Successful European car dealers of the future may do what Christian Pace and his Scai Motor in Parma, Italy has done - diversify.
Like most other European retailers, Pace does not know for sure what the new block exemption regulation will mean for his dealership. But he isn't waiting to see what happens. He's taking action now.
Pace has seen his profits on selling new General Motors cars (primarily Opels) virtually disappear in an over-dealered Italian market. So he has decided to hedge his bets by starting new businesses. That way, Pace will ensure that he still makes money if profits from his dealership evaporate.
Block exemption and other factors in the rapidly changing retail landscape are forcing thousands of European dealers such as Pace to rethink, and in some cases to reinvent their businesses.
The European Commission forced the industry to separate sales, service and parts. After 2005, dealers will be able to locate wherever they choose.
Pace has already opened a used-car dealership called Scai Store, which will sell used cars of all different brands. And Pace is negotiating to open a Bosch Car Service franchise, an aftermarket repair business.
Scai now operates a 1,000-square-meter showroom for new cars and a similarly sized showroom for used cars. During the last 10 years, used car sales have doubled at Scai, while new car sales have remained stagnant. If profits keep growing on the used car side, that floor space could surpass new cars.
"I have two major programs to prepare me for [the environment] after block exemption," said Pace.
The block exemption is just one of many changes affecting the way dealers will do business in Europe. During the last few years, most manufacturers have extensively rationalized their networks. The introduction of the euro has started the process of price harmonization. The Internet has introduced the tantalizing possibility of a new retailing model. More recently, difficult economic conditions have brought round after round of brutal discounting, all but eliminating profits on new cars.
"Slowly, gradually there will be more pressures for dealers to find other sources of profit," said Philip Wade of HWB International, a Warwick, England, consultancy.
Dealers worry most about splitting sales and service.
"In the service business nobody knows how it will work out because all the independent service stations will ask for a contract," said Fritz Haberl, recently retired CEO of the MAHAG group, a Munich-based dealer group selling Volkswagen and Audi. "We're all afraid the service business will have bad competition in the future."
A survey conducted by IBM's automotive consulting arm suggests dealers have a lot to be afraid of in the service area. The survey showed 85 percent of fleet managers and 45 percent of retail customers in Europe would be willing to switch from a dealership to an approved, brand-independent garage if the price was right. Mike Woodward, partner for IBM's north region, said customers surveyed said having the option of going somewhere besides the franchised dealer was good.
Pace says he may have to service additional brands if GM business declines.
"We're going to be obliged to be multi-brand on repairs," he said. "You can't have reduced turnover on this [service] business."
Hans van der Sluijs, chairman of Nefkens group, a large Dutch dealer group based in Utrecht, is adopting a more conservative approach. He predicts Nefkens' future business will remain similar to today's model.
But van der Sluijs believes many older dealers in smaller markets will look to sell their businesses rather than invest the time, energy and money in adapting to the complex new rules. So Nefkens plans to go shopping for more stores to buy among these potential sellers.
But Max Warburton, an analyst at Goldman Sachs in London, said it's tough to predict whether companies such as Nefkens will be better off getting bigger.
"There is no compelling evidence from the USA that the largest dealers are the most profitable," he said.
HWB's Wade says that while small town dealers may be sold to large groups, the stores will remain.
"In places like Germany and Switzerland, they don't drive 30 kilometers to buy a car. They buy it from their local dealer. I honestly don't see those guys disappearing. In a lot of Europe, people still shop very locally."
Jaap van den Broek, owner of a Citroen dealership in the provincial town of Deventer, Holland, envisions his future business looking much the same as it does today. He sells about 200 new cars a year, and hopes to grow that to 250 in five years. He plans to remain the owner and operator and believes he can sell and service more cars with the same seven employees he has now.
"If you sell cars, you should keep service within your own company, not outsource it," he said.
It's unlikely that relations between manufacturers and dealers will be easier in the future.
Said Haberl: "It's getting more and more complicated working together with the manufacturer. Because they don't make money, they try to get our money and we don't make money. In that environment, it's very hard to do good business and satisfy the customer."