Europe dealer network still relies on factory's stores
Auto retailing in Europe is more about national cultures, customs and practices than any coherent continentwide structure. Compared with the United States, Europe has more factory-owned dealerships. There is less reliance on exclusive territories for dealers. And franchise contracts have shorter terms, generally two years.
A century of the franchise system and a couple of thousand years of national language and cultural development have left deep-seated - and, consumer groups argue, ill-conceived - European habits. They include national pricing structures and a general lack of cross-border vehicle trade.
Nonetheless, Europe these days is supposed to be a common market. Auto retailing has a pan-European legal basis, laid down and enforced by the European Commission.
Despite a preference for free markets, the European Commission has accepted the arguments of retailers and automakers that selling cars is a special case. So the industry has an exemption from the usual free-market principles, called a block exemption.
The franchise system of sales outlets is enshrined in European law. Automakers have the right to appoint retailers and end their contracts if they are deemed to have broken the terms of the franchise agreement. This threat ensures that automakers hold the upper hand in any potential power struggle with their dealers, even though an arbitration process is available.
The current block exemption runs until 2010. There are signs that the European Commission will use the next review of the exemption to loosen the automakers' grip on power further, as it has done in each review over the past 30 or so years.
The last review had a dramatic effect on the shape and size of European franchise networks. Figures from the GMAP European Car Distribution Handbook confirm that retail networks contracted dramatically around the time of the review.
Between 2002 and 2004, the number of franchised sales outlets in established European markets fell by 19.1 percent, or 17,549 retailers. During that period, automakers began to reorganize their distribution networks.
The contraction has been particularly marked in Italy and Spain, where subdealers that act as secondary sales outlets for dealerships are prevalent. In 2002 and 2003, PricewaterhouseCoopers estimates, about 12,000 subdealers were removed from automakers' networks. Another 14,000 were converted to main dealers.
The number of retailers in Germany also has fallen substantially and continues to decline. But Germany still has by far the largest concentration of franchised sales outlets in Europe.
While automakers used the block exemption review as an excuse to cull their retail networks, the underlying business case for a slimming-down has been around for some time.
More than 10 years ago, Ford introduced the concept of "market areas" to the British auto retail industry. Ford argued that there needed to be fewer dealerships in larger territories selling more vehicles if they were to remain economically viable.
Large-scale consolidation of dealerships began in the United Kingdom in the early 1990s, amid falling new-car sales. The United Kingdom now has the most mature and sophisticated auto retailing business model in Europe.
Large publicly traded dealership groups dominate sales of volume brands in major urban areas. Smaller family-owned groups are left to work on a more regional basis.Group dynamics
The biggest dealership group, in terms of revenue and number of outlets, is Pendragon. It has around 6 percent of the United Kingdom's new-vehicle market. After its recent acquisition of Reg Vardy, a competing group, Pendragon expects gross revenues this year of more than 7.2 billion euros, or about $9.2 billion at current exchange rates.
Pendragon also is one of the few European groups to have significant cross-border operations. It has Premier Automotive Group outlets in California, and Jaguar and Land Rover dealerships in Germany.
National boundaries are holding strong for European auto sales, despite the best efforts of the European Commission and the emergence of some ambitious players.
"There are signs of a number of significant dealership groups emerging, and a number of these have pan-European ambitions," says Philip Wylie, automotive team leader at PricewaterhouseCoopers Corporate Finance in London. "The most significant of these appear to be Inchcape, Kroymans, Berge Group and AVAG.
"The barriers to genuinely pan-European players emerging appear to relate to the fragmented state of the industry and the relative shortage of truly pan-European management," Wylie says.
"Each local marketplace offers significant consolidation potential," Wylie says. But he adds: "There are still few cross-border economies of scale which can be achieved at this point in time. Most of the larger groups have struggled to make truly multinational activities work."
Wylie reckons it could take "at least another five to 10 years" before significant changes occur.
The consolidation has caused ill feeling between dealers and automakers. There has been a parallel rise in the ownership of retail outlets by automakers.
This is particularly true in Germany, where BMW dealers are suspicious of the company's motives. The company has 17 stores in Germany.
Automakers' investments in retailing largely take two forms in Europe:
1. "Brand centers" in capital cities, which seek to make a brand statement rather than just provide a retail site.
2. Traditional retail outlets that serve a local market, usually in an urban area.
A brand center is usually associated with a prestige marque such as Mercedes-Benz, BMW or Audi. It can cost as much as $18 million. Such an investment is well beyond the reach of any retail group.
Brand centers are not just about selling and servicing cars. They are designed as temples for auto enthusiasts, with museums, cafes and lifestyle accessories for sale. As such, they do not compete directly with conventional dealer networks.
The role of more traditional dealerships owned by automakers is less clear. But manufacturers insist they are an economic necessity, given the high cost of land and staff in many major European cities.
Ford Retail Europe has 53 sites in the United Kingdom and others in Amsterdam, Netherlands; Vienna, Austria; and Brussels. Chris Hayden, the network's CEO, says Ford created the dealerships to ensure that it would remain competitive in markets that were proving uneconomic for smaller businesses.
"The strategy for Ford Retail Europe is to achieve representation in key metropolitan areas," Hayden says. "The volume and geographic spread of our dealerships enable us to maintain high levels of customer satisfaction."
Hayden denies claims by other Ford dealers that Ford shows favoritism to its own stores. "We operate on a level playing field, to the same standards as other Ford franchised dealers," he says.
Andre Bodis is CEO of REAGroup, which operates 300 sales sites for Nissan and Renault in Europe. He says "the high cost and scarcity of property" in major cities requires big investments in dealerships.
"In the major cities, the full force of competition is felt," Bodis says. "It is hard for a conventional dealer to generate sufficient profitability, and the risk for a carmaker is the reduction of its network in these areas."
As the European market enters a difficult phase, many family-owned dealerships may choose to exit the market. Investment costs are rising, risks are increasing and some ambitious pan-European players are waiting to pounce.
Having created market areas, automakers now are having difficulty finding retail groups with enough firepower to operate in them.
Rupert Saunders is editor of Auto Retail Bulletin, a monthly journal that covers European auto retailing.
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