A perfect storm for dealers?
Investors and senior management of dealers, particularly the large groups, face a perfect storm in the next two to three years, arguably unprecedented in recent times, possibly ever. This is due to the convergence of multiple trends, including some new additions to the mix, that will create a highly unstable environment.
We have the established trends that we at ICDP have been following and commenting on for a few years, First amongst these are the changes in customer behaviour (which empathically do not include fewer dealer visits by new car buyers – they continue to trend upwards). These changes in part force the need for greater process discipline and stronger systems and data management to work effectively in an omni-channel environment. Also, we face structural decline in the size of the aftermarket due to new product technologies and more reliable cars.
Relationships with manufacturers have never been a bed of roses, but the closer connection between manufacturers and end-customers created by connected cars and online channels adds new areas of concern and suspicion. Products are going through radical change, not only with electric cars, but also in the sense of whether the car is the product, or the sale of access to a car through a mobility scheme is the product. If the latter, who sells it, and what is the role of the dealer? This is being addressed by a new round of contract negotiations – always a good source of fees for the lawyers – but again this is compounded in the next couple years by the potential changes that will be brought about by the update, renewal or scrapping of the Block Exemption regulations.
We also have the new kid on the block – where meeting emissions regulations is not just an issue for engineers, but also for dealers. Meeting the WLTP regulations caused widespread supply issues due to test bottlenecks last year, and looks to be causing more problems again now as we head into the next stage. If every derivative has to be individually tested, then every point at which the requirements are ratcheted up will cause more supply disruption. However, the bigger issue is that manufacturer compliance will not depend on having engineered cars to meet the standards, but on selling cars to end customers in a mix that meets the standards. Already PSA in Germany is looking to target dealers with mix objectives, and they will soon be joined by others.
This all happens against a background of growing concerns about economic recession, triggered by increased nationalism and concerns about trade wars. That might at least ensure that interest rates remain low, but it will squeeze margins at all levels in the value chain and make customers nervous about committing to replacing their car.
There is nowhere for dealers to hide against this multiple onslaught – no safe haven, no quiet moment. Investors need to decide whether this is the time to quit, or whether they have the confidence and patience to ride out the storm with a five year time horizon. They need to have confidence in their management, and believe that they have the skills and the flexibility to not only manage the business day to day, but remodel their business for the future. It recalls an image we used some years ago of “having to change the wheels whilst driving along”, except that now there may not be the luxury of being allowed two wheels on the ground.