Pub. 58 2017-2018 Issue 2

43 WINTER 2017 The Environment (Regulation, Competition) • The independent aftermarket, long weaker than in the USA, is gaining strength, evolving from fragmented independents to professionalized chains, with a growing number of virtual networks linking independents behind one online brand. Fleets are also increasingly likely to use independent garages for service, even during the warranty period, than in the past. These trends combine to mean that fixed cost absorption for dealers has been falling rather than rising: few dealers get close now to the once normal 100% figure, and the average in most markets is in the 50%-60% range. • Regulationof theOEM-dealer relationship has been evolving toward consumer protection and choice (including the right to repair under-warranty vehicles at independent garages). National law is now more of an influence on protecting dealer rights in the face of theOEM, than theEU- wide regulations that previously dominated. • Unlike in the States, OEMs in Europe do own a non-trivial but small (3%) share of dealerships directly, mainly in the largest markets 49 —which is not as troubling as it may seem to American dealers, as there seems to be a state of relatively peaceful coexistence. For example, many company stores are maintained in high- cost urban locations as brand flagships, whose economics would not pencil for an independent operator anyway.And further, there is a growing tendency for European OEMs to pull back from owned stores (typically selling them to existing partner dealer groups), as their performance tends to lag that of independent dealers, and adversely affect corporate results.However the introductionof online channels is being led byOEMs, some of whomwill contract directly with the customer, using dealers only for fulfilment. • Third-party online channels are numerous, growing, and capturing a slice of the profits that otherwise would remain with dealers. These channels are operating across new and used car sales, service, parts and F&I, often acting as an intermediary linking seller and buyer in return for a fee. Some are positioned as the main interface for the customer, therefore not only taking a slice of the profit on the transaction, but also removing the opportunity for the dealer to build a direct relationshipwith the customer for future work. TheDealers Themselves • For all the above reasons, as well as smaller scale (the average annual new sales in 2015 was 300 permainEuropean dealer), dealers in Europe have weaker profits than in the USA (their pre-tax bottom line profit margin on sales is probably half that of a typical US store) and in recent years a majority of dealers have been losingmoney. • Thanks to such low profits, and also rising facility costs (even as e-commerce would seem to make physical facilities less relevant), the dealership count in Europe has been in decline and this is expected to continue. Dealer counts that were stable from 2004 to 2008 started falling in the Great Recession, by about 10% as of 2016, and are expected to drop another 10% by 2020 or so. • Further, as in the States, consolidation of dealership ownership has been advancing – but again as in the USA, primarily though the formationof regional groups rather than national or pan-European mega-chains. Smaller (often rural) outlets continue to vanish, except for those who adopt a more diversified business model, e.g. offering multiple brands from the same showroom (which is not unusual in Europe), or by developing an aggressive AMM repair strategy. • As in the USA, OEMs in Europe have been shifting the source of dealer profits from margins to payments (e.g. for CSI, for specific investments made, for volume targets hit). They have also been pushing OEM-branded service plans, where they become the bill-payer for service work, and mandate the hiring of additional staff, even becoming involved in the recruitment of management.Thus, as in the USA, OEMs are increasing their influence on dealership activities across the board. Implications for the EuropeanDealership of Tomorrow Together, these trends show a clear path of what the European Dealership of Tomorrow will look like: • Dealerships in metro and urban areas will be most affected – these represent the majority of sales volumes, and are most subject to the pressures discussed. Sma l ler r ura l dea lers (mak ing up a substantial minorit y of the total count) will have little influence on the changes, but also can survive—on the basis of local customer relationships. Consolidation of ownership especially of large and medium dealerships will continue. • The number of traditional dealerships in metro and urban areas will decrease by around 40%. This will be partially offset by an increase in the number of smaller sales-only and service-only formats operated as satellites of large hub dealers. • Large dealer groups will continue to centralize responsibilities and shared services, leaving the individual stores to focus on local, mainly face to face, customer relationships, and fulfillment of sales and service needs. • All dealers will operate in an omni- channel environment, meaning that they will support leads completed in another channel (e.g. online), or close deals which have been largely processed in another channel. This will drive a move away from a “winner takes all” margin model to one of fee- for-service and other factory payments distributed across participants. • More cars will be bundled with service, F&I, and more, to provide a “mobility 49 And in some cases, e.g. among German premium makes in their networks in Germany, this percentage is much higher.