According to the latest Ernst & Young Car Dealership report falling new car sales, growing manufacturer power and dwindling profit margins are all making the market tough for retailers.
"We believe that the UK car retail industry is in a further period of consolidation, driven by declining sales, with margins under pressure and an added impetus from regulatory change," said David Duggins, corporate restructuring partner at Ernst & Young.
"Vehicle manufacturers are currently focusing on cost reduction and growth markets, particularly China, Eastern Europe and Russia. UK dealers and dealer chains that survive these pressures will be characterised by high levels of management capability, with robust financial information and control systems, and the ability to capitalise on economies of scale," he said.
Dealers feeling the pressure have three choices, namely a ‘capital intensive’ effort to improve their business to meet best practice standards; a sale to a larger and better resourced group; or a slow and steady decline possibly ending in their demise.
A significant factor impacting the sector is falling sales of new units. UK registrations of new vehicles rose by 32% from 1995 to 2004. However, sales for 2005 dropped 5% on 2004, while private sales - with higher margins than fleet sales - dropped by 10%.
And for the year-to-September, Society of Motor Manufacturers and Traders’ figures show a decrease of 3.5% in new car registrations.
Lower selling prices as a result of price pressure from consumers, over capacity issues and an extremely competitive market mean that margins in the car retail sector are also being squeezed, with the industry average 1%.
"It is not only the dealers' margins from new car sales that are under pressure, virtually every area is facing reducing revenues and margins. Used car sales, servicing and parts, and financing and insurance, which were once high cash generators for dealerships, are all seeing significant declines in profit margins," said Duggins.
He also said the recent changes to the Block Exemption regulation has caused manufacturers to change the way dealers make their margins on new car sales by reducing the direct margin, and linking significant parts of the dealers' rewards to subjective factors, such as how well they represent the brand, achieve sales volumes, or achieve customer satisfaction ratings.
#AM_ART_SPLIT# "However, less well reported are changes in the legislation that make it easier to buy and sell dealerships while maintaining the vehicle manufacturers' franchise. This is acting as a major enabler to the further consolidation of the automotive retail sector," said Duggins.
Pendragon, the UK's largest quoted car retailer, has led the way, buying rival dealerships CD Bramall and Reg Vardy. Earlier this year, it also launched an unsuccessful offer for Lookers.
"Although the automotive retail sector has begun to consolidate, the industry is still hugely fragmented. The recent purchases of Reg Vardy and CD Bramall by Pendragon demonstrate the aggressive attempts to leverage scale amongst leading dealers," said Duggins.
"Even after these acquisitions, Pendragon still only has 6% of the market, while the top 10 players currently hold a 28% market share of the new car market."