An independent study into the future of car retailing in the UK and the European Union, recommends that the current system of exclusive distribution should end, and that selective distribution should remain, but in a much reduced form. 

The research study finds that exclusive sales territories and exclusive manufacturer branded dealerships restrict inter-brand and intra-brand competition and customer choice in the car market.  However, the study finds that car manufacturers should retain the right to select retailers that comply with defined quality standards, but that manufacturers should no longer be allowed to restrict the type and number of retailers they deal with.

The year-long study carried out by independent motor industry analysts MFBI, comes at a time when the European Commission is considering whether to renew the motor industry’s Block Exemption from European competition law to operate a selective and exclusive distribution system for car sales and servicing.  The current Block Exemption is due to expire in September 2002, and MFBI’s report has been submitted as evidence to the European Commission that the current Block Exemption should be replaced by a new regulation. 

MFBI’s report says that a new regulation should be adopted that no longer exempts manufacturer’ exclusive distribution agreements from European competition law, and that only a much reduced form of selective distribution should be exempted.  MFBI believes that it has been the ability of car manufacturers to impose

“rigid quantitative and qualitative restrictions …  which has restricted competition”

rigid quantitative and qualitative restrictions upon franchised dealers under selective and exclusive distribution, which has restricted competition in the supply of new cars and aftersales services.

Selective distribution enables car manufacturers to both choose and restrict the type and number of resellers they deal with, while exclusive brand dealerships effectively prevent consumers from making direct comparisons between competing brands at a single point of sale.  The study says that allowing car dealers and other retailers to sell several different competing brands at a single point of sale rather than just one brand, would increase competition between brands, produce greater downward pressure on new car prices and increase customer choice.

The ending of exclusive distribution agreements would therefore enable car retailers and dealers to become multi-franchise operations selling several makes side-by-side under one roof.  Currently dealers are not allowed to sell more than one brand at one site unless it is physically separated from other brands and under separate management.  MFBI’s consumer research from the study shows that most car buyers regard brand exclusive dealerships as a restriction of customer choice.

Robert Macnab, MFBI’s senior partner and co-author of the report says that consumers want multi-franchise sales outlets.  “If they are trying to decide between three models from three different manufacturers, they don’t see why they should have to travel several miles from one dealer to another just to make a comparison.  They think there should be more choice under one roof.” 

To an extent, the development of the Internet has gone some way towards increasing competition and customer choice in the new car market, but the MFBI study finds that the Internet still has a long way to go before it replaces physical retail outlets as a primary distribution channel for new cars.  This is because most consumers are reluctant to buy large-ticket items unseen over the Internet and want to retain the “touchy-feely” experience of buying a new car, or at least seeing a new car in a showroom before they decide to buy.

There are several options open to the European Commission to reform the Block Exemption Regulation including liberalising the current system to the extent of allowing a laissez-faire free-for-all market to develop.  MFBI discounts such a solution by saying that consumers would benefit more from higher service and repair standards under a reduced form of selective distribution, rather than a market free-for-all.

Fundamentally, MFBI’s research finds that selective and exclusive distribution has restricted competition in the car industry by preventing new competitors from entering the market to compete directly with the manufacturers’ dealer networks.  A new regulation that would effectively prohibit car manufacturers from operating selective and exclusive distribution in its current form, would help create a more liberal and flexible market in which new competitors would be able to enter the market and sell new cars. 

MFBI believes that a new regulation would allow a wider range of competitors to enter the market including banks, other finance companies and multiple retailers.  It would also allow used car supermarkets to legitimately extend their activity into selling new cars.  Under the existing regulations, car manufacturers can refuse to supply other retailers unless they agree to sell only that manufacturer’s range of vehicles, and they can also limit the number of resellers they deal with.  This effectively protects car manufacturers from price negotiations with more powerful distributors and retailers.

“Until .. September 2000 .. franchised dealers were unable to obtain the same discounts .. as the large fleet companies”

Much of the furore over new cars in the last few years has mainly concerned the differences in the list prices of new cars between the UK and other EU Member States, and also the difference in prices paid for new cars by fleet companies and the manufacturers’ own dealer networks.  Until the introduction of the ‘New Car Order’ in September 2000 by the UK government, franchised dealers were unable to obtain the same discounts on new cars ordered from manufacturers as the large fleet companies. 

MFBI’s research shows that the majority of dealers in the UK, except the larger dealer groups, are too small in comparison with fleet companies to take advantage of the New Car Order and obtain the same discounts on new cars as large fleet companies.  A new regulation that liberalised the current distribution system would enable larger retailers to demand bigger discounts from car manufacturers, which would place greater downward pressure on retail prices. 

MFBI says the current system should be liberalised to allow retailers to form buying groups to prevent the existing smaller franchised dealers from being squeezed out of the market on price by larger and more powerful retailers.  In reality, the Block Exemption enables car manufacturers to operate a tied distribution channel that is effectively obliged to sell every unit of production that the car manufacturers supply to it.  This means that dealers are currently forced to sacrifice their own profitability to maintain a high level of car sales that is demanded of them by the manufacturers.
Low dealer profitability from selling new cars therefore effectively subsidises car manufacturers’ excess production capacity.  MFBI finds that the quid pro quo of low dealer profitability from new car sales is higher profitability from service and repair operations.  This is achieved by providing dealers with a captive market for servicing and repairs within the manufacturer’s warranty period, which now extends to three years for most car brands, plus a captive market for OEM replacement parts.

Failure to have a car serviced by a manufacturer’s dealer network invalidates a new car’s warranty.  MFBI’s research says this results in franchised dealers obtaining a 78% share of the UK service market for cars up to three years old, which falls to 40% for cars aged four to six years when they are no longer covered by a manufacturer’s warranty.  This virtual monopoly of the service and repair market results in higher service costs in franchised dealers but not necessarily higher standards when compared with independent service and repair garages.

MFBI therefore believes that the provision of car servicing and repairs should be separated from car sales, with independent garages allowed to become manufacturer approved service outlets if they meet and comply with objective quality criteria.  Car manufacturers should not therefore be able to exclude independent garages from becoming manufacturer approved service and repair outlets if they meet the required standards. MFBI’s study also recommends that all service and repair outlets in the UK should be licensed by local authorities. 

To purchase the full MFBI report, click here