A spate of dealer consolidation is set to take place as dramatic changes in the market boost the dominance of large motor retailer groups, according to HSBC Bank.
A continuing decline in profitability largely due to slumps in the value of used cars by around 20%, coupled with the Government's new car pricing reforms both mean that smaller dealers will find it hard to keep their businesses financially viable.
In addition the development of online distribution will also play into the hands of the larger groups.
The findings are contained in the HSBC Bank report, 'The Motor Trade - A Rocky Road Ahead' by Mark Berrisford-Smith, senior economist in the bank's business economics unit.
An analysis of the accounts of more than 2,000 motor trade businesses reveal that while returns in the car retailing sector are traditionally 'meagre', they have deteriorated in the past few years.
The bank claims that in 1999/2000 the average return on capital was 5.5%, while 16% of firms reported an operating loss, compared with 10% two years earlier. Although debts continue to be cut and lower interest rates have helped margins, says the report, remain "uncomfortably tight".
As a consequence of the Government's Supply of New Cars Order 2000 - the result of the Competition Commission's investigation into new cars in the UK - the ability to negotiate discounts with manufacturers will give the large dealership groups 'a clear advantage over their smaller counterparts', according to the report.
The new rules, which prevent manufacturers from discriminating against dealers when offering discounts to fleets, only apply where cars are paid for outright.
The report says: "This will mean an end to the widespread practice of dealers taking stock on a 'sale or return' basis. This will bring risks to smaller dealerships which cannot manage stocking levels on a network basis as can the larger players. It is also likely that smaller dealerships will be disadvantaged when negotiating discounts."
With e-commerce activity also playing into the hands of the large dealer groups the report says: "The net result of all these developments is likely to be a renewed rush to consolidation; the increasing dominance of the large dealership groups in the new car market and a reduction in the number of outlets."
Meanwhile, manufacturers are in the process of rationalising their dealer networks.
As well as reducing the number of dealers manufacturers are also assigning larger franchise areas and demanding higher standards of premises and servicing.
Mr Berrisford-Smith concludes: "The face of motor distribution could well be markedly different in a few years time, losing its unique character and coming to resemble most other areas of retailing.
"While franchised dealers will doubtless welcome the recent revival of demand they must also recognise the Government's recent reforms will also be the catalyst for much more deep-seated changes. In many respects their business environment will become more uncertain and the fact of a stronger market may not be enough to protect them from the winds of change." But industry experts think the trend towards consolidation among dealers is nothing more than a natural cycle.
Alan Pulham, franchised dealer director of the Retail Motor Industry Federation, said: “We are likely to see some consolidation within franchises, and Volvo and Mercedes are already looking at that. We have seen groups getting bigger and swallowing other groups, but almost inevitably consolidation is followed by fragmentation.
“For example, although there is nothing wrong with Pendragon, it has been selling dealerships and changing its portfolio of franchises.” He said if a dealer lost a franchise, it would not be difficult to find another one and the manufacturers would suffer through fewer sales.