ANALYSIS: UK Franchise dealers set to lose half their fleet service business? We don’t think so - MTS Knowledge
MTS Knowledge analysts say dealers could match independent labour rates through new efficiencies made possible by the block exemption. Cutting OE parts prices alone won't work, because fleets spend little on parts anyway.
Franchise/independent service price differentials are worth as little as one tank of fuel a year - before counting in added-value courtesy cars, etc. Manufacturers could afford to make dealer service fully competitive with subsidised maintenance contracts.
Delegates to an aftermarket conference in November heard from co-sponsor IBM Automotive that leasing companies and fleet operators would soon leave franchised dealers' service departments with only half the 75% share of fleet servicing they now hold - and that independent garages would only have to cut service prices by up to 20% to encourage consumers to switch from franchised dealers too. Manufacturers would have to cut parts prices to stop the stampede, since dealers could not reduce their labour rates.
Analysts Toby Procter and John Genge from MTS Knowledge, the new independent online automotive knowledge resource, have countered these claims with an analysis of the make-up of service costs and assessed the risks and opportunities available to service providers post-block exemption.
First, they say that at least some franchised dealer groups could reduce their labour charges, if they exploit their new freedoms to consolidate multi-brand service offerings and to operate more efficient, multi-brand parts operations to improve their margins.
Procter and Genge note that no absolute comparison between franchised dealers and independent garages is easy, given the enormous variations between garages' labour rates in each sector. Many dealerships' charges are similar to those of national servicing chains.
But the two conclude that on average, the franchised sector would have to cut labour rates to see off any increased threat from independents in the fleet servicing sector - because reducing OE service parts prices to match independents' non-OE prices would cut no more than 5-6% from typical volume franchise dealer service bills.
An independent garage's £99 menu service price typically undercuts a dealer's routine service bill by just under £30, or just over 21%. Parts account for well under half of either invoice.
Barring warranty repairs, a fleet car uses only about £100/£150-worth of parts over a three-year lease, depending on mileage. Switching service provider offers little scope for savings until cars reach the 40,000-mile service, when cam belt changes incur higher labour charges. It is with older cars that service and repair costs rise, and with them, the absolute differential between more and less expensive suppliers.
The latest clarifications from the European Commission on the authorised repairer clauses of the new block exemption suggest that manufacturers may have to make it slightly easier than some anticipated for independent garages to meet their criteria. They may rent rather than own some infrequently-used tooling, sub-let car washes or courtesy transport, avoid buying brand-specific diagnostic equipment, for example. If these concessions prove sufficient to swell authorised repairer numbers, they may offer franchise servicing at lower labour rates than some dealers, and provide a 'third way' for fleet customers to save money.
However, MTS Knowledge believes the variable but often only slight cost difference between franchise and non-franchise fleet service provision will leave little room for authorised repairers or independents to win profitable new business in what is anyway a declining market.
But Procter and Genge do have a positive suggestion for those who wish to retain their fleet and consumer service custom: Consider following the lead established by Daewoo and then BMW, and offer free or at least competitive service contracts to new car buyers, so that the real cost of servicing is transparent and predictable, and the revenue assured.