, MFCS created a nation-wide network of 300
service centers across India, dabbling with Company-owned and Franchisee-owned
models before settling on Franchisee-owned model as their operating standard. The
servicing industry, estimated at about INR. 20,000 Crores, has been getting more
organized over time. About 50% of service centers now are considered to be
organized players. With India becoming the 5th largest automotive producing country
in the world in 2016 by volume, and with over 60 million vehicles plying the Indian
roads, the servicing industry is set to grow to about INR. 35,000 crores in 2020. There
is a huge potential upside that the business stands to gain if they are able to leverage
this opportunity. Hence they have embarked on a journey to build a dierentiated Value
proposition for their franchisees which will enable them of leapfrog on the back of this
opportunity.

Studies show that while over 80% of cars are technically in need of some type of
service or repair, only 52% of the car owners choose to service their cars seasonally.
Many owners are not interested in doing preventive maintenance beyond fluid checks
and tyres. There is an expectation that the automobile should be maintenance free. The
emerging trend of relying on access to an automobile (through apps) rather than
owning an automobile compounds the situation though it also creates an antifragility in
creating a market to maintain aggregators cars. And those who seek to service their
car have plethora of options - Authorized Dealerships, Local Garages and Independent
Garages. Independent Garages are usually multi-brand and they hold 50% of the total

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market. The costs and benefits of servicing a car vary depending on where one
chooses to service her car. One end of the spectrum are independent garages, the
erstwhile car mechanics who oer a low cost solution, but there are concerns on the
use of genuine spare parts and service standards, unless the owner knows the
mechanic personally and has a history of positive relationship. Other end of the
spectrum is the OEMs Authorized Service Centre which is attached to the company
dealerships where the cost of servicing is significantly higher, though it is backed by a
large brand and hence one can expect greater standardization in the use of spares as
well as better service eciencies. Mahindra First Choice Services is positioned in
between the two, where one can get the trusted and high quality service experience of
an OEM authorized service centre at a significantly lower cost, though it would still be
more expensive than a roadside mechanic.

LIVE CHALLENGE: STRATEGY FOR CUSTOMER FOOTFALLS & SPARE PARTS

EFFICIENCY

Over the last decade, both OEM Authorized Service Centers and MFCS have not
managed to attain full capacity utilization of their facilities, though they have expanded
their networks significantly. A part of the reason is the cost-quality equation of the
good friendly neighborhood car mechanics. Promising upstart players such as
CarNation and myTVS have practically shut down completely or scaled down
operations significantly. MFCS has stayed on with strong backing from the Mahindra
Group, and has proved its viability, though not entirely.

Currently, MFCS operates 300 Franchise Owned and Franchise Operated outlets
across India, and a further network of 35 warehouses which supply the spare parts
required by all these 300 outlets. Typically, Franchisees could be located anywhere
between 50 to 200kms from the warehouse. As the Warehouse operates purely on
cash and carry basis (and does not oer credit), delivery time is vital to ensure that the
customer does not wait for servicing, while the Franchisee waits for the spare parts
from the warehouse. If the Warehouse does not have a spare part at a competitive
price, the Franchisee will invariably source it from locally available stores. Both lost
sales and high inventory position will cost MFCS significantly, and increasing customer
wait time is not an option as well. About 95% of spare parts used are specific while 5%
could be generic products (such as oils, grease, filters etc.) With the number of
franchisees increasing dramatically, MFCS is now able to access OEM spare-part
suppliers directly, instead of going through intermediaries. The scale of MFCS with 300
franchisees is proving to be attractive to OEMs and their dealers. With 500 franchisees

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(expected in a year), how will this change? Will it be the tipping point post which the
positive asymmetry curve will kick into action? Also, with GST coming into force, cost
for MFCS is expected to come down. Ensuring spare parts availability on demand,
with minimal delivery time and costs is a major success factor in this business.

A Franchisee enrolls into MFCS by investing anywhere between INR. 65 Lacs to INR. 1
crore, including a security deposit and monthly fee. All other costs are borne by the
Franchisee. Sometimes, Franchisees own the retail outlet they propose to use as
Service Centre, but often they rent it out. MFCS provides the knowhow, equipment
sourcing, set up, process training, SAP set up, spare parts supply and business
development which would through the principle of "transferability" infuse in the
franchisee a spirit to win. At the time of enrollment, usually Franchisees are confident of
sourcing all business from their network itself. But over time they realize the challenges
in the marketplace, and seek support from MFCS to get customer footfalls at the
service centers. As investors, they believe they have the right to have customers
walking into their service centers every day, and expect MFCS to play a major role in
getting them, though that is not the understanding initially. It is to be noted here that
CarWorkz, the app launched by MFCS aims to be an aggregator, a platform for the
over 17,000 independent garages in the country - the unorganized segment. The
segment there is separate - it does not cover the 300 franchisees. Improving
customer footfalls is a major success factor in this business.

Last year, MFCS ran a campaign called Free ke baad, First Choice, implying that
customers should move their servicing needs to First Choice once they are done with
the Authorized Service Centre freebies for initial servicing. About INR. 6 Crores was
invested into the campaign, as only about 70 franchisees were operational at that time.
The response from prospective franchises, spare parts suppliers and potential
customers was good, considering the small scale of the campaign. Perhaps a
campaign with 3-4 times the spend would generate a significantly larger brand
momentum, considering that there are over 300 franchisees in operation today across
India. From the perspective of the principle of Antifragility, Antifragile systems build
extra capacity when put under stress. Those who exercise regularly know that the body
grows and develops with exercise - this happens because when the muscle tissues are
broken down, the failure is reported to the system causing it to improve to ensure
future success. The body compensates for the shock, by building extra capacity to
handle future shocks better! During sleep, the muscles are rebuilt, and they are now
stronger than before. What has the servicing industry learnt from the failures of
CarNation and MyTVS, that can be used by MFCS to predict fragility and build

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antifragility, rather than predicting risks? How can MFCS stress the system to utilize
the excess capacity (the flab) in ways that improves the overall health of the business?

Another fragility increasing threat to MFCS are some new players approaching MFCS
Franchisees and oering to solve all problems faced by them at a fraction of the fee
they pay to MFCS. These pitches sometimes confuse the franchisees, which can be
sorted out only by building anti fragility - driving footfalls and providing spare parts in
the most ecient manner. There is also an opportunity to increase anti fragility by
teaming up with some OEMs, whose authorized centre facilities do not attract more
than 20% capacity utilization, to make MFCS their partner.

With the fundamental need of servicing cars set to grow significantly over the
next few years, driving customer footfalls and ensuring fast turnarounds through
spare parts availability will determine success in this business. How to drive
footfalls dramatically higher? What is that solid reason that customers can be
given, for them to visit a First Choice Services facility? What combination of
brand building, digital strategies, B2B selling and Franchisee eort will
dramatically increase footfalls for Mahindra First Choice Services? MFCS being
positioned in between the Independent Garages and the Authorized Service
Centres, should get across a complex message of giving the quality of an
authorized service centre at a cost comparable to an independent garage. How
to do this? How will the additional spends if any be justified in terms of increased
business - what is the ROI and how to make sure it is high? Also, MFCS has
planned to attain sales of INR. 1000 crores by 2021 - should the goal be advanced
to 2019, and a big ticket campaign be unleashed now to arrive at the revenues
ahead of time? Will this greater aggression benefit? How can Mahindra capture
the large demand for servicing that will originate from aggregators to improve
capacity? What strategy should be adopted to ensure seamless on demand spare
parts supply? How will the impact of GST eventually play out, and how will the
situation be dierent for MFCS with 300 Franchisees now, likely going up to 500 in
the near future? Can MFCS partner with other OEMs to become their partner in
both extending facilities as authorized service center as well as spare parts
distribution? How can technologies such as Digisense, Internet of Things
disrupt the spare parts situation?

Evolve a strategy for MFCS to dramatically increase customer footfalls and also
have a magical supply chain for Spare Parts, to attain revenues of INR. 1000

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Crores by 2019, 2 years ahead of plan. You may integrate the CarWorkz app
platform too in the overall strategy, to meet the revenue goal.

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