Of all the changes made under the latest version of block exemption, the introduction of greater competition in service and repairs is likely to be the most bitterly contested because aftersales is by far the most profitable part of the automotive value chain. It is also the single most consistent point of contact between consumers and the industry itself.
Building a showroom in a prominent location and maintaining a stock of new cars costs a substantial amount of money – and traditional dealers have made the investment on the understanding that exclusive representation of a particular carmaker in a designated territory would help them get a good return on their investment. But repairers do not need to purchase premises in the centre of town or invest in expensive showrooms.
Not only are the entry costs much lower, the gross margins on revenues earned from servicing vehicles are also much higher than those from selling new cars. Research by the investment bank Goldman Sachs and automotive consultancy Autopolis suggests that, on average, new cars account for 60% of sales but only 20% of earnings before interest and taxes (EBIT); conversely, service labour and spare parts account for only 20% of sales but 50% of EBIT.
Many dealers that lose their franchises may therefore apply to become authorised repairers – and, as the carmakers consolidate their distribution networks in the wake of the new regulation, the number of dealers will fall quite dramatically. Some ex-dealers may also join the multi-marque repair networks certain carmakers have set up in an effort to maintain their share of the spare parts market. Both Renault and Citroen, for example, have launched new garage networks – called Motrio and Europepar respectively – which service all makes of car, primarily for ex-dealers with which they still want to do business.
A number of independent repairers may also choose to become authorised repairers, but most will probably want to remain independent, particularly if the privileges dealers and authorised repairers enjoy regarding warranty work are removed following a critical report from the Office of Fair Trading. They may also fear losing their autonomy. Most small garages succeed by maintaining personal relationships with their customers, while the larger repair chains are often run by entrepreneurs. For both such groups, the freedom to manage their businesses as they see fit could well outweigh the advantages of becoming authorised.
One route for independents who do wish to become authorised is possibly through an association that would enable them to get information, equipment and expertise on a cost-effective basis. The formation of local networks would allow small repair businesses in the same geographic area to share sophisticated diagnostic tools and expensive new equipment – something they will certainly need as the growing use of electronics makes even common repairs such as changing a tyre increasingly high-tech.
It might likewise enable them to “borrow” from other brands, if they teamed up with some of the other big participants in the automotive market. Several independent national networks are already starting to emerge, including the Good Garage Scheme (which is backed by the Department of Trade and Industry and the Retail Motor Industry Federation), and the Shell Helix Service Centre (which was launched by Royal Dutch/Shell and has over 580 members).
The new block exemption regulation has other ramifications in terms of recruitment and training. Carmakers and dealers already invest a considerable amount of time and money in technical training, but any independent repairer that wants to be authorised will now have to invest heavily in training as well. In the longer term, this could improve the quality of the service offered by all repairers, including fast-fit chains, autocentres and independent garages. It could also help to alleviate the shortage of competent car mechanics. The majority of skilled mechanics are middle-aged, mainly because other areas of employment have proved more appealing to the next generation. But the automotive industry has worked hard to elevate the status of repairers, with the development of vocational courses and apprenticeships. Meanwhile, the increasing complexity of cars – including the explosive growth in electrical and electronic sensors, diesel fuel systems and air conditioning – has made the job more attractive to youngsters (and less attractive to older people unaccustomed to using computers).
Public perception that independents charge less for servicing than franchised garages - reinforced by the same OFT report that looked into warranties – could change with the separation of sales and aftersales. ‘Unbundling’ service labour revenues shows that more than 40% of the average hourly rate dealers charge goes on cross-subsidies. So, if dealers stopped subsidising their sales activities, and revised their operating processes and merchandising schemes, they could charge the same labour rates for servicing and repairs as independent repairers, without reducing their retained gross margins or expenditure on training. Multi-brand dealers and authorised repairers could then seize a much larger share of the market, leaving independent repairers out in the cold.
The market itself may also evolve to reflect the nature of the repairs being performed. Where it remains acceptable for carmakers and dealers to issue warranties with servicing restrictions, a three-tier structure might emerge in which new cars under warranty are serviced by a franchised dealer. Relatively new or expensive cars on which the warranty has expired would be serviced by an authorised repairer because consumers might still have some sort of comeback with the manufacturer if anything went wrong. And old cars would be serviced by an independent repairer because this would be the cheapest option.
What is certain is that mergers and acquisitions will play a major role in shaping the repair and servicing market. The independent repair market is currently very fragmented because it includes thousands of sole traders and small chains. But some of the fast-fit operations and large repair chains could attract considerable interest.Fast-fit and national auto chains already control more than 50% of the European market for fitting tyres, exhausts, brake pads and oil filters (largely because they trade in convenient locations). Further consolidation seems inevitable – especially given experience in the US, where a number of fast-fit companies have won market share from dealers by expanding the menu of services they offer and providing those services on a drive-up basis. Private equity firms, most of which invest for a maximum of five years, also own a number of fast-fit operations and autocentres. They include Nationwide Automotive Centres, which is owned by NBGI; ATU, which is owned by Doughty Hanson; and Kwik-Fit, which was recently bought from Ford by CVC Capital Partners. Such companies could be attractive to Japanese trading houses involved in the manufacturing of automotive components (such as Mitsubishi) or any vehicle manufacturer eager to secure a foothold in the European servicing and repairs market.
Most carmakers want to track their cars and customers, so that they can improve their products and market to former customers more effectively. At present, this is very difficult, because only the dealer that services a customer’s car keeps any information on the customer and the car after the point of sale or completion of the financing contract. And dealers generally do not share such information either with the carmakers they represent or with other dealers in the same network.
Thus some carmakers might decide to set up their own authorised repair chains – much as BMW and Mercedes-Benz have set up their own retail outlets – as a means of protecting their relations with their customers and their share of the lucrative spare parts market. This is already true in mature markets such as France, where Renault, Citroen, Peugeot and Fiat all have various fast-fit or autocentre operations; and in North America, where carmakers such as General Motors, Ford and Honda have set up authorised repair outlets under related brand names like GM Goodwrench.
However, some of the larger dealers could also seize the opportunity to extend their remit by acquiring small groups of franchised dealers or independent repair chains. They could then split their retail and repair operations in order to compete more effectively with authorised and independent repairers unburdened by the expenses of running a costly showroom. Alternatively, they could operate a full-service business that includes retail sites and satellite repair shops – both authorised and independent.
This would be one way of trying to capture the entire market, much as airlines offer first, business and economy class seating for passengers with different budgets. It would also increase their customer retention rates; industry data shows that consumers are much more likely to purchase another car from the dealer that services their existing vehicles than from a dealer they do not know.
In short, there will probably be ferocious competition in the servicing and repair market for some time to come. Many of the dealers that lose their franchises, as the carmakers consolidate their distribution networks, will become authorised repairers – and those that retain their franchises are currently at a definite disadvantage, weighed down as they are by the costs associated with selling new cars. But though authorised and independent repairers could thrive in the short term, dealers will certainly fight back. They will stop using the revenues from their servicing and repair operations to subsidise their retail operations, so that they can compete more effectively. They will also actively expand the services they offer, and improve access to those services, by setting up satellite sites. Prices will then fall, putting further pressure on authorised and independent repairers. Meanwhile, the lucrative nature of the aftermarket will attract new entrants, including general retailers, carmakers and financial institutions already involved in vehicle financing.