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Why the influence of the top 20 groups is starting to slide

It is not so much change that defines whether an industry is going through turmoil but the pace and unexpectedness of its direction. If you cannot make a reasonable guess at what is going to affect you, it is difficult to manage risk, let alone drive a decent return on your capital.

The automotive industry has long been plagued by complexity, in part of its own making. Representing many brands in many parts of the country produces more alternative outcomes than the average manager can cope with, and there are too few of the exceptional kind.

Despite the imminent and unpredictable change in Block Exemption, and all the other emerging challenges, the direction and rate of change appears to have become more predictable. There also appears to be a consensus on the idea that complexity is a bad thing and also avoidable.

Much of the uncertainty of the past 18 months has been resolved. Prices have fallen and manufacturer intentions are clearer, however unpopular the plans of some may seem. The economic climate appears reasonably encouraging and the cost of money is forecast to remain low, so retail buyers should feel fairly safe in making long-postponed major replacements.

The impact of complexity also seems to be clear. The best returns are not made by the larger groups which seems to be reflected in the overall size of the major players. In a general atmosphere of consolidation, the top 20 groups now control a slightly lower percentage of the market than they did the previous year. And the best return on shareholders' funds continues to be among the medium sized players.

The future is unlikely to see a reversal of this trend because of what is best for the manufacturer and for the customer.

Carmakers would like to see their brands represented by those who do it single-mindedly and are the best at customer service. They would also like to manage fewer relationships and be exposed to less risk from financial instability inherent in that collection of relationships.

Larger groups may have better access to equity and cheaper debt than smaller companies. But simple statistics make them worse at customer service and brand representation.

If you are large, no matter how good your processes, you won't get it right everywhere all the time. And however good your brand managers, the individual who lives and breathes their business in a less complex environment will also get it right more of the time.

Financial strength based on size and access to financial markets comes with strings. The City is notorious for its short-termism and somewhat patchy understanding of the sectors in which it invests. City expectations will often rule out holding an ailing franchise until it recovers, often to the detriment of the manufacturer and of the business. The business must then invest in change for a period that may not see a return on that investment, for the same reason that caused it to be made in the first place.

The largest organisations must constantly trade franchises in and out to maximise portfolio returns, with the obvious impact this has on continuity.

Manufacturers prefer to see solus representation and have done, with more or less conviction depending on the economic climate and their individual fortunes.

But they also want businesses which can invest large sums of money and have the scale and access to funds that makes them a better bet in the survival stakes.

Over the past 10 years or so this has driven the consolidation of the industry, producing Pendragon, CD Bramall, Lancaster, Vardy and Inchcape. But it also caused the exit of Evans Halshaw, Lex, Appleyard, DC Cook and Whichford.

For each of the successes, the brand owners have seen a disaster. The search for strong companies to represent them has brought only turbulence and uncertainty.

So, the search is on for specialists who have the reserves to ride out storms, the inclination to do so and a passion for the brand.

Exit stage left the plcs - enter stage right the entrepreneurs who want to keep businesses private, manageable, profitable and dedicated to a small number of relationships.

The only way to produce the investment required to operate in the larger metropolitan areas is for manufacturers to take a hand. That means total control if you are Mercedes-Benz with its new retail strategy.

Fiat handed the London area to Pendragon but that did not work out - the switch to several smaller Fiat specialists so far looks good.

Peugeot and Renault already cover most of the metropolitan areas with their own dealerships, currently without noticeable detriment to the independent owners. Of course, this has not always been the case.

Most manufacturers see some version of the market area approach as the way to go. Dealers need more units per outlet to succeed. The customer, if anything, wants to travel lower distances to buy or have their car serviced.

Manufacturers' goal is to reach 80% of the market more cost effectively. This means fewer dealer groups running more outlets, more mid-sized groups and more manufacturer-owned sites in high cost areas. And for the remaining 20% of the market, anything goes.

This does of course mean some casualties at the smaller end of the market, particularly where equity reserves or return on equity is low. But it also means some remarkable opportunities for a number of those who have already prospered in difficult times. And it does not sound the final death knell for the owner driver - there will be room for them in 20% of the market and even room for some in the new market areas.

The only sector that looks set to lose market share and also continue to generate unacceptable returns is that inhabited by the largest, and with only a few notable exceptions.

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