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.
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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.
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Table
1- NUMBER OF UK DEALERS |
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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?
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Table
2- FRANCHISED NEW CAR SALES OUTLETS |
 |
|
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.
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Table
3 – FRANCHISED SERVICING OUTLETS |
 |
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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.
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