In our 2020 automotive insight report with Cox Automotive, released in November, we highlighted the big changes already taking place in the sector relating to alternatively fuelled vehicles, digital customer journeys, the subscription economy, and connectivity. It would be naïve to think that traditional automotive business models were not already coming under pressure to evolve.
Since the last recession in 2008, automotive market consolidation and restructuring of dealer networks have already made an impact, with a number of large acquisitions. Examples include Marshall Motors Holdings Plc acquiring Ridgeway, and Lookers plc acquiring Benfield Motors. National sales companies have been reducing the physical footprint of their dealer networks while others have pulled out of markets or model segments. Examples include Ford reducing 180 of its sales franchise dealerships, Mitsubishi exiting the UK market, and the move from city cars to SUVs.
It comes as no surprise that 2020 accelerated some of these automotive industry trends, with 2021 expecting to see more change. The impact of a COVID-19, weak economic markets and leaving the EU has pushed companies across many sectors, including automotive retailers, into survival mode.
In a Cox Automotive dealer sentiment survey completed for the 2020 insight report, a third of respondents (33%) indicated that they expected the number of UK franchise dealer outlets to decline by 11% or more by 2025. This is in line with or above current rates of around a 2% decline, year-on-year.
Around a quarter (24%) of respondents expected to see the same level of decline in the independent sector. In contrast, a third (33%) expected the independent sector to remain flat or increase over the same time.
For used car supermarkets, the news was even stronger, with around a quarter (24%) expecting to see the number of outlets increase and 58% expecting the number of used car supermarkets to remain flat over the next five years.
The distinction between these three market segments is perhaps no longer as clear as it once was, however. This is due to the growth of digital sales channels and direct-to-consumer retail, as well as the increase in used car business and ongoing consolidation in the market.
In some cases, large dealer groups are already focusing, or considering a focus, on digital used car operations, which are being classified as used car supermarkets. Examples include Arnold Clark Motorstore. It is arguably a natural move for dealers to expand into a market where costs of selling vehicles are lower and the volume of vehicles sold is high – if done correctly. Recently the owner of Sytner Group - Penske Automotive Group indicated that it would take the Car Store brand to the US, expanding its used car supermarket process into other countries.
Used car supermarkets have been quick to evolve digital and e-commerce strategies and there have been several new entrants in this market. Examples include Cazoo. Due to the large amounts of vehicle stock required as a used car supermarket Cazoo has subsequently acquired Imperial Cars to deliver a larger physical presence, as well as recently expanding into vehicle refurbishment - a move into a new vertical part of the used car market.
Consolidation in the automotive sector slowed in the last global recession and, at present, the number of acquisitions in 2020 was limited. These were predominantly small dealer groups or individual dealerships, of which most were already in the pipeline before lockdown. We anticipate acquisitions will increase in the following three ways, however.
In downstream markets, we believe there will be other opportunities for consolidation and restructuring among fleet and leasing companies and automotive manufacturers. In the first instance, current fragmentation in the fleet and leasing sector may be overcome through consolidation. Many such organisations are diversifying into the broader mobility as a service (MaaS) environment, meaning there may be fewer but larger companies in the medium to long-term.
Within the automotive manufacturing space, PSA has already acquired Vauxhall/Opel and has successfully merged with Fiat-Chrysler Automobiles (FCA) Group to create Stellantis. There are three key complementary trends at work in this space.
Firstly, there will be further consolidation of the manufacturers because the investment required to meet changing EU and China vehicle emission targets will continue to increase. In order for the original equipment manufacturers (OEMs) to generate profits from expensive-to-produce electric vehicles and pay less in the way of emissions fines, they will need to gain economies of scale through manufacturing large numbers of electric vehicles.
Secondly, there will be additional brands or new brands in the market. New brands such as Nikola are coming to market, while long-established manufacturers are spinning out their electric vehicle brands, such as Hyundai’s IONIQ. When this spin-off was announced, Hyundai’s share price increased by 10%. Creating such new brands, based on this evidence, can add shareholder value. Geely has a similar strategy with its brand Polestar.
And finally, the investment in electric vehicles (EVs) and connected and autonomous vehicles (CAVs) has meant that joint ventures are becoming more common, as seen by Fisker partnering with Magna to manufacture its Ocean electric SUV.
Increasingly there have been a number of IPO or reverse takeovers (special-purpose acquisition companies) in order to source investment from equity shareholders. NIO listed on the US Nasdaq in 2018 and more recently this was followed by Li Auto, a Chinese EV/hybrid automotive company, taking advantage of the meteoric rise of the Tesla share price.
To stay ahead of a changing UK automotive industry, it is critical that businesses develop a strategy which is viable for both the short and long term – one that can evolve as the situation changes. If carefully planned, this should provide opportunities for survival in the short term as well as organic or acquisition-founded growth in the medium to long term.
Running an organisation which survives, or even thrives, in these conditions requires having a strong grip and a short-term three-month rolling business plan to ensure management is focused on performance and cash flow. We recommend organisations review planning in line with at least three scenarios: best, middle and worst case.
Communicating an evolving business strategy is critical in order to ensure effective implementation. Many strategies and plans fall by the wayside due to poor communication. We propose setting targets for all of the senior management team and then filtering this down.
If the business is in survival mode, it will be important to conserve cash, so this should be reviewed regularly in order to act quickly if needed. A short-term focus should be placed on day-to-day changes, such as how to increase sales volumes/vehicles, hours sold and parts sold. Areas such as margin, costs and so on will take longer – perhaps weeks or months.
Looking longer term, there will be changes in the automotive industry across the supply, distribution and retail market. As new patterns and ways of working come to the fore, management also has the difficult task of considering the medium and long-term strategy of the organisation. This may well mean adapting the overall vision and aspirations, and perhaps a realignment in expectations of what can be achieved.
For further information on the challenges facing the automotive industry, contact Owen Edwards.