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Block exemption: Whatever happened to the brave new world of retail?

Eighteen months ago, Europe’s automotive industry began operating under revised block exemption which promised a brave new world of massive consolidation, slashed prices and mounting pressure by independents on franchised dealers. So why has no one in Britain heard the Big Bang?

In reality, the industry is slowly adjusting to changes which give retailers more freedom while allowing carmakers to retain much of their influence.

On the plus side, say many, the new rules do offer opportunities, but there is a major downside for dealers: manufacturers are raising standards which means that showroom and workshop costs are rising, too. Bureaucracy is also increasing, say most dealers, and this has to be cut through before bonuses can be earned.

The European Union says the effects of the new regulation are being felt and it is investigating complaints that standards imposed on independents to become authorised repairers are too tough.

In the UK, the Department of Trade and Industry and the Office of Fair Trading are watching developments carefully, but saying little.

Raising of barriers

Jonathan Todd, European Commission competition spokesman, says dealers are already taking advantage of entitlement to operate different forms of outlets.

“Alternative models are slowly emerging to challenge the old one-size-fits-all format,” he says. “More dealers are selling extra brands in the same premises, and others are clubbing together to give themselves more clout.”

Todd says many standalone authorised repairers are opening across Europe, and the EC is investigating concerns that carmakers have raised barriers by imposing onerous standards.

“This is a serious allegation, since excessive standards are likely to restrict competition for the repair of newer vehicles,” says Todd. “Vehicles tend not to be repaired in independent garages during the first few years, so the only competition is between authorised outlets. If artificial barriers are used to keep the numbers of such outlets down, competition will suffer.”

Now, the industry is bracing itself for the final phase of revised block exemption. From October, when the regulation’s ‘location clause’ goes, dealers will be allowed to open a sales point for any vehicle franchise they hold anywhere in the EU, and some groups are thought to be poised to use vacant dealerships to expand in the UK.

Pendragon has a stake in Germany’s retail motor industry but few other AM100 groups have shown any interest in expanding into mainland Europe. Taking the letter of the legislation literally, the location clause would allow retail groups from other EU countries to gain a foothold in the UK. This is unlikely, because of consolidation among Britain’s franchised automotive retailers during the past decade, and the complication of investing in a country outside the Eurozone.

Colin Hainstock, managing director of Harrogate-based Nidd Vale, has experienced two contrasting effects of revised block exemption. He has four franchises in one outlet but says he is becoming entangled in manufacturers’ red tape.

“We added Mazda and Seat to a Vauxhall/Saab showroom with no walls between the brands – without the changes, the four sections would probably have been separated by walls,” says Hainstock. “We have 100 cars in a ‘motor village’ which makes it easier for customers to make a choice. We benefit from shared back office savings.”

Hainstock’s problem is that manufacturers have made his life more complicated. “They have leapt on the standards bandwagon because of the location clause and have raised the bar to prevent the wrong people getting in,” he says.

“Bureaucracy is becoming a bit of a nightmare and I’m not always sure what a manufacturer means, even after reading a letter two or three times. Nevertheless, you have to understand the content and act on it, otherwise you’re in danger of losing part of your bonus.”

Change of climate

At the other end of the scale, Fred Maguire, the chairman at billion-pound turnover Lookers, says his group has also felt the effect of the switch from front-end, sales-related bonuses to payments based on the results of customer satisfaction surveys. “All manufacturers are raising standards which makes it more difficult for someone to come into the sector,” he says.

Maguire believes in loyalty to chosen manufacturer partners and is wary about the location clause change. “I expect dealer groups with properties to use them as a way of moving into territories, but narrow margins mean you need 100% of the business in a territory to make it viable,” he says.

“Two groups taking 50% each makes no sense and we would not try to steal business in that way. We are ready to respond if someone does it to us and then it’s down to who has the deeper pockets.”

Clive Sutton has judged this to be the ideal time to move out of selling Chryslers and Jeeps in north London under franchise, and to start his Premier Marques business (he finds expensive cars for wealthy clients, and provides a personal service).

“I’m not anti-franchised dealer but believe a different motor retailing climate under new block exemption presents opportunities,” says Sutton. “The separation of vehicle sales and aftersales is opening new service channels for independents – it is a chance to approach the market in different ways. Premier Marques operates at the very top of the market but you could operate a personal service in other market sectors.”

Sutton points out that manufacturers have increased factory-owned and operator-leased sales points to retain their influence as the market becomes more liberal.

“Volume manufacturers are taking advantage of a more liberal market to sell large numbers of new or pre-registered cars with large discounts to dealers who sell them under list price,” he says. “It’s a question of who can grab hold of and own the customer, and who is controlling the market place.”

Intra-brand competition

Manufacturers view the effects of the new regulation in a different way. Jim O’Donnell, managing director of BMW (GB), is characteristically outspoken.

“Most UK dealer groups outside the top 20 feel their future is less certain due to the ability of other dealers to set up new sales outlets, multi-franchise sales outlets, delivery outlets or approved workshops on their doorstep. There is very little evidence customers want or need such new entities,” says O’Donnell.

“The balance of power between manufacturer and dealer may have shifted slightly but the relationship is always best based on trust, not on who holds the best cards in the deck.”

O’Donnell says the EC naively expected car prices to tumble across Europe but manufacturers are under significant profit pressure. “The location clause might increase the fiercely-fought intra-brand competition to such an extent that discounts on new cars will damage residential values, and that the total life cost of a customer’s car will increase,” he adds.

What about the volume carmakers? Paul Thomas, managing director, Ford of Britain, says manufacturers’ national standards now play a more important role in ‘representation management’.

“We have kept standards focused on key performance metrics, representation and customer satisfaction,” he says. “Some manufacturers have been more demanding, and this may increase the costs to their dealer network. Smaller, rural dealerships have to sign up to the same standards as large groups and proportionally there is a heavier financial and organisational burden on them.

“Our fear is these smaller dealerships may leave the industry, which could disadvantage customers.”

For the emerging brands, block exemption has created a raft of new opportunities – in particular for dual and multi-franchising. Kia, for instance, is in talks with two plcs, including Pendragon, which are keen to take on franchises.

Regional influence

“There is an opportunity to re-examine your business position and more dealers have been able to change brand, as well as to add,” says Paul Williams, managing director, Kia Motors (UK).

“I expect the main change over the next two years to be the emergence of more authorised repairers. We must also see whether the EC thinks competition is affected by Mercedes and other manufacturers owning more sales points.”

Garel Rhys, automotive professor at Cardiff Business School, says: “There are opportunities if people have the courage to grasp them.”

He sees a danger if the new rules eventually hand too much power to dealers.

“They are not cuddly teddy bears, and can be vicious while trying to make a profit. We are already seeing strong regional influencing of the market by their presence, and through buying other groups,” says Rhys.

“They are also causing others to pull out of motor retailing. It’s not a big effect yet but if the trend continues, huge areas of the country could be dominated by one large group. The idea was to increase competition – the OFT will have to be vigilant.”

ADF on authorised repairers

Automotive aftermarket specialists are not taking full advantage of the chance to win additional business under the new block exemption rules, says Brian Spratt, chief executive of the Automotive Distribution Federation.

The ADF has sent out 200,000 leaflets urging firms to win new car warranty business from franchised dealers. “We are getting quite a lot of feedback, which shows some garages are at least considering the move,” he says.

“A complaint from many though is that franchised dealers are misleading consumers, suggesting warranty work outside the network is not valid.

“I can’t figure out whether this is ignorance on the part of dealers, or whether the suggestion is coming from manufacturers.”

The ADF has sent details of alleged “blatant” cases to the Office of Fair Trading and is urging it to act. MPs are being lobbied to push the OFT to take action against infringements.

Spratt is sceptical about the success of the idea of authorised repairers while manufacturer standards are set so high.

“Many garages are understandably reluctant to spend £30,000 or so to meet a single manufacturer’s standards, and then to find that the demanded marque-specific requirements for an authorised repairer puts off owners of other makes,” he says.

The ADF is also disappointed by the small number of garages targeting franchised dealers, who are now not obliged to buy parts from their manufacturers.

Location clause adds to the pressures

The removal of the so-called location clause will not lead to the replacement of small dealerships and groups by megagroups, says John Whiteman, ICDP project director. “So far the largest groups have shown the least interest in opening additional outlets.”

October’s exit of the clause – the final piece in the block exemption 1400/02 jigsaw – will permit new car dealers to open additional outlets. “These can be down the road from their existing main site, in an adjacent town or region, or even in a different European country,” says Whiteman.

“The format of such outlets is for the dealer to decide and could range from a simple brochure display to a full sales point. Any additional outlet must meet the quality standards set by the manufacturer for the activities concerned, and applying in the geographical area in which it is located.

“The removal of the location clause will lead to opportunistic local expansion rather than growth across national borders. It will benefit successful dealers extending their coverage beyond the range of their main site, or regional-scale groups maximising the use of existing facilities by mixing and matching their portfolio of brands.

“Longer term, the removal of the location clause will lead to an erosion of standards, especially those which are not crucial to performance, and to a greater variety in sizes and formats of outlet. It will reinforce existing market pressures on franchise networks to set standards matching what real customers actually want.”

The 2010 revision and beyond

A replacement for current block exemption in 2010 is likely, but it could be the last developed exclusively for the motor industry, says Garel Rhys, automotive industry professor at Cardiff Business School.

“I expect the EU to recognise that a new set of rules will continue to be better than a free-for-all – the complete liberalisation of the motor trade,” says Rhys. “By the time the next agreement expires, the motor industry might fall within a ‘general block exemption’ which would include other sectors.

“It will come down to whether the EU feels the automotive industry has grown up enough and become sufficiently mature not to need special treatment.”

The original block exemption came into force in 1985 and was revised in 1995, expiring in September 2002. It allowed the motor industry to be exempt (with a number of conditions) from the EU’s single-market open competition because of the investment dealers have to make in premises and equipment.

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