Drastic changes in the size of dealer networks are “essential to maintain profitability”.

New research suggests that despite cut-backs, more needs to be done to acknowledge changing customer behaviour and expectations.

The new edition of the European Car Distribution Handbook published by research and consultancy the ICDP, says despite some recent respite from recovering new car markets, the underlying pressures on individual dealer profitability remain on both the sales and aftersales side.

Western European dealer networks have been shrinking since the global financial crisis of 2007-2009.

And dealers’ ability to fund major new facility investments requested by many manufacturers is also “coming under strain”.

Competition from the independent aftermarket contributes to a faster rate of decline in service networks than sales networks.

This is in the context of manufacturer standards increasing. The ICDP says site investment for premium brands is “typically over €10 million (£8.6m), in some cases over €20m”.      

However, the ICDP says, individual brands have bucked the general trend.

“Kia, now considered by many dealers to be a strong franchise with high earnings potential after years of image and brand building across Europe, has expanded networks by more than 30% since 2008.

“Dacia has used its relationship with Renault to roll out a large dealer network across Europe in a short period of time through sharing existing showrooms for both brands - a low investment strategy which has allowed them phenomenal year-on-year growth of main dealer sales outlets of 19%.”

At the same time more established brands such as Toyota and Volkswagen show modest network decreases of around 5-10%.

In combination with declining networks, recovering new car sales volumes have driven the average sales per main dealer to increase by 4% year-on-year to a high of 300, up from their six year low of 255 in 2009 in the period immediately after the financial crisis.

This increased performance in terms of average sales per main dealer has been aided by the continued expansion of ‘premium’ brands, having increased 13% year-on-year.

‘Asian volume’ brands have declined year-on-year by 2%, reflecting a spread between the positive performance of Hyundai and a decline for Nissan dealers, with the others ranging in between.

[See UK dealer new car sales per franchised outlet figures]

“These figures are set against a backdrop of recent trends and innovations, changing customer behaviour, and pressures on dealer profitability which, combined, underline the requirements for change to the current system of automotive distribution.”                                                                                        

ICDP have identified a number of factors in the new edition of the European Car Distribution Handbook:

 

•  Changes to customer willingness to drive, for both sales and aftersales, and lower levels of physical shopping visits than a decade ago will result in a need for fewer traditional main dealer sales outlets

 

•  This demand for non-traditional sales formats will also be driven by digitisation, as customers increasingly have narrowed down, or actually made, the brand choice before starting to physically visit dealers. New ways to display product and drive brand awareness, such as pop-up stores, shopping mall outlets, and improved online channels, will need to be found in order to compete in this new world. This only adds to the financial pressures on the traditional dealers

 

•  At the same time, the reduced number of traditional main dealers and a need to maintain relatively shorter drive time requirements for aftersales needs will require more standalone service points and innovations such as rapid service options and mobile mechanics. This may result in service networks changing little in the overall number of points, or even increasing due to the lower capacity at individual locations.

“However, in an industry where legacy investments and contractual restrictions combine with an aversion by manufacturers to risk sales volume by cutting networks, there is often a discrepancy between what should be happening and what is actually happening,” the ICDP says.

“Although there are a number of individual initiatives in place attempting to address pressures on the sector, such as shopping centre outlets, innovative online sales channels, and investor consolidation, there are as yet no cohesive initiatives being implemented by manufacturers which have attained significant dealer buy-in and which will affect material change on the sector by 2020.

“Additionally, increasing sales per main dealer may convince network planners that the slow pace of network reductions up to now has been sufficient, and that they are now where they need to be, but it ignores the growing pressures which will more than counteract any short term boost from market recovery.

“Despite these pressures, there are both real and perceived barriers to material change, with both brands and dealers wary of abandoning traditional dealers for fear of losing market share to competitors who have not done so.

“Nevertheless, if more and more alternatives can be seen to be successful there is an opportunity for the rate of decline to sharply increase. However, when this sea change will happen is impossible to predict.”

 

Market impact assessment: case study one (from 2013)

The ICDP looked at two scenarios and the impact on dealer profitibality for a typical European volume brand network:

• 5% decline in sales volume at market level as a result of share loss to brand such as Kia and Hyundai broadening their offer
• Around €150 per new car price erosion due to increased price transparency in the internet
• 10% reduction in aftersales business due to better products and more competition from independents

Result: A reduction in average dealer profitability from 0.6% return on sales to a loss of 0.2%.

Case study two (from 2014)

• a move towards omni-channel trading environment
• more large brand centres in metro areas capturing a third of the market volume and an online channel taking a further 10%

Result: the above requires a reduction of 45% in the number of traditional dealers to maintain their new car sales volumes, but profitability improved from an average of 0.6% to 1.5% as the result of improved aftersales business.

> The European Car Distribution Handbook is an analysis outlining the size and shape of franchised dealer networks across Europe. The report includes data of the name and status of sales companies, the number of contracts, and the number of outlets and their function, split between sales and aftersales networks, for a total of 36 brands across 36 European markets. It has been updated annually since 1996, providing unique insights into the changing profile of dealer representation in an expanding Europe.