Understanding the car supermarket phenomenon

Sales of new cars began dropping off significantly from the start of Q2 2017 as dealership bosses finally called time on excess pre-reg and demo stock piling and began requesting OEMs to lower sales bonus targets to more realistic levels as the four-year long new car sales boom ran out of road.

The Society of Motor Manufacturers and Traders’ (SMMT) full year 2017 sales numbers told the full story by reporting a 5.7% drop on 2016 numbers, leaving 2.5 million new cars registered. Diesel new car sales fell by 17.1% as higher Vehicle Excise Duties, local pollution-linked taxes and continued ‘diesel bashing’ in the media hit demand.  The SMMT predicts a further new car sales fall of 5.4% to 2.426m for 2018.

However, it seems that some of the larger dealer groups saw the new car sales drop coming and began diversifying to reduce exposure to declining margins (and now potentially volume) of new car sales as early as 2016.

Sytner has perhaps led the diversification game by buying two top 10 used car supermarkets in the last year alone. In its quest for scalable growth and high return on capital growth, it bought CarShop in early 2017 and followed that with the purchase of The Car People which is set to complete within the next few weeks. Sytner is serious about expanding its used car division aggressively. Its chief executive, Darren Edwards, is on record as wanting to build the largest car supermarket group in the UK within the next few years.

These two acquisitions are clearly the cream of the growing car supermarket crop but what is it that successful supermarket operations do which impresses the likes of Mr Edwards so much? Firstly, used car sales generally offer better margins than new car sales.

Secondly, there are clear synergies between franchise-heavy groups and supermarkets as it offers the group’s franchise dealerships the opportunity of offloading part-exchange stock more profitably by passing them onto their own supermarkets to sell.

Thirdly, the best car supermarkets have large sites in great locations, offerings space for a huge volume and range of used cars, as well as highly efficient sales processes and staff designed to move all that stock through those sites at top speed and do a good job by the customer. They also tend to get their demographic analysis spot on, making sure that cars which are likely to be of interest to people living close by are present in number.

However, the ‘secret sauce’ of many car supermarkets’ strategy is, somewhat paradoxically, also an ability to niche, not necessarily by marque but by type of vehicle. CarShop specialises in three-to-six-year-old cars which means it is less exposed to book drops and stock write-downs. It sells over 18,000 vehicles and generates approximately £225 million in revenue each year.  Saxton has developed a specialisation in high-end 4x4s from recognisable, largely prestige brands. While Big Motoring World sells more than 20,000 used BMW, Audi, VW and Mercedes Benz cars each year.

As well as concentrating hard on sales and operational process efficiencies, they also tend to simplify ways of remunerating staff. Many now operate fixed bonus schemes regardless of the value or type of car sold. This sort of blanket approach means that customers are less likely to be pushed into the wrong vehicle (for them) and less likely to be miss-sold additional add-ons they don’t want. Customer service scores tend to be higher as a result.

These scores feed into the other area which they’ve generally stolen a march on franchise dealership cousins - digital marketing. They were early into showing strong online image libraries and more recently video of stock online. They were also early adopters of customer service scoring systems. They focus hard on getting new stock looking great and well-presented on their website fast. They were early adopter partners of used car-focused online intermediaries like Carsnip and AutoTrader.co.uk.  So, they learnt more, more quickly, than many franchise players and their stock tends to be closer to the top of the search rankings as a result.

The stage is now set for 2018 to be ‘the year of the car supermarket’, if current economic sentiment is anything to go by. The 2012-2016 new car sales boom years, which saw significant back to back new car registration annual gains, are clearly over for the time being.

Annual New Car Registrations 2000 to 2016

There are many factors at work pushing this trend but new car sales growth on that level simply cannot keep going for ever before some kind of correction occurs. Some of this is just cyclical, some of that growth was stoked by the PCP financing revolution. Whatever the causes, the digital savvy car supermarkets with the right niches, focus on offering desirable cars, with good provenance, selling from large well-located sites, supported by well-trained staff; with strong business processes and customer service ethic, will be the ones to watch. Don’t expect Sytner’s sales numbers to drop any time soon. Indeed, you should see its profits further boosted this year as The Car People and CarShop begin to show their profitable colours on Sytner’s bottom line.

This article originally appeared in Car Dealer Magazine