Sceptics who believe that Block Exemption changes won’t result in that much difference to the car market should bear in mind what happened when regulators turned their attention on the brewing industry, says Professor Martin Clarke of GMAP Consulting.
Reforms to the Block Exemption regulations were heralded by the European Union as a way to increase competition and consumer choice. Though it’s probably true that there will be little change in the market short-term, medium or long-term change is inevitable.
All retail sectors have to undergo change at some time - usually to the benefit of consumers. Indeed, consumers may be the only group in the current car market with a case for reform. Dealers and manufacturers have no argument for change. Instead Block Exemption itself could be the catalyst to completely disrupt the automotive retail market – causing a shift in a sector that has remained mostly in stasis for the last 50 years. And an agent for that disruption is all too likely to be a large retail group or bank - unbound by the rules governing the existing players.
Such a non-linear change has happened in other sectors – airlines, brewing and travel are just a few. In the brewing industry, following a Monopolies and Mergers Commission enquiry, the Beer Orders regulations in 1989 were intended to break up the dominance of the six large brewers and help the regional brewers gain access to a closed vertical distribution network.
In this sector it was the banks that gained first-mover advantage. They were able to enter the pub market by exploiting their property portfolio and reforms that allowed them to sell multiple brands from one location.
The new Block Exemption certainly changes the rules for dealers, allowing them to separate sales and service outlets and offer multiple brands from a single outlet. However, there is little evidence to suggest they will move away from today’s bundled sales and service facilities. This is not surprising since most dealers make their profits as a result of the bundled arrangement – relying on cross-selling servicing after a sale. Moreover, the large dealer groups have little ready capital and too much invested in their existing infrastructure to make major changes.
A new entrant on the other hand, such as a bank or supermarket group, has access to the capital needed to establish new sales and service outlets. Banks in particular are well positioned to enter the market – recall the acquisition last year of Dixon Motors – one of the top 10 dealer groups - by Royal Bank of Scotland. Banks also have a ready list of would-be car buyers (their core business and personal customers), strong brand values and brand management expertise, and plenty of experience of cross-selling through their well-developed customer relationship management systems.
A new player would also be well-placed to set up a more efficient distribution network, free from existing property investments and having no incumbent network to dismantle.
Latest research by GMAP reinforces other studies which suggest that people will travel up to 30 minutes from their home to a sales outlet to buy a new car, especially if this provides them with more choice. With service, however, convenience is more important, with owners preferring an outlet somewhere near where they live or work, ideally within 15 minutes.
A new entrant could quickly take advantage of the new Block Exemption arrangements and set up separate sales and service outlets, improving the operational efficiency, and profits, of every outlet. As few as 60 sales points and 300 service points would be sufficient to give a new player optimal coverage for 90 per cent population coverage – as highlighted in figure 1. This is radically different from today’s networks where most dealers run single-branded combined sales and service networks – with as many as 600 outlets – most of them positioned within 10 minutes of 80 per cent of the population. Figure 2 shows Ford’s current dealer network. Such a model is neither essential nor cost-effective.
Manufacturers and dealers can learn from other retail sectors about how to brace themselves against such change. Firstly, they need to have effective market representation plans in place and to understand retail market moves. At the moment they know a lot about vehicles sold and very little about the people they have sold them to. Clearly a greater understanding of customer behaviour will allow them to optimise distribution models, cut costs and maintain revenues.
Secondly, they should evaluate the positions of their current retail outlets and check this against consumer demographics – deciding whether each dealership is in an optimal location and carefully planning any new dealership locations.
Thirdly, dealers will need to increase their own brand value – something that other retail groups have already mastered. Consumers are more likely to buy from a trusted brand if they have a multi-brand outlet. At the same time, manufacturers can continue to build sales and service experience as a key component of their overall brand values.
Finally, dealers will need to decide on whether they can finance a multiple-brand outlet at any of their sales/service outlets. They could cross reference this with data on known consumer spending preferences for that location to ascertain which brands would be most likely to succeed.
GMAP Consulting is a supplier of market intelligence and predictive modelling. It helps automotive manufacturers and dealer groups to understand their markets, customers, competitors and channel to market.