Increased consolidation in the dealer networks

Owen Edwards 14 Jun 2019

The automotive industry is in a period of transformation that will impact everyone in the supply chain.

Automotive OEM’s are facing significant capital investment and looking to partner, in order to meet their research and development requirements, so they can stay ahead of their competitors and abreast of new technologies. The consequence of this investment is that OEMs and their national sales companies need to reduce their downstream cost bases. So what will be the ramifications for the franchised dealer network?

Increasing the pressure

OEMs face mounting pressure to reduce their costs to fund the ballooning investment required to deliver electrification, develop autonomous driving technology and offer mobility as a service (MaaS) solutions, while also keeping pace with changing regulatory and consumer demands.

As part of this process we are seeing OEMs review their costs, both in the upstream and downstream. In the downstream distribution model, there is expected to be further costs reductions in both the national sales companies and also the dealer network in order to fund these sizeable investment project.

Fewer franchised dealerships selling more vehicles

There has been a slow decline in the UK of the number of dealers, this has been through consolidation and general closure of dealers. The automotive retail sector has seen the number of dealers more than halve between 1976 and 2016, even though vehicle registrations have doubled in the same period to 2.6m units.

This is likely to continue with increased consolidation in the retail networks and the requirement to gain a better return on investment, whilst costs continue to rise in the network, driven by increased regulatory changes and staff costs.

As the dealer outlet get less in the future, the dealers which survive will be larger and sell more vehicles per outlet. The optimisation of working capital is critical in the downstream sector.

OEMs are reaching the conclusion that small cost savings in around the edges of the dealers network are no longer viable and that bolder strategy is required to reshape the dealers network, for the benefits of the OEMs, dealers and consumers.

With these pressures in play, the franchised dealer model is expected to look significantly different in five years’ time.

Volkswagen, is one business that is already planning to ensure that its sales organisation fit for the future, as it fundamentally realigns its sales model together with its dealers. The new model, which is expected to be launched in Europe in April 2020, will provide seamless individual round-the-clock support for customers going far beyond vehicle sales on the basis of a unique Volkswagen customer ID. The car buying experience itself will also change. On-line sales are to be massively expanded and direct sales are to become possible. New sales and service formats such as city showrooms or pop-up stores are to be added. At the same time, the sales organisation is to become more flexible and efficient¹.

Driving change

The UK’s new car market was down 6.9% in 2018 but with 2.4 million registrations reported by the Society of Motor Manufacturers and Traders, the year still ended at a historically high level². We have already seen further weak demand in 2019 with the latest vehicle registrations down -3.1% May 2019 YTD.

Last year the market was impacted by the introduction of WLTP (Worldwide harmonised Light vehicle Test Procedure), the stricter EU emissions testing regime. It had a profound impact on the availability of compliant cars from some OEMs with many dealers unable to source and sell some models.
There is a close correlation between the Consumer Confidence Index (CCI) and the purchasing of cars. The reality now is that the CCI is low, with Brexit uncertainty playing a part, and consumers are delaying purchasing decisions.
The market acceptance of Personal Contract Purchase (PCP) has seen a fundamental change in the way consumers fund cars. Renewals proved to be a useful lever for dealers to offer customers competitive PCP deals on another new car prior to the end of their contracts, driving up registrations. However, we are now seeing PCP deals running to full term and in some cases they are being extended and this will have an impact on registrations.
Margins on new cars continue to be squeezed to a point where it is extremely difficult to make a profit on a new car sale. Dealers now face the prospect of trading reduced volumes on tighter margins.
During the recession the National Sales Companies (NSCs) supported their networks by building in additional margins into new cars. But with car brands now looking to reduce costs support is less likely from the NSCs, which means retailers have to find a way through and they are doing that by selling more used vehicles and their aftersales.
We are seeing the rise of some highly professional non-franchised used car supermarkets. These are big facilities with large stocks and are far more competitive than they have ever been. This is starting to have a profound impact on the franchised dealer network, especially as they compete for the same stock.

Creeping consolidation

The level of consolidation in the franchised sector is illustrated by the top 10 dealer groups accounting for 44.8% of total revenue in the sector³. The big dealer groups are getting bigger and there is room for more growth, making it even more challenging for the small and medium sized dealers.

The large dealer groups we talk to are typically receiving a number of business acquisitions proposals as some dealers and dealers groups look to exit the industry. However in a number of cases the consolidators are looking to grow with earnings enhancing businesses; many of these are being turned down as the consolidators are looking to grow with earnings enhancing businesses.

Reduction in the size of the dealer network is also being driven by a number of OEMs cutting the size of their networks. NSCs are being held to account by their owners and important decisions are being made outside of the UK, making this a challenging time for the franchised sector.

PSA has said its Vauxhall network will be significantly downsized.
The Audi and BMW networks are being restructured – discussion mainly taking place in Europe.
Volkswagen has revealed how its future network footprint will be smaller but consist of bigger sites, handling more servicing and online requirements.

In five years’ time the franchised sector will look quite different with fewer outlets operated by fewer owners. The market is
currently served by 4,583 dealer sites, averaging 516 new car units per outlet. A network reduction of 10-20% by 2023 looks a likely scenario with around 4,125 outlets selling 574 vehicles per site, or 3,666 selling 646⁴.

Ensuring your business is future-fit

The automotive retail sector remains a highly operationally geared business. A small change in revenue makes a sizeable difference to profitability because of the high level of fixed costs and the working capital employed. Therefore there is the requirement to have the optimal level of working capital in both the NSC and automotive retailers as this impacts cash which is critical in difficult markets.

With such a high level of risk we can help franchised networks to define and refine the best sites in terms of working capital and the optimal level of cost savings within those dealerships to make them future-fit.

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

Optimising working capital

The external environment is causing disruption in the automotive sector but there are still areas that we believe can be influenced by managing working capital and cash.

The value chain in the automotive industry, from component suppliers, OEMs and NSCs to dealers -- and ultimately the consumer -- is a high intensity working capital industry, so optimal working capital is critical for survival.

Dealers are unable to influence volumes set by OEMs but they have the potential to drive down costs in stock management across new and used cars and parts. Stock management is difficult to manage well, and optimising working capital could present operators with cost saving opportunities to achieve better optimisation.
There is high staff turnover across the sector which has a major impact when individuals with detailed knowledge of the stock ordering leave as processes are not always written down. This is an area which can be easily addressed with formal processes.
Generally dealer principals have a rudimentary understanding of finance but there is a requirement for them to have detailed knowledge of balance sheets and cash flow in order to optimise the dealers working capital requirements .
Typically there is less than efficient communication between the OEMs and the supply chain, so volumes that have been ordered do not always factor in changes made to production.
Meanwhile, Tier 1 suppliers are heavily dependent on one or two large customers so their commercial terms are largely dictated. Tier 2 and Tier 3 suppliers often have limited access to finance due to their positioning in the supply chain and may have poor management of payment terms.

We can facilitate better management of working capital across the automotive supply chain. Our experience shows how improvements can be achieved downstream in stock management and receivables and upstream in inventory and payables.

Our underlying key to success is achieving sustainable optimal working capital.

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