Dealer feeding frenzy could
backfire

Consolidation could be a dead-end street for the UK car dealer
sector, says Steve Raybould

With announcements of dealership closures and group acquisitions
dominating the motor trade press, there is a general acceptance
that the UK automotive retail sector is undergoing a period of
major consolidation. But how this consolidation is being
demonstrated within the sector in terms of ownership patterns and
the customers’ available choices is yet to be fully
determined.

Dealer groups verses independents

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First of all let us look at the proportion of franchises which
are still held by independent franchised dealerships. These are
typically owner-managed dealerships in a one-to-one relationship
with the manufacturer, not part of a dealer group. If economies of
scale are operating, it is these independents, without the
resources of a large organization behind them, who would feel the
pinch of declining margins, and who would be most vulnerable to
closure or acquisition.

According to Autointel’s UK auto retail sector database,
the actual share of franchises held by independents has not
declined over the last five years. In fact, it may have grown a
little (see graph 1). According to the data, the share of
franchises held by independents actually grew from a 23 per cent
share in 2001 to a 26 per cent share by the end of 2007. In real
terms this would seem to indicate a static situation.

Percentage of franchises held by the dealer
groups

Despite the fact that the proportion of franchises held by the
dealer groups has more or less stayed the same over the last five
years, there has been significant change in ownership within the
dealer group sector itself. Graph 2 shows that the proportion of
franchises held by the ‘Super’ size dealer groups (more than
seventy dealerships) and the ‘Middle’ size dealer groups (between
five and twenty dealerships) has actually grown, while the
proportion of franchises held by the ‘Large’ groups (twenty to
seventy dealerships) and the ‘Small’ dealer groups (less than five
dealerships) has fallen.

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The Super groups increased their share from 7 per cent in
2001 to almost 14 per cent in 2007, while the Middle size groups
increased their share of franchises from less than 22 per cent in
2001 to almost 32 per cent in 2007. During the same period, the
Large groups saw their share of franchises fall from almost 20 per
cent to slightly more than 10 per cent, and the Small groups share
of franchises fell from 52 per cent to 44 per cent.

It would be natural to assume that we have a big fish-eats-small
fish situation here, with the Super groups growing at the expense
of the Large groups and the Middle groups growing at the expense of
the Small groups. It is not possible, without much more research,
to see if this is so, but Pendragon’s purchase of nineteen of
Dixon’s sites before it went into administration in August 2007,
Dutton Forshaw’s acquisition by Lookers in October and other
similar recent acquisitions may indicate that there is some
justification in this assumption.

Multi-franchised outlets

One expectation of the 2002 block exemption rules was that they
would make possible, or even encourage, the growth of
multi-franchised dealerships. That is, individual dealers would
take advantage of the relaxed regulations relating to the
manufacturers’ control of the dealership environment to run several
franchises from the same premises.

Our data would appear to indicate that this is not
happening on any appreciable scale as yet (see graph 3). In 2001
the ratio of dealership sites to franchises held was 1:1.16. But by
2007, the ratio had remained practically unchanged at 1:1.19.

It would seem that whatever the regulatory framework,
there are still very significant other factors, maybe economic,
maybe to do with the manufacturer-dealer relationship, which are
acting against the development of multi-franchised outlets. Again,
this would seem to be another aspect of the BER where the
legislators apparently have failed to achieve their objectives.

Growth of the ‘Super Groups’

So where is consolidation taking place in the UK dealer
sector?

One can not deny that a small number of ‘super groups’ are
beginning to dominate the sector. And the high-profile contests
between such powerful groups as Pendragon and Lookers have made
sure that what consolidating activity that there is, gets more than
its fair share of exposure.

But as the overall proportion of dealerships held by
dealer groups has remained the same over the last five or six
years, there is little reason to suppose that the individual
consumer has had any reason to notice – or to be worried about – a
change in the industry structure.

The special case of Pendragon

There is no doubt that the one group which has demonstrated
dramatic growth since the 2002 has been Pendragon. And its early
success with this strategy would seem to have made it a model for
other large groups in the sector.

But 2007 may have been a turning point. Profit warnings
from Pendragon and gloomy outlooks for 2008 expressed by other
major groups may be indicating that there are feasible limits to
dealer group growth within the UK dealer sector – at least until
the current trading conditions undergo further change.

So, for now, it looks like the trend to consolidation in
the UK car dealer sector may have been halted before it really got
underway.