Retailers may have a tough time profiting from selling cars when conditions are good. When recession bites, the going can get very tough indeed. When this is combined with EU legislation which attempts to introduce major changes to the established system of retailing, major pain can occur. Mike Wattam reports.
Many would have us believe that franchised car retailers are on the point of collapse, but is that really true when this has been said many times by many people in the last 10 years or so?
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The new Block Exemption regulation has introduced many potential changes into the way car makers control and organise their retailing networks. How are the car makers adopting this legislation? Is it with due regard for the spirit or to the letter of the regulation, and what opportunities are they generating to make changes their retailers and the consumer body will look upon favourably? The available evidence indicates that the omens are good for the lawyers and conflict between the Competition Commission and a number of VM’s.
Across the EU, retailers are certainly not homogenous. Different markets have different regulations, consumer needs and basic wealth. What works well in one market may not work in another, indeed why should it? However in some cases there are considerable missed opportunities.
Should retailers continue to change as an evolutionary process and analyse their business to ‘lean’ them out to improve currently non-existent profitability, or is revolution really needed when conventional franchised car retailing is under such great pressure from the VM’s, consumer bodies and alternative channels?
The economic environment and background
Whether the current state of the world auto industry should be interpreted as in recession or not, for most car manufacturers the current priority is to stay in business. Large and modern production plants – characteristically with high break-even volumes – demand that excessive volumes of cars are sold into a wide range of markets largely led to high volumes by intense inter-VM competition, and leading directly to price reduction techniques of one kind or another.
It can be argued that the auto industry is cyclically reliant upon general economics, probably with some delayed and less negative reactions. VM action to maintain volume when consumers are reluctant to spend, probably causes this. But the fact remains that world demand is much lower than total economic production capacity and while this situation continues, then intense price competition will continue to focus on consumer transaction price. Therefore most VM’s gamble on slashing chain profit contributions to the bone in the hope of squeezing out enough unit sales to add at least ‘something’ to their bottom line.
Of course there are exceptions; those VM’s who for the time being have one or more model ranges in high demand due to fashion or merit. Again, this is cyclical and in 2003 we have seen some previously highly successful VM’s losing both volume and market share – PSA, Volkswagen and Porsche are examples.
Economic cycling and VM reactions have pushed car retailers for most brands to the point where new car department profitability cannot be attained, and selling new cars can be justified only on the basis of being a primary source of:
- retailable quality but lower priced used cars,
- in-house finance and insurance commission earnings,
- after-sales parts and service business,
but these sources of profit contribution are also being steadily eroded.
A methodical approach to taking cost out – lean distribution – has been taking place for a few years. This has prompted structural change in car retailing to reduce waste by streamlining functions and promoting mergers and acquisition activity.
In future better times, the VM’s having persistently given away valuable sales contributions through their retailers, are going to find it very tough indeed to re-grow those margins to any worthwhile extent without some form of adverse consumer reaction. While there are signs in late 2003 that a few VM’s are subtly raising their list prices, it is too early to suggest that any positive effect will be seen at the bottom line.
The imminent collapse of the traditional franchised new car retailer has been forecast by many motor industry pundits for some years, yet it has still to happen.
Consumerism will become stronger and as the car is seen less as an object of desire and more as a commodity providing transport, the emphasis on price will continue to grow stronger – both in terms of investment and in running cost.
The current block exemption in Europe
Why is the block exemption so attractive?
Because:
- the auto industry feels the need to be insulated from the attack of alternative retailing channels which will cause traditional franchised retailing to collapse, and huge numbers of people will be put out of work,
- car retailing is much more specialised than the legislators imagine, and only franchised retailers can offer that expertise,
- consumers need to be protected from untrained unfranchised opportunists
But maybe a car retailing industry which is apparently so vulnerable to lower cost retailing channels (which might even work despite conventional scepticism) needs to be significantly re-thought?
With the advent of the information world via internet, it is very easy for a car-buying consumer to be better educated than the car salesman, so is expertise in this area important or even wanted today in traditional franchised car retailers?
And with the increasing reliability and durability without servicing which the modern car is normally able to endure – without any VM yet admitting their cars are maintenance-free – is after-sales expertise really needed any longer?
The current block exemption changes
The European Commission translates its corner-stone ethos of into legislation, and in this case we focus upon competition in which a global ‘level playing field’ is sought. However in the past recognising that car retailing is a significant industry in most European countries, the Commission was prevailed upon to protect traditional franchise car retailers on the bases that this was indeed a large employer industry which needed to be protected, that offered expertise which untrained new market entrants could not muster.
However, process specialist representative organisations outside the franchise network and lobby groups purporting to act on behalf of ‘the consumer’ (this briefing does not attempt to analyse their true motives) have successfully argued that process specialists in niche areas of the car retailing industry may indeed be able to do a similar job at a lower price, and thus please the consumer.
Accordingly, previous attempts to regulate and free these new entrants into a ‘level playing field’ have largely proven futile. The auto manufacturing industry is a powerful lobbying force too, and operationally it has shown itself to be nimble in meeting the letter of each new BE regulation while perhaps not adhering to the true spirit of the Regulation. In practice the VM’s continue to make life very difficult for anybody outside their established systems. Maybe this is not intentional.
Current V.M. actions
The latest round of BE changes about to be enacted in 2003, seek to reinforce legislation to promote competition in the areas of:
- Access by process specialists to the franchise as listed franchisees, in specific single or multiple functions such as car retailing, parts supply, service/repair,
- Freedom of technical information and equipment supply to independent after-market specialist retailers to enable them to service new cars,
- To enable retailers to sell/service multi-brands under one roof,
- To enable non-franchise ‘equivalent’ parts to be supplied to cars within or outside warranty at any time in accordance with retailer or customer needs.
The first-mentioned change has caused a considerable amount of franchise re-alignment by VM’s as process specialists can now become franchisees in that specialist process. But, there is covert evidence that VM’s are making the ‘standards’ requirements for such retailers so strict, that it will be virtually impossible to comply, e.g., on site parking is not a particular strength of these specialists – never mind whether parking is a practical requirement.
You could well be excused for thinking that after so much wailing and gnashing of teeth, the VM’s have a weakened hold upon retailing, but this does not appear to be happening. Quite the reverse.
The legislation has forced the VM’s to re-write all their dealer agreements. The VM’s in turn appear to have seized this as a major opportunity to re-align their franchisees, in many cases insisting upon ever-higher standards of investment and operation yet again. Again we see a reduction in the number of owners while VM’s are promoting multi-site operation by retailer owners, and in some cases the VM’s have increased their portfolio of ownership of retail sites. Thus, VM’s have to a considerable degree tightened their grip upon what actually happens in retailing. Was this the intention within the new Regulation?
It could be argued that once these retailers have increased their levels of franchise-specific investment, jumping to another franchise becomes ever-more difficult. New investment and transitional income costs could become impossible to finance. Maybe the VM’s are aware of this.
Brand profitability vs block exemption
It should not be forgotten that retailers will jump through hoops of fire to retain good relationships with their VM’s, when those VM’s have a profitable brand in high demand. In this kind of relationship, Block Exemption is merely an irritating diversion to be tolerated by all participants.
Thus, most VM’s are currently struggling to attain brand power as much as they are struggling for short and medium term profitability.
Will there be a future for block exemption
If the ‘powers that be’ in the Competition Commission understand how the VM’s have complied with the wordage but not the spirit of the current regulations – and having already received complaints this will happen if not already understood – then prosecution will follow if there is not a re-alignment.
The probability of a watered-down version of a further Exemption is almost nil, if the current circumstances are allowed to prevail.
The vehicle manufacturer view: channel distribution issues
VM’s are familiar with – and like – aspects of the single-channel distributor to retailer relationship. For the time being, it suits them to have third party organisations making large investments with little prospect of sustained profitability, yet selling large volumes of their cars. It suits them to keep consumers at arms length, because most consumer contacts are ‘dirty’ – that is there are trade-ins, or negotiations to be conducted. It is much more profitable to push cars out of the factory gate and let somebody else worry, even when retailers add significant costs into the retail price of cars.
If there is evidence that the retailer(s) might be making a fair profit, the VM will ‘adjust’ the financials to ensure the retailer remains financially hungry – by juggling factory gate prices, consumer incentives and retailer bonuses a higher net margin is retained in the VM’s funds.
VM’s are also used to by-passing the retailer when they want to, for instance to make very large fleet deals direct with fleet operators at high discounts or to dump pre-registered cars on unfranchised used car supermarkets. To keep franchised retailers sweet, they very often channel supply/delivery and PDI to their favoured retailers when making direct sales to fleets or via the internet. But a ‘lean’ infrastructure already exists to supply cars direct from factory gate to customers.
When times are financially tough, the VM will stringently apply cost reduction techniques in distribution and retail wherever possible and it remains fashionable to ‘lean’ distribution as far as is considered possible at present. Retailing remains relatively untouched by this, so far.
Regional distributors
Regional distributors (or National Sales Companies – NSC’s) handle the franchise for the VM, and as far as the buying public is concerned these organisations are transparently the VM – even though in some cases they are either independent or joint venture organisations with the VM.
In these times of extremely easy inter-organisational communication, it appears that these organisations may be becoming at least partially redundant and it is relatively common for one NSC to ‘run’ 2 or 3 countries from one geo-location – retaining staff with multi-lingual capabilities. This rationalised supply chain becomes easier to control when supply and after-sales processing (e.g., warranty) can be handled electronically from remote locations – it is even now becoming ‘smart’ to use customer contact centres based in India or other low-cost countries, although consumer reaction has yet to strike through here.
V.M. – distributor – retailer relationships
It has been noted that the VM will whenever possible keep individual retailers as financially hungry as possible by juggling pricing, discounts, bonuses and services to maximise the profit/contributions retained by the VM.
While it suits the VM – or the regional distributor – to publicly refer to the franchised retailers as ‘partners’ when the VM is disinclined to attempt to directly invest in retailing, within the VM there remains a strong feeling that retailers do not contribute greatly to the sales processes, but consume a disproportionate amount of money – and in general VM’s would like to ‘lean’ retailers out of the equation when they can.
Thus in truth the VM may well view the retailer network with suspicion and dislike and remain open to quantum change by-passing their appointed retailers. This could be a danger for franchisees under the new BE.
Similarly, retailer networks often view the VM’s with little regard, knowing that if they could do without retailers, they would and accordingly see VM declarations of ‘partnership’ with some scepticism especially when their contacts with VM’s indicate little understanding of them, their customers or the retailing processes.
V.M. ownership of retailing
For VM’s, there comes a point in (lack of) profitability of the selling processes, brand value, residual prices and control of the retail network, when ownership of at least an influential portion of the retailing network is important to retain control of retailing and profitability.
Just such a point has been reached in 2003. Increasingly there is evidence that VM’s directly – or through their regional distributors – are increasing effective control of retailing by investing in the purchase and running of retail outlets. Thus, if strategic locations are chosen in cities and close to large fleet or consumer markets, a VM can largely influence the market for the remaining privately owned retailers in the areas of:
- the terms upon which new cars are sold including finance subsidy/excess
- the levels at which residual values are set
- used car pricing
- making a semi-captive market for parts usage
Such market involvement is characterised by large volume sales and thus tends to be prevalent in the indigenous sales market for the brand concerned – for instance M-B and BMW use ‘Niederlassungen’, and Renault and Peugeot use ‘Succursales’ in their home and other high volume/contribution markets. Thus maybe 50% of the retail car market can be controlled, leaving the smaller independent retailers to sweep up small fleet volumes and genuine retail sales.
VM’s act in a similar way in non-indigenous markets where there is a higher unit profit contribution and/or volume to be achieved – the UK is a good case in point with Peugeot, Renault, BMW and Mercedes Benz being prominent players.
It should be remembered that the primary objective in VM ownership of strategic retailing is not to directly profit, but to control retailing and to possibly build a fail-safe future distribution if the BE is not renewed next time round.
Whilst past experience shows that VM’s had made a poor fist of running retail outlets, there is mounting evidence that they are getting much better at doing this.
The current BE regulation does not regulate the relationship between wholly-owned retailers and ‘the factory’ and thus ownership of retailers may make much of distribution and retention of any profit contributions easier for the VM’s.
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