Obscured by all the fuss over changes to block exemption which came into force last October, a quiet revolution has been taking place in motor retailing stretching back for at least a decade. Quite simply, the sector has been apeing swathes of industry generally where consolidation is the name of the game.Take as just one example Lookers with its 90-plus outlets generating an annual turnover of around £1bn. A big chunk of that growth came with the acquisition of Charles Hurst in 1996 which took the company into Northern Ireland, and Taggarts in 2003, which provided a foothold in Scotland.
Top of the leader board, Pendragon, began its phenomenal growth in 1989 with the demerger from Williams PLC. Then the operation comprised just 19 dealerships with an emphasis on luxury and specialist franchises such as BMW, Jaguar, Mercedes-Benz and Porsche. Today, Pendragon is the UK’s largest vehicle distribution group with more than 250 dealerships in three countries representing 29 marques. The vigour with which volume brands has been embraced is indicated by the fact that the company is now Vauxhall’s largest UK distributor. The takeover of CD Bramall earlier in the year is the latest in a series of major acquisitions.
Reg Vardy is another hugely ambitious company which anticipates a dealer tally of around 100 by the end of the year, rising to around 160 within the next five years. Evidence of the seriousness of its intent is provided by the arrival last February of its first regional operations director with responsibility for identifying potential acquisition opportunities in the Midlands and South. More recently, Reg Vardy appointed Lambert Smith Hampton, a property consultancy with a network of regional offices, to assist its expansion programme.
To what extent, though, has the development of the UK’s vehicle distribution sector reflected a grand plan on the part of the main protagonists, as opposed to a series of opportunistic moves prompted by lucky chances which have presented themselves? And how will the sector develop in the future? Will the leading groups develop into truly nationwide operations in the manner of the leading food retailers, or will some retain their regional identity?
Leaving aside the purely local operators which have one or two sites centred around a town or city, an analysis of the sector reveals that almost all of the principal dealer groups fall into one of four broad business segmentations. These range from organisations which aspire to achieve nationwide coverage and represent the entire spectrum of marques to companies which operate in a limited area with just a single marque. Until someone devises a more suitable classification, these four segments may be termed ‘national players’, ‘regional champions’, ‘marque champions’ and ‘manufacturer owned’.
Most (but not quite all) of the largest groups belong in the national players’ segment with the aforementioned Lookers, Pendragon and Reg Vardy obvious examples. However, none has achieved comprehensive countrywide coverage, and perhaps it is more appropriate to consider them as ‘multi-regional players’. Reg Vardy’s operations, for instance, span from Aberdeen in the north to Reading in the south but are absent from Wales, East Anglia, the West Country and almost all of southern England.
Regional champions emulate the national players in terms of marque coverage but are limited to a specific area. As one of the country’s biggest dealer groups, Arnold Clark is the most celebrated member of this segment and is the UK’s largest privately-owned vehicle distribution group. The company’s operations are rooted firmly in Scotland, although acquisition raids south of the border have resulted in limited representation in England, principally around Liverpool and Manchester. In total there are around 120 sites with 20 marques represented.
Another well known regional champion is Caffyns with a spread of dealerships in southern England, principally in Kent and Sussex. Expansion continues as witnessed by the purchase of a Volkswagen dealership in Brighton a few months ago, but there are no indications of a desire to pursue opportunities further afield.
Regional champions undoubtedly comprise the biggest part of the retail motor trade when it comes to individual businesses and, as such, provide a rich source of potential takeover fodder for national players. Also, the fact that many are privately-owned family businesses which may face a succession problem provides a further attractive prospect for any dealer group which fancies its chances of establishing nationwide credentials.
As implied by the category description, marque champions have pinned their fortunes to a single marque, usually Ford, and typically operate in a limited area. Examples include CEM Day, TC Harrison and Peoples. TC Harrison operates six dealerships in a tight cluster across central England, ranging from Burton in the west to Huntingdon in the east, and is exclusively Ford. Similarly, CEM Day operates four Ford dealerships in South Wales.
These operations would appear to be far less vulnerable to a takeover than their regional counterparts. For one thing, the vehicle manufacturer would be expected to have a strong voice in the event that a deal was mooted although, in the context of Ford’s growing presence in the retail sector, perhaps some will be absorbed eventually within the Ford Retail network.
This leads on to the fourth and final grouping which takes in the manufacturer owned outlets. Recent years have seen a sharp increase in the involvement of manufacturers in the retail scene with the result that dealer groups owned and controlled by Ford, Mercedes-Benz, Peugeot and Renault are becoming among the largest in the country.
The pace in this segment has been set by Mercedes-Benz which, through DaimlerChrysler Retail, is well on its way towards fulfilling its ambition to control the sale of Mercedes-Benz and Smart models in the three principal conurbations of London, Birmingham and Manchester. The group envisages an eventual network of 50 sites, accounting for 30% of its total UK sales. A matching ambition to assume greater control over the sales, marketing and servicing functions in important metropolitan areas explains Ford’s acquisition from Jardine of the 51% stake which it did not already own in the Polar Motor Group, one of its largest UK distributors.
Notwithstanding the block exemption revisions, it is clear that vehicle manufacturers will carry out a range of initiatives to retain control of the retailing agenda, with ownership the ultimate ‘weapon’. Not even the most ambitious dealer groups envisage the time when they will be able to dictate terms to their suppliers in the manner evident in food retailing.
Dealer groups have used takeovers as a means of adding critical mass to an existing business and thereby exploit the economies of scale that larger businesses are able to enjoy. Historically, the motive for expansion has been the addition of market territories and, especially, the addition of marque representation where the prospect of achieving above average volumes or margins exists. This explains the popularity, among others, of Audi, BMW and Mercedes-Benz along with other more specialist brands including Ferrari and Porsche. At the same time, though, the desire to secure a slot among the top ten largest dealer groups has inevitably required the addition of volume brands. This calls for a delicate balancing of the seesaw. At one end there is the temptation to expand in the expectation of securing lower costs through greater economy of scale, albeit with the risk of margin dilution through the arrival of mass brands. At the other is the seemingly less risky strategy of remaining focused on premium brands and thereby providing the best opportunity of preserving margins.
So far, there is scant evidence of a move on the part of the marque champions to embrace upmarket brands, no doubt due to their unsuitability in the eyes of the prestige manufacturers. However, this may change as the role of manufacturer-owned outlets increases. Surely, logic dictates an evolvement of these sites so that all of a vehicle company’s marques are represented, or at least delivered to the final customer.
More fundamentally, the abolition of market areas, allied to the growing popularity among private car consumers to use the internet as a means of prospecting the market, implies that the purchase of market territories as a means of expansion will become increasingly redundant. This is not to imply that the business model of the principal dealer groups is flawed, but rather that the future emphasis surely will be directed towards ensuring a nationwide network of delivery points. These will probably be based around current dealership premises, rather than the addition of yet more sites which replicate existing geographical and/or marque representation.
If so, the principal dealer groups with ambitions to become the Asda or Tesco of vehicle retailing must surely move quickly to plug the gaps in their nationwide coverage through the acquisition of the juiciest local and regional players.