With margins on new cars typically wafer-thin or non-existent, carmakers and their franchised networks have had to resort to downstream activities, such as finance and aftercare, for profits. But changes to block exemption in 2003 looked like giving them another headache because the intention was to loosen the manufacturers’ hold on the aftermarket and offer more opportunities to the independent sector.
Under the new order, warranties on new cars are no longer invalidated if prescribed servicing work with approved parts is conducted by a non-franchised outlet. The block exemption reforms also gave more freedom of choice to franchised dealers, releasing them from the requirement in their contracts to use replacement parts from vehicle manufacturers.
The scene was set, therefore, for a radical shift in the pattern of servicing and repair – and hence aftermarket parts distribution. Some observers pointed to the start of a new era during which all facets of the independent trade would flourish and, crucially, consumers would benefit from heightened competition and lower prices.
So how have things worked out 20 months further on? Have the independents grasped the opportunities presented to them, and to what extent have franchised dealers taken advantage of the freedom to purchase parts more cost effectively from other sources?
For a sector of such complexity it is hardly surprising that consequences have been many and varied, but one thing seems clear. Manufacturers have ridden the changes rather well and, against many expectations, have strengthened their competitive position in parts distribution.
For a start, there is little or no evidence that franchised dealers have abandoned manufacturer sources for aftermarket parts and little expectation that they will do so in the future. To some extent, this is because they are not prepared to invest in the resources necessary to make use of new supply channels. The general view is that adding yet more part numbers and forming additional supplier relationships would result in unnecessary complications to what is already an involved operation. There seems to be a prevailing attitude of ‘the traditional system appears to be working tolerably well, so why change?’
More significantly, though, carmakers have gone on the offensive and targeted independent garages with their own parts offers. According to the latest CAT Parts Distribution Trend Index (compiled by Trend Tracker and released last January), the independent garages are sourcing 39% of their parts from vehicle manufacturers, representing a steady rise from 27% in September 2003 and 32% in May 2004.
The same survey indicated that 77% of independent garages were members of at least one manufacturer parts ‘club’ with Vauxhall leading the pack followed by Volkswagen and Ford. So it would appear that if anyone is losing out it’s the traditional motor factors.
On the face of it, this is puzzling because the campaign is not being won or lost on price-cutting. But for customers there’s the reassurance that genuine original equipment parts with a warranty are being used and for repairers there’s the attraction of having a first-time fit. Also, it’s often the case that parts are more readily sourced from manufacturers, especially for the more marginal marques and newer models. Pricing is not a big issue since the cost of parts will invariably be a small proportion of the servicing invoice, and customers of independent garages benefit from lower labour rates than those of franchised networks.
It is generally recognised that Vauxhall’s Trade Club provides the benchmark against which all other manufacturer ‘clubs’ are judged. Launched in 1991 with a product range restricted mainly to braking parts, the offering has expanded to over 50 product groups including batteries, cambelt kits, rotating electrics and lubricants. In 2004 alone no fewer than six major product groups were added, along with parts for the current Vauxhall van range. Services include next day emergency delivery and a 12-month guarantee on all Vauxhall branded parts. The Trade Club Book contains over 2,000 part numbers covering 23 model applications and shows retail, normal trade and Trade Club member prices, thereby allowing independent repairers to calculate the profit margin on each part.
According to Vauxhall, total membership stands at 58,000 of which around 21,000 are active each month. For 2005 the Trade Club is looking to secure a 10% increase in the number of members who purchase from the Trade Club on a regular monthly basis. Tactics to maintain momentum include an intensification of direct marketing at both national and local levels together with improved database management at dealerships.
By tradition, franchised dealers are the channel through which manufacturer parts are distributed to the independent sector. However, towards the end of last year Citroen appointed Euro Car Parts (ECP) as a franchised parts distributor in what is believed to be the first deal of its kind between a vehicle manufacturer and an independent parts operator. Citroen issues separate contracts for sales, servicing and parts supply and therefore the appointment of an independent parts distributor was not unexpected. ECP has indicated a desire to secure similar contracts with other vehicle manufacturers.
The evolvement of large dealer groups such as Lookers and Reg Vardy opens up the possibility of further change. In mid-2004 Lookers entered the vehicle parts wholesaling sector through the acquisition of FPS Distribution. At the time Ken Surgenor, Lookers chief executive, noted that “this is an important step in Lookers’ strategy to broaden our revenue streams from the automotive industry and, in particular, vehicle aftersales”.
It might be supposed that FPS would develop into a principal source of components for Lookers’ franchised outlets, but the company is adamant that FPS is and will remain a stand-alone business and also that the dealerships will remain faithful to their manufacturer links.
Meanwhile, Reg Vardy is developing all-makes regional parts centres which stock replacement items for the marques it represents at its dealerships. The idea is that independent garages will be able to use these centres as a one-stop shop, rather than deal with a range of dealers for their parts needs.
For manufacturers, it seems that the only development on the horizon which could overturn their present strong position is the ‘location clause’ which comes into effect in October. Once implemented, it would be possible for a franchised dealer in the UK to purchase parts from a dealer of the same marque in a country where prices were much lower. How many, though, would want the hassle of setting up overseas buying operations with all the complexities of foreign exchange movements, supply pipelines and other paraphernalia?
For the moment vehicle manufacturers are on an aftermarket roll which appears unlikely to be stopped, let alone reversed – and they know it.