Playing the consolidation game

Paul Smith of Traka Automotive looks at the trend for large dealer groups to continue getting bigger and looks at what it means for the rest of the market.

It is clear from studying the activity of the larger franchise dealer groups over the last few years that the prevailing view is that biggest is best. Arnold Clark (currently seventh largest group in Europe with revenues of 3.1bn Euros) has been buying up independent groups like John R Weir and most recently Ness Motors. While Marshall Motors bought Astle Group and Crystal Motor Group before raising £40m through a recent AIM listing presumably an even more ambitious buying spree. Acquisition stories abound. While others like Jardine, Sytner (Penske) and Inchcape are already multi-country goliaths.

Across the pond, last year the top 150 US groups now own 3,453 dealerships which is 19% of the US market (up from 16.4% just a year before) and represents 22% of total US sales. Although benefits of scale seem to wane if you study the growth of the mega groups – in the last 10 years the top 10 US dealer groups have only edged up total market share from 8.1% to 8.6%.

However it is clear that the number of independents out there is steadily falling and this trend is not restricted to the UK. In 1970 there were 30,800 independent dealerships throughout the US. Some 43 years later in 2013 this number had nearly halved to 17,600, according to the National Automobile Dealers Association (NADA). In the UK there has been so much independent capacity lost in recent years that cracks are now appearing in areas like body shops where there just aren’t enough across the country to handle demand.

The management consultancy McKinsey & Company’s ‘Innovating Automotive Retail’ February 2014 study recorded an average 15% fall in the number of dealerships in both the US and Europe in the last five years to 2014. For example over that time Germany saw a fall in numbers of dealerships from 16,000 to 13,300.

There is also no doubt that franchise dealerships are heavily influenced by what the major car manufacturers are trying to achieve and many are seeking to aggressively grow sales and market share as the recession abates.

However there is a flip side to all this relentless quest for growth amongst the big groups. As groups snap up smaller independents and franchise chains, those independents that remain are benefitting from offering an increasingly compelling alternative to the big franchise operators. Many of them are effectively niched – offering well-priced service and repairs and expertise in specific types of vehicles. They can also read the local market well because they make it their business to do so - many have been doing so through several generations of one family’s management living and working in the same area.

It is clear that smaller independents and franchise operators are also less beholden to manufacturers. They carve their own road much more. So the independent owner-manager ‘local hero’ dealer can build a business which best serves his local market. Customer service experience can be more personalised and aftersales retention tends to be higher than in the expensive-looking franchise outlets which demand higher hourly rates and rigid service plans.

So the big players have had it all their own way for the last few years but independents may yet find they will enjoy a bounce back to them over the next couple of years. Certainly many in the market believe that these things are cyclical and if this is the case then it is high time the pendulum began swinging back in the direction of smaller players.

But what stands in the way of this swing may be speed of adoption of the next generation of dealership technologies as well as digital marketing. The larger groups have the deeper pockets needed for early adoption of new technologies and new ways of reaching out to prospects. Audi for example has been busy rolling out a set of standardised digital marketing tools to its dealers (SEO, banner adverts, eNewsletter packages etc.). BMW has created product Geniuses to try to ratchet up the customer experience, having realised that one of the main reasons people walk into a car dealership is to get the inside track on the latest cars.

Manufacturers are clearly finding it easier to increase sales by concentrating their firepower on fewer larger groups. That way they have to re-educate fewer people, and change fewer processes around them. The larger groups, in turn, are more dependent on the manufacturers to meet giant and ever-growing sales targets.

Some of the big dealerships increasingly feel like extensions of the car makers’ own brands. They express those brands through a uniform dealership ‘look and feel’ which builds brand awareness, loyalty and engagement. The next stage for these big groups is to communicate their staff’s product experience and expertise that’s why test drives and ‘Genius’ insight is so important.  From there you are likely to go back to the dealership to complete the car sale, purchase F&I and return periodically for parts and servicing.

McKinsey’s study also advocates that manufacturers and large dealer groups explore a multi-format retail approach: separating out Test Drive Centres which can serve several dealerships in close proximity; from Superstores which offer the extensive range of cars which many customers are looking for early in the buying cycle. They also advocate smaller City-based dealerships which are there to offer would-be customers the first experience of a car.  Early pilots of this multi-format approach in Germany look very encouraging.

Through these and other formats, the consultancy argues, the dealer group can hope to have multiple touch points with the customer. But this only really works if data from all these touch points can be integrated effectively and the data crunched to deliver real insight to dealership staff at the right time.

This demands heavy investment in the next generation of CRM and DMS-based solutions. Arguably this kind of investment needs to be driven by manufacturers and only delivers sufficient Return on Sales where dealerships are really large.  And surely only the largest groups are likely to have sites in all those different locations? The reality is that the transformational journey that some of these larger dealer groups are now on is a long and difficult one.

Encouragingly from the point of view of the smaller independents much of what they are trying to engender through change is a customer experience which is exciting, compelling and multi-faceted. It needs to keep them coming back. There is every possibility that smaller players can achieve much of these gains simply by continuing to focus on improving what many of them do well already i.e. serving the customer well. Owner-operator independents (and smaller franchise operators) are often best placed to deliver better customer service because, quite literally, every customer does matter to them personally. Many of the small players hold onto their customers from the purchase of their first car, through servicing of that car and then part-exchange and purchase of the next.