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‘More retailers will close’

The rate of closure of dealerships will accelerate unless vehicle manufacturers ease the financial pressures they are placing on their franchises.

Over the past 15 years, more than 2,200 outlets have closed, leaving the industry with 5,901 dealerships (source: Sewells Franchise Networks 2004 report).

That stark warning comes from Alan Pulham, franchised dealer director of the Retail Motor Industry Federation, who was speaking at the AM Financial Management conference in November.

“We are in the midst of a manufacturer imposed cost explosion,” warns Pulham. “The sector is at a financial crossroads. The price of vehicles is dropping in real terms, as are dealer margins on new car sales and servicing, while property and labour costs are rising.

At the same time, manufacturers are demanding more and more investment in corporate identity, decor, technology and equipment.”

Pulham argues that although block exemption revisions have encouraged more competition in the car retail sector, the demands enforced by some brands put them out of reach of some of the smaller dealer groups.

He highlights the risks faced by owner-driver franchises, who in trying to keep up with investment requirements may become over-exposed to cashflow issues, citing the recently collapsed South Cleveland Garages as a prime example.

“There’s a case across the whole industry for people to look at sensible cost levels,” he adds.

Nevertheless, Pulham believes the dealers that survive the “worrying decline” could stand to benefit, as a strong economy and higher new car sales are shared between fewer companies.

And he suggests it presents those owner-driver franchisees seeking to leave the industry with an opportunity to sell to larger groups, which can acquire existing sites more cheaply than building afresh.

The automotive retail industry has undergone significant change over the past 20 years. When the original block exemption regulations were introduced in 1984, 8,500 retailers were selling 1.75m new cars while there were 700 service only points. Ten years later there were 1,000 fewer dealers and only 160 service-only points, although new car sales totalled 1.91m.

In 2003, a year after the latest block exemption revisions, the number of dealerships had fallen to 5,900, service-only franchises increased to 275 outlets and new car sales hit a record 2.58m.

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