A Slow Death or a metamorphosis

Existing distribution models are not working. The current model for automotive distribution is characterised by low customer satisfaction, high cost and poor dealer returns. It is not working – for customers, for vehicle manufacturers (VMs) or for dealers. Publicly traded automotive retailers have experience the worst performance across the entire automotive value chain over the last two years. In the US, the PricewaterhouseCoopers Shareholder Value Index showed an average erosion of value of 59% over the two-year period ending December 31, 1999. The pressure for change is becoming ever more acute as VMs focus on both the need to become truly consumer focused organisations, and the cost reduction potential within the distribution network.

The Drivers of Change are Myriad

  • Increasing political focus on consumer protection
  • Sociological change bringing with it changing attitudes, increased consumer power and heightened buyer awareness
  • Environmental concerns and the pressure for a more eco-friendly society
  • Legal and regulatory reform, notably in Europe where the prospective abolition of Block Exemption in 2002 may open up geographic boundaries as never before.
  • But new technology is the key enabler which is turning potential into reality.

    New Models are Already Emerging

    The potential savings from B2C on-line retail models are estimated at $1,000+ per vehicle. The prize for those who can develop a winning formula is clearly worth chasing. New entrants provide a threat to the traditional, captive distribution systems control over automotive retailing. The drive to establish new and direct relationships with customers is at the forefront of the change process.

    Deal activity has intensified in 1999, both in terms of scale and breadth, as new channels to market emerge and the boundaries of the customer interface are extended.

    Ford’s acquisition of Kwik Fit for $1.6 billion was undoubtedly the most groundbreaking deal in 1999, and indicates that Jac Nasser, President and CEO of Ford, intends to rewrite the rules of the game. Another sign of the attention being paid to the customer interface has been the surge in activity in roadside assistance services. The UK’s three principal players all exited within a six month period in transactions with a total value of some $2.8 billion.

    Top Ten Deals in Automotive Retail, Distribution and Services 1999

    Target’s
    Activities
    Target’s
    Nat.
    Buyer
    Buyer’s

    Nat.
    Deal
    Value
    ($m)
    %

    Acquired
    Cendant
    Corp.’s PHH &
    Wright Express units
    Vehicle
    leasing
    US Avis Rent
    A Car, Inc.
    US
    5,200.0
    100.0
    Automobile
    Association
    Roadside
    assistance
    UK Centrica UK
    1,760.0
    100.0
    Kwik-Fit
    Holdings
    Auto repair
    centers
    UK Ford Motor
    Co.
    US
    1,600.0
    100.0
    Quaker
    State Corp.
    Auto consumer
    products
    US Pennzoil
    Co.
    US
    985.0
    100.0
    Arriva
    Automotive Solutions
    Vehicle
    leasing
    UK General
    Motors Acceptance Credit
    US
    821.7
    100.0
    RAC Motoring
    Services Ltd.
    Roadside
    assistance
    UK Lex Service
    Plc.
    UK
    703.5
    100.0
    Fraikin
    SA
    Vehicle
    leasing
    FRA Fiat SpA ITA
    596.2
    63.0
    Green Flag Vehicle
    breakdown recovery services
    UK Direct
    Line Group
    UK
    363.7
    UNDISCLOSED
    Plate Glass
    and Shatterprufe
    Automotive
    glass repair and replacement
    SA Investor
    Group
    BEL
    348.5
    UNDISCLOSED
    FirstAmerica
    Auto
    Auto retail US Sonic Automotive US
    241.0
    100.0

    The opportunity within Europe to exploit cross border price differentials, combined with greater public acceptance and high profile publicity of the potential for cross border sourcing, has led to a range of web based alternatives for consumers.

    VMs continue to develop and market test their factory direct models, whilst the range of alternate independent retail and distribution channels facing the consumer is multiplying at speed. 1999 has seen the emergence of many new on-line B2C models for the sale, delivery and service of new and used vehicles – dealer direct, dealer referral, buying clubs, direct sales and auction sites have all seen varying degrees of market penetration.

    The extent to which the various on-line retail models are reliant on existing bricks and mortar operations varies, however the trend towards direct supply is inexorably gathering momentum with consequent impact on the future of existing channels as volume is progressively diverted to on-line alternatives. Dealers need to be more flexible and nimble than ever before in order to survive and flourish.

    Traditional dealer groups have not stood still in coming to terms with the new competitive landscape, although many have chosen to exit. Transaction volumes have increased 25% over 1998 levels, as the erosion of value generally seen in the sector forces stakeholders to price the risk associated with the uncertainty in determining the winning distribution model of tomorrow.

    The benefits of scale in the highly competitive world of financial services continues to be a key driver of M&A activity, as the captive finance arms of the VMs and the major global financial institutions continue to do battle for the remaining jewels in the independent vehicle leasing market.

    So what of the future for Bricks & Mortar Distribution Channels?

    The poor shareholder performance of the retail sector plus its role as automotive’s “touch point” with the consumer, ensures that this sector will undergo intense scrutiny, experimentation and ultimately, dramatic change in the years ahead. The catalyst for that change will be the potential of E-Technology to allow manufacturers to strengthen customer relationships and develop multiple brand images.

    The costs involved are significant. It is estimated that over 25% of the cost of new vehicles is tied up in distribution and marketing. Substantially reducing these costs and increasing their effectiveness is more than a dream. Some VMs have linked local customers, dealers, suppliers, and employees via the Internet. By doing so, VMs can reduce levels of finished vehicle inventory and suppliers have the ability to send and see real-time information. Dealers can enter customer demand information, track vehicles in the order process, and amend orders up to the point of production. Obviously money is saved and these on-line breakthroughs allow VMs to better focus on the consumer.

    Depending on the country, the power of the Internet will either substantially change, or completely eliminate, the dealership network as we know it. In the US, where the dealer network is well established, almost entrenched, functionality will change, but deal activity will still be generated by a need to establish a scale that is consistent with the ability to develop customer relationships and a brand image apart from the manufacturer. Indeed, if an independent dealer network doesn’t do those two things it has no reason to exist.

    An almost direct control of retailing process by the manufacturer has been experimented with in the US, but with mixed success. State franchise laws serve as significant impediment to further experimentation, and their complete removal from the books is unlikely in that the manufacturers also benefit from certain aspects of the law, especially the symbiotic relationship with the dealer franchise agreement.

    In this environment, future retail change (and resulting deal activity) in the US promises to be more collaborative, less contentious. And, given that the VM and retailers have already ventured down some dead ends in recent years, the future direction of change is becoming clearer.

    Although dealerships will better link with their customers and improve the use of the resulting wealth of customer information to their advantage, they will also leverage that information with the manufacturers so that VMs truly can become VBOs. Likewise, even though manufacturers will increasingly focus on building strong one-to-one relationships with their retail customers, a retail channel – maybe much changed and diverse, but a retail channel nonetheless – will remain. Indeed, enabled by E-Technologies retailers will enjoy a greater opportunity than ever to add value and create shareholder wealth.

    At the present time we are in a significant period of change. New channels are being explored, adding further cost, without eliminating the redundant assets and processes inherent in the traditional retail and customer service models.

    As assets are redeployed up and down the value chain, the one certainty is that non value added processes will be eliminated and that the most efficient and most capable member of the extended enterprise will end up with the task – and the associated revenue.

    This should drive future independent retail deal activity, away from a simple search for scale economies (although that remains a necessity), and towards acquisitions that improve processes and build a brand separate from, but not in conflict with, the manufacturers. The alternate model, in which VBOs increasingly exercise more significant influence over the customer interface, will also be evaluated. Ultimately the customer has a choice and will dictate the nature and extent of the asset reallocation.