With Block Exemption in the balance, moves by carmakers to prune their franchised distribution networks could prove misguided and present a heaven-sent opportunity for independent retailers, reports Michael Banks of the OAI management group.

Manufacturers are concerned. After several decades of controlling the retailing of product through the single franchise system, the noises from Brussels seem ominous. The power of the motor lobby may no longer be sufficient to renew Block Exemption as we know it. The race to protect solus manufacturer representation is on.

Mercedes Benz's recent controversial moves to control its retail distribution are unprecedented and causing much unease well beyond the Mercedes Benz dealer network. Less dramatic, but nevertheless significant, has been the growth of the fully manufacturer owned dealer groups of Peugeot and Renault, twelfth and fourteenth respectively in the latest Top 100 motor retailers with a combined turnover of over £1.2bn. Other marques are increasing their stake in the retail market or considering doing so.

Most major manufacturers are also evaluating their own version of Ford's market area strategy. Many have concluded that their number of retail outlets should be reduced on the basis that this will lower manufacturer overheads and increase volume throughput for the remaining dealers. The anticipated additional dealer profit will then enable the manufacturer to demand greater investment in dealer facilities. Perhaps this may appear good in theory but it is certainly not without considerable risk.

OAI believes this approach tends to ignore the marketing principle that the strength of product penetration (or market share) is closely related to the strength of distribution. Reducing the number of sales points nationally is not without its consequences. It will be recalled that when a similar exercise was undertaken by British Leyland in the early 1970s, dismissed BL dealers did not fade away as planned but formed a ready foothold for the Japanese invasion. It could be argued that the BL strategy seriously backfired in that it assisted the competition to prosper rather than increase its own profitability.

Table 1-
source: Sewells

It is not imperative to maintain an inefficient dealer network providing a viable alternative is in place. However, there is little sign of this. While we believe that e commerce has an important role to play, most web sites are still in their infancy and are certainly no substitute for a local dealer. Our studies of retail trends in the US also indicate that there have been no new retail models to follow, although With Block Exemption in the balance, moves by carmakers to prune their franchised distribution networks could prove misguided and present a heaven-sent opportunity for independent retailers, reports Michael Banks of the OAI management group.

AutoNation, as the major retailer, has established a dominant position with its manufacturer suppliers. Nevertheless, we are starting to see the closure of a number of dealerships across the UK, particularly in London where previously well known sites are lost forever as they readily transform into apartment blocks or major retail food outlets.

In addition to the deliberate reduction in dealerships planned by many manufacturers there is also the growing attrition of the property developers. For a family run concern, without an enthusiastic heir, the temptation to accept a large sum for the redevelopment of the dealership site is extremely strong. This is particularly so when motor retailing faces such an uncertain future.

The reduction in the number of dealers during the 1990s is shown in table 1, although it should be noted that the independents still remain greater in number. It can also be expected that franchised dealers will continue to decline at a greater rate as manufacturer strategies take their toll.

All this would suggest that the UK has far too many dealerships and that the time is well overdue for a serious rationalisation. But is this so?

There is no expectation that the annual new car market will fall below 2m. The used car market maintains its volumes and the car parc continues to grow. Public transport fails to improve, throwing ever greater dependence on car ownership. Reduction in dealer numbers is much more related to profit margins within the industry than the demands of the market.

Looking at the number of new car outlets per 100,000 of population, it will be seen from table 2 that the UK seriously lags behind the whole of Western Europe, with only one third the outlets of the major markets of Germany and France. Even accepting the geographical differences, the inference is that the UK has not too many outlets but too few. And this is before all the planned manufacturer reductions take place.

OAI has conducted research among car owners for nearly 20 years. It has been clear that the majority of respondents do not feel that the current motor retail structure is primarily designed for them but is modelled on the needs of the manufacturer. In other words new car franchises are geared towards the supplier rather than the consumer. This is not seen in any other major consumer market and is only permitted to continue as a result of Block Exemption, which offsets the natural trends of markets and consumer retailing.

If we put the dismissal of smaller franchise dealers, the resultant lack of sales coverage and the restrictions of the current franchise arrangements all together, it can be seen that there is a growing opportunity area for an independent force to rebalance consumer needs.

We have been close to a number of manufacturer retail strategies of late but not one has considered the possible strength of the independents and the prospect of their future role. That independents sell only used cars should not detract from the fact that many have been more successful than new car franchises and that, if Block Exemption is not renewed, they may well have direct access to new car sales and become a considerable threat to the new car franchise with its limited stock offerings. But how well prepared are the independent sales outlets for such an opportunity?

Table 2-
source: Automotive News Europe

The wide variety of size and standards within the sector would suggest that each operation needs to be judged on its merits. However, OAI considers that in principle the independents already provide a more appropriate retail model than franchised operations.

Except for "shopaholics", the majority of consumers intending to buy a major item have a good general idea of the product size and price that matches their need and budget. Accordingly they will concentrate their activity within this area. In other market sectors this is recognised and be it furniture, TVs or white goods, a choice of product and price is provided on one site by retail stores. Not so with a new car franchise which only offers one brand and often only one appropriate product within that brand. Car buyers are not interested in the manufacturer's range, simply the product reflecting their requirements.

Therefore, in order for the customer to compare the models of his choice it may well be necessary to locate and visit a number of individual new car franchises. This can prove inconvenient and time consuming and is certainly not a format designed for the customers' benefit.

By contrast the independent, to a greater or lesser degree, provides a number of purchase opportunities across a range of popular models at prices that reflect their true market value on one site. If, as we suspect, an important part of future car retailing will be based onsegmented .multi-franchise outlets, then the independents have already adopted the trading principles that much of the market requires. In addition the independent survives on his buying skills in an open market and does not remain in business if he fails his customers. Many of these attributes have shrivelled in the franchised sector and will need to be re-learnt.

This trend has been exacerbated by manufacturers' Approved Used Car Schemes. In 1988 franchised dealers were clear sector leaders in all makes used car sales. During the 1990s this was equalled by the independents who took the lead towards the end of the decade. Meanwhile, manufacturers' concentration on their own used car schemes was successful in increasing stock of their own marque models to provide a more specialist but restricted stock offering overall. Many might also claim that the manufacturers' used car schemes were more designed to provide a channel for fleet disposals than improve dealer market penetration. But that's another argument. What appears certain is that the manufacturers had a greater influence on their dealers used car operations.

We now turn to aftercare. The recent report by The Office of Fair Trading estimates that this market sector is worth £9.4bn a year and continues to grow. Franchised dealers enjoy 46 per cent of this, largely due to the influence of the new car warranty period, following which car owners quickly transfer to the independents. Car owners have been led to believe that it is necessary to take their car for service or repair to a franchised dealer of their marque to ensure warranty cover is maintained. As the OFT report points out, this is not necessary and leaves the new car franchise vulnerable to a more informed ownership body. At the moment it remains one of the world's better kept secrets but organised competition could change this.

OAI has asked car owners why they are so keen to leave the franchised dealer once their car is out of warranty. The answers are quite clear. The independents provide a more personal service, tend to be more convenient and give much better value.

These aspects are so strong that they overcome any doubts over abandoning the claimed benefits of specifically trained staff at the franchised dealer. A benefit that is disputed by the more demanding motorist and OFT report alike.

Why should this be? Perhaps the long held view that dealer overheads should be covered by service and parts profitability has led to a profit rather than a consumer service philosophy. Maybe the need to increase profit from this area as new car profitability falls is proving counter productive, or the comfort given by the warranty has been sufficient for the day. Whatever the underlying cause, the private car owner considers that, post warranty, franchised dealers are largely to be avoided. This pattern can also be seen among buyers of used cars on Approved Schemes. There would appear to be some recognition of this by the franchised dealers themselves, as little attempt is made to regain lost service custom in the belief that this is largely a lost cause. A dangerous precedent for their future.

Table 3 -
source: Automotive News Europe

As table 3 shows, the number of franchised service outlets in the UK is already at a lower area index than other major European markets and this time geography should be working in the UK's favour. On the assumption that remaining franchised dealers will continue to combine sales and service on the same site, franchised service opportunities will be even thinner on the ground. Yet it has been conventional industry wisdom, supported by OAI findings, that car owners wish to have their service facility conveniently located. Higher traffic density and pressurised life styles will increase this need. The 16,000 independent outlets should be able to take greater advantage of this trend.

However, the OFT report is scathing about the general standards of repair with franchised dealers providing poorer value than the independents. It states that the increased sophistication of car mechanics is bemusing the average motorist and many dealers are tempted to take advantage of this without providing the necessary training to their mechanics. The OFT intend to produce a consumer guide, within which will be an explanation of the correct position on warranties. If this guide becomes common currency many dubious practices will have to cease.

It can be seen from the forgoing that there is a need to provide more convenient and better value service. With a market of this size it can be expected that this opportunity will be addressed. It is, therefore, hardly surprising that this need has been recognised by the Chippenham-based Fleet Support Group who have recently launched Masterserve.

By combining the reach of independents with a higher set of service standards, they aim to challenge the existing fast-fit operations and franchised dealer servicing. While not yet a major force, they provide an example of what is to come.

And when looking to the future we can also consider the forces that already exist in the independent market. Although the used car supermarkets have had a somewhat varied career during the 1990s, a number have become established and accepted by sufficient customers as important outlets for used cars. OAI believes that car buyers would have little difficulty in accepting them as suppliers of new cars.

Also not to be overlooked are motor rescue organisations and/or Tesco's power and understanding of the retail market. Potential independents of a different order. To what extent will they take advantage of the situation? We know they are looking. Will the independents have their day?

Michael Banks is managing director of OAI Management Group, a strategic marketing management consultancy to the motor industry, operating since 1981.

To view related research reports, please follow the links below:-

Global Automotive Legislation

The Future of Automotive Distribution - Evolution or revolution?

The world's car manufacturers: A financial and operating review (download)