You don’t have to support or fight in the war in Iraq to be able to comment on its direction and tactics. Sitting where we do, in contact with all the major players but outside the action, gives us a chance to sit back and comment on the direction our industry is taking.
For a few years now it has been accepted that, except for a very few franchises, there is little margin in New Car Sales. New cars are a loss leader. They help you sell used cars and aftersales, where the margins are much more healthy.
It is a structure that helps the manufacturers to keep the status quo. To keep control of their own network of dedicated dealerships to preserve their own brand values.
Why? Because they don’t want new entrants who are outside of their control. And new entrants will always cherry pick the mass market commodity, which in our case is new cars. And if there ain’t no profit, there ain’t many competitors.
Used cars, on the other hand, are not a mass commodity, though some have tried to turn them into one. Each is an individual product, and so it needs considerable expertise and man-hours to ensure that it is properly prepared and priced to make money.
They are also recognised as an area in which the general public is at risk from the more unscrupulous. So unless there is a niche in the market where this does not matter so much, such as so-called ‘sub-prime’, the general public is really distrustful of anyone it does not know.
And because manufacturers have been very astute at creating their own used car brands, the public still trusts the franchise more than the independents. And even if a trusted brand such as the AA steps into the ring, they can still find it difficult. Who could be more trusted than them, but as they don’t have the expertise, they have to rely on third parties. When the public realise it is not them, trust can evaporate quickly.
And so to aftersales, currently propping up more than 75% of the nation’s dealers. Until now there has been no national threat to the dealers. Kwik-Fit makes some in-roads at the margins, but Halfords, Lex Autocentres and now the AA (again) seem to be struggling to gain the motorists confidence, despite the fact that labour rates have risen an astonishing 50-60% in the past five years, with inflation at 2-3%. If you want proof, then the top technicians are paid as much as the top salesmen in some dealers (and probably earn the company more money).
But now, slowly but surely, we are about to see this structure change. And we are beginning to see the players who will drive the market lining up. And we, Motor Trade Selection, are just starting to feel it on the ground.
And I am sure I do not have to remind you why.
It might be divided over the world situation, but Europe is still a powerful force in our industry and will be wielding real influence over the coming years through the implementation of their Block Exemption Directives.
Forget the detail, this initiative is about the loosening of ties between manufacturers and dealers. About the opening up of the dealer market to competition. And instead of just doing through the car sales route, they are concentrating heavily on aftersales. As a tactic it is quite sensible too, because to achieve their aims they must break the link between the dealer and the manufacturer.
So here’s the scenario. As yet, there is not much point in opening up the new car sales market. There is no profit in it, ask any of the internet brokers now that prices with Europe are generally harmonised. Open up aftersales, though, through the sharing of technology and the recognition of approved aftersales sites and the dealer’s one real source of income starts to erode.
Once that starts to happen then manufacturers are left with two choices – either let their networks go, or give them something profitable to deal in, like new cars. And that is when the competition will arrive. And it will arrive in shapes and sizes, from Tescos to your local specialist broker.
Not only that, once the process starts and the manufacturers know that the aftersales route is no longer a viable way to ‘subsidise’ a dealer’s activity, then service intervals will extend.
After all in a truly competitive sales environment, cars will be judged on whole life costs and on reliability. A genuine new car retailer will not be interested in future aftersales income, but in finance and chassis profit now. And suppose they go down the Daewoo route of free servicing, they will want that cost to be as low as possible, or they don’t sell your brand.
Today, yes, in five years time it will start to happen, in ten years we might be wondering what franchised outlets looked like. (As I often remind people, 35 years ago TV shops used to be franchised with aftersales income a regular profit maker, now we only see Dixons and Currys on the high street).
Does all this matter?
On one level the answer is probably no. Over a period of time it will not really affect the number of cars sold or the size of the industry. In other words, a similar number of people will be employed whether or not these changes happen.
On another level, there will be changes and as we always say, the ones who appreciate the new opportunities will thrive, those that don’t will be left in their wake. Technicians, salesmen, managers, recruitment consultants, we will all be affected in some way.
Enjoy the ride.