One aspect of Volkswagen Group's first-quarter report that jumps out the most is the plunge in revenue at its core VW brand: its top line collapsed by 24 percent versus the previous year to 19 billion euros, a level not seen since 2010.
What's odd is that VW brand's vehicle deliveries to retail customers shrank only 1.3 percent during the quarter, while earnings jumped to an impressive 869 million euros. So it wasn't a late customer revolt following the company's diesel-emissions scandal and clearly VW wasn't giving the cars away for free.
VW brand CEO Herbert Diess is presumably delighted by the plummeting revenue because the reason it happened is a reclassification of the brand's sales operations that in the past artificially inflated its revenue without an equivalent boost in earnings, thereby diluting VW's margins.
In its first-quarter report VW said cross-brand logistics and importers that also distribute vehicles from other group brands will be separated from the core brand's results. This will increase "transparency and comparability," the report said.
This is a big boost to the VW brand, which has been struggling for years with low profitability. Excluding one-off items, the brand posted a 4.6 percent return on sales in the first quarter, compared with 0.3 percent a year earlier.
VW's previous reporting methods meant, for example, that sales of Audi, Skoda and Seat brand vehicles in the UK sold through the national sales company were consolidated with the VW brand, most likely a legacy decision taken at the time for practical reasons since the group and the brand are the same under corporate law. That distribution system will be done away with, and the revenue reclassified under the group's "Other" reporting line, in which it includes other multibrand sales companies such as its Porsche Holding Salzburg dealership group.
According to a presentation that VW Group's investor relations team held with financial analysts on April 27 (See PDF, above right), had the VW brand applied this same reporting method to last year's results, operating profit would have dropped by 15 percent.
Now that may seem like VW is shooting itself in the foot, but this leads more importantly to revenue plummeting by twice that rate. The resulting mathematical effect boosts the VW brand's 2016 pro-forma return on sales by 30 basis points to 2.1 percent – and that's the key. That alone is ultimately the reason for the reclassification.
If there was one single reason why Diess was brought on board, after all, it was to sustainably improve the profitability of the business. Sure, he's doing that by rolling out more SUVs with this year's launch of the crucial Atlas and T-Roc along with a long-wheelbase Tiguan, but stripping out organizational dead weight from his brand is low-hanging fruit and also a legitimate method.
This is not unlike the same conclusion Daimler CEO Dieter Zetsche arrived at when he wanted to close the gap between his Mercedes-Benz division with Audi and BMW in terms of their return on sales. A sobering analysis revealed his division needed to offload parts of its own retail network, since trading cars – much like most retail businesses – is a structurally low-margin business. If the goal is improving your profitability rather than overall income, then not all earnings are created equal, and consolidating one too many sales operations can be a problem.
By shifting a chunk of lower-quality revenue from the sale of Audi or Skoda cars back onto the group, Volkswagen has found an ideal solution. No dealer operations are sold, no sales points are closed, there's no change to the Group's consolidated results since turnover is just reclassified internally, and best of all no brand’s profitability suffers. Everyone comes out looking like a winner.