In seeking to install the most appropriate means of marketplace representation – in terms of both geographical coverage and cost effectiveness – vehicle manufacturers typically have been rejigging their franchised networks on a continual basis for a long time. Arthur Way reviews the carmakers’ latest efforts to cut distribution costs in the UK.
This has played a major part in network shrinkage, with the number of franchised agreements over the past 20 or so years having roughly halved from more than 11,000 to the current estimated level of less than 6,000. This reduction is all the more significant when taking into account the arrival of newcomers such as Daewoo, Hyundai and Proton which have been building up their outlets.
With network rationalisation at one end of the spectrum and the filling of open points at the other, recent years have seen a growing number of carmakers formulate ‘market area’ strategies. This involves dividing the country into territories and appointing a single organisation to distribute vehicles within each area. In some cases this can be achieved through a single site, but typically there will be a ‘core’ outlet which supports one or several satellites.
Unlike in previous times when some companies appointed main and retail dealers – the latter acting as independent operators who received their supplies from the former – the market area concept envisages common ownership within the territory and hence minimises any conflict of interest between the outlets which may otherwise exist.
The approach to market areas varies from company to company when it comes to the finer details, but all broadly follow a similar pattern and share the same basic aims. In essence, development of the market area concept recognises vehicle manufacturers’ efforts to streamline dealer relationships by forging closer and deeper links with a limited number of strong partners who have sound financial foundations and are able to invest in premises and facilities which deliver high customer satisfaction.
For dealers, it should mean that they are able to offer consumers a more consistent service over a wider area by increasing the effectiveness and efficiency of their promotional and other activities. One simple example is that a general manager with responsibility for several outlets will perform the job more effectively if the sites are in a cluster rather than spread throughout the country. Additional advantages include the opportunity to cut costs by exploiting economies of scale in back office functions and implementing central and common systems.
What made the Mercedes-Benz move into market areas so radical was the company’s intention to seize direct control of around a third of the distribution territories.
An example of the growing size and scope of market areas by manufacturers bent on further consolidation of their networks is provided by Volvo. At the beginning of 1997, the company’s 220 outlets were replaced by 113 territories with 180 sites. Many of these territories comprised a single outlet while others had two or three. There was also a notable consolidation in ownership, with the network in the hands of just 80 organisations compared with the previous 130.
At the time of this first reorganisation Volvo awarded its dealers a five-year fixed term agreement. When this expired at the end of last year, further reorganisation saw the establishment of larger territories. The network now contains 95 territories with 150 sites and 60 owners. This means that in little more than five years the number of individual Volvo dealerships has fallen by around one third, while the company’s distribution partners have declined by more than half.
Future developments within the Volvo network are expected to be more evolutionary than revolutionary. There’s a strong probability, however, that market area development by Ford’s Premier Automotive Group will result in dealers assuming responsibility for distribution of all the PAG marques, including Jaguar and Land Rover, as well as Volvo. In a similar manner, the link-up between Renault and Nissan is leading to the formation of joint dealers with expanded market areas. This is part of a combined strategy to cut costs by adopting a ‘hub-and-spoke’distribution system.
Adding a dramatic twist to the market area concept was the move by Mercedes-Benz towards the end of 2000 to issue one-year termination notices to its entire network. This was accompanied by a decision to divide the UK into 35 marketing areas with 175 representation points.
What distinguished the Mercedes-Benz approach was the company’s intention to secure greater control over distribution through ownership of outlets. At the time of the termination announcement, Mercedes-Benz indicated that it wanted to control around one third of these marketing areas itself and, in addition, establish three Mercedes-Benz Experience Centres to serve London, Birmingham and Manchester.
Although manufacturers and major dealers believe that the establishment of market areas has brought benefits in terms of both customer satisfaction and operating efficiencies, there’s also the feeling it’s caused among those who have lost their franchises. For those who survive, there’s often prolonged upheaval as they relinquish sites in market areas where they were not appointed and take over others.
On the surface it may appear that market areas favour the major publicly quoted dealer groups such as CD Bramall, Lookers and Reg Vardy. However, vehicle manufacturers stress that there is still a role for independent groups which demonstrate the necessary credentials.
Vacillation by the European Commission over the timing and impact of the proposed changes has led to uncertainty among vehicle manufacturers and dealers alike, but there seems little expectation that fundamental change will occur in the short term since few dealers are expected to take full advantage of their new freedoms. Market areas cannot prevent consumers from sourcing cars from outside their ‘area’ or dealers from selling outside of theirs.
Looking ahead, it is apparent that much still needs to be done to secure maximum benefit from market areas. Synergies are far from being fully exploited at present with the result that vehicle manufacturers are looking to direct assistance towards their dealers to deliver them.
It would also be wrong to suppose that market areas represent the best way forward in every case. Some of the more marginal producers have little option other than to appoint dealers on a piecemeal basis and rely on them to do their best. Even some of the larger players are expected to supplement their core dealers with smaller independent operators to ensure adequate coverage.