Dealer consolidation on course to continue post-Brexit

Owen Edwards 05 Dec 2018

The UK franchised dealer sector is the most consolidated in Europe, but there is appetite and room for more merger and acquisition activity.

The rate of consolidation has picked up

The consolidation of the UK’s franchised dealer sector will continue into 2019 and beyond although the rate at which it happens will be dependent on whether Brexit begins on 29 March with or without a deal.

Dealer group consolidation has characterised the sector for decades, we believe that the UK is the most mature in Europe with the top 10 groups accounting for 48% of the dealer market by revenue¹.

As the second biggest new car market in Europe, behind Germany and ahead of France, the UK offers a model of evolving consolidation and a high average new vehicle throughput per outlet. In 2017 the UK dealer headcount stood at 4,622 outlets trading an average of 549 new units per site; a higher throughput from fewer sites than Germany (306 average new units per outlet) and France (346 average new units per outlet)².

The sector has taken decades to reach this point. In 1976, the earliest date we have for new car registrations, there were approximately 10,000 franchised outlets serving a market with 1.28 million registrations³. By 2016 the number of outlets had more than halved to 4,678 although the market for new cars had more than doubled to a peak of 2.6 million⁴.

The higher output per site can be explained by the relative strength of retail sales in recent years, accounting for 44.2% of the new car market in 2017, and an increase in some fleet volumes now typically going through dealerships, as showrooms increasingly become handover centres for some company cars.

The best performing dealers are also harnessing the latest digital technology to generate, manage and fulfil leads.

Although the rate of consolidation slowed during the recession, as hatches were battened and buyers stayed out of the market, it has gathered pace since. In 2008 there were 4,939 dealer outlets and by the end of 2018 the total is estimated to fall to around 4,580⁵.

Brand attraction

Consolidation has seen many of the largest groups by turnover grow significantly in recent years through the tactical acquisition of businesses judged to be earnings enhancing and strategic.

Successful acquisitions have been based on achieving economies of scale and increasing representation with target brands; the high unit gross margins offered by premium marques proving to be particularly attractive.

Audi, BMW and Mercedes-Benz have all seen significant volume and market share growth in recent years with the average number of units sold per franchised outlet tracking at over 1,200 units in 2017, higher than any other brands and significantly ahead of the average of 549.⁶

For the acquisitive groups, especially the listed ones, these brands continue to punch above their weight with high unit outputs from relatively low numbers of sites compared to the volume brands. For these groups the potential to boost returns is too good an opportunity to miss with all three brands offering high profit per unit potential on new and approved used cars, in turn delivering high levels of profit per asset.

Further consolidation

Recent years have seen the emergence of more groups with revenues in excess of £1 billion with these businesses occupying the top 15 positions in the 2018 AM100 listing of the UK’s biggest franchised dealer groups by turnover.⁷

The top performing group is the US-owned Sytner which grew dramatically in 2017 with the acquisition of The Car People and CarShop, both non-franchised car supermarket chains, taking its turnover to £5.7 billion.

The £5 billion plus club is expected to grow with further acquisitions likely to take place as the bigger players look at opportunities amongst the privately-owned groups with turnovers of between £200 million and £500 million; attractive targets for their potential to deliver scalable growth. The continued appetite for acquisitions was expressed by a number of the plc dealer groups in their recently published results

Falling number of sites

Against this backdrop of consolidation is a falling number of franchised sites which can be attributed to a number of factors including natural attrition and owner-operator family businesses, many without succession plans, exiting the motor trade to realise freehold investments. Car manufacturers have also been reviewing their representation, a process likely to be accelerated as the result of actions taken by Vauxhall and Volkswagen, respectively the UK’s second and third biggest dealer networks.⁸

Since being acquired by the PSA Group last year, the under-performing Vauxhall brand issued its 326-strong dealer network with two year termination notices in April 2018. A small number of these sites have already closed.

Stephen Norman, Vauxhall’s new UK managing director, said the restructured network would settle at “around 250” with a 40% rise in new car sales per site to more than 400 units.⁹

Meanwhile, Volkswagen has announced plans to introduce a new digital based retailing model across Europe by April 2020. The programme will see the brand offer direct sales as it plans to significantly increase its online proposition to cover more products and services.¹⁰

New sales and service formats will be introduced across the Volkswagen network. Each dealer will only be required to operate one “full-centre” facility offering sales and aftersales under one rooftop and will be able to shape their representation, in agreement with Volkswagen, with a mix of city showrooms, pop-up stores, “service factories”, used car centres as well as “scalable full-feature” dealerships.

Volkswagen has yet to say how its ambitious restructuring plan will impact the number of sales sites it expects to have in the UK, although dealers were required to sign new contracts by the end of November.

Who will be consolidating?

Publicly Listed Companies

The listed groups will continue to make acquisitions, but they are likely to be even more selective in what they buy, avoiding businesses with unrealistic multiples. However there is the requirement to make further acquisition in order to grow earnings, gain the benefits of economies of scale and increase national representation.

Internationals

Interest from international investors has increased in recent years with acquisitions in both volume and premium brands.

Growth in international investment has been facilitated by a weak exchange rate, increasing the attractions of UK-based assets following the Brexit referendum. In October the Dubai-based AW Rostamani conglomerate took a majority stake in the family-owned multi-franchise Brayleys Group, saying it would grow its presence in the UK automotive market¹¹.

The key international players which have taken an active role in consolidation in the market are the US-owned Penske Automotive Group (owner of Sytner) and Group 1 Automotive; Far East-based Lee Shing Hung and the Jardine Matheson-owned Jardine Motors; and the South Africa-based Super Group and Motus.

Private companies

Both small and large privately-owned dealer groups are likely to continue to buy in order to increase their local market presence through targeting contiguous territories.

Acquisitions made in this sector will continue to be mostly for a limited number of sites rather than larger dealer groups..

Final thoughts

The consolidation of the franchised dealer sector will continue although the rate is likely to be slower than we have seen historically. The main influencing factors will be the unknowns posed by Brexit and the increasing maturity of the UK dealer sector, although even with a reduced pool of medium to large sized targets, there are still earnings enhancing opportunities for the acquisitive groups.

For more information on consolidation in the franchised dealer sector contact Owen Edwards.