“Buy land, they’re not making it any more”

The quote “buy land, they’re not making it any more” is attributed to Mark Twain who died just as the motor industry was getting into its stride in 1910.  However, his advice has been followed by car dealers around the world as they have bought property, and then invested in ever-larger premises, built to increasingly higher standards.  Even a relatively modest dealership for a volume brand in Europe now involves a spend of millions of Euros, and for premium brands, the bill starts above €10 million and can reach a multiple of that.  For listed dealerships, the property portfolio helps to build a strong balance sheet, for private owner-operators it may represent their pension fund.

The dealership ‘arms race’ has not been entirely driven by dealers wanting to build their property portfolio – manufacturers have demanded, encouraged or condoned investments that meet new corporate standards.  A few dealers have resisted the more extreme demands and there are a few examples where a dealer has given up the franchise rather than invest millions in a new concept that will not yield a commensurate return.  Those that have run the numbers and still invested have often done so because the spend is still going to boost the balance sheet – which is true as long as dealership property values do not slip.

Having first talked about the ‘property timebomb’ almost ten years ago with the words “the number, locations and formats of both sales and aftersales points must be reviewed, assessed against the value they deliver to the customer in a more transparent, largely online world”, the fuse seems now to be burning down.  Unfortunately, progress over the last decade has been modest.  On a like for like basis, the number of main dealer sales points has declined by 13% over the last decade across 36 European markets, the number of authorised repairers by a slightly greater 19%.  Although we don’t have hard numbers, the investment at each of these sites has surely increased as the site size has grown and the built cost soared to meet new standards.  It’s likely that the inflation-adjusted investment in dealer property has actually increased over the decade, at a time when it should have been shrinking in the face of digitalisation.

We may now be approaching a point where this all has to be resolved.  With a number of brands in the process of, or considering, introducing agency contracts to replace franchise, the manufacturers need to take on a share of the dealership costs to reflect the brand-related investment and operating costs for those parts of the business moving to agency, typically new car sales.  This does not mean that they have to buy property assets, but they will have to pay an economic rent.  They therefore have a strong interest in reducing the asset intensity of the business and reconsidering whether it is really necessary to insist on a particular floor tile or furniture supplier.  There are signs that some brands may try to work their way around this requirement of a ‘genuine agency’, but the European Commission (and the CMA in the UK now that we have Brexited) have indicated that they will be looking very closely at any attempt by manufacturers to get the benefits of agency without taking on the appropriate responsibilities.

Some manufacturers, and probably some dealer groups, assume that there will be an alternative use for premises that are no longer required, perhaps by another brand, or for a dedicated used car outlet, but this logic is flawed.  Whilst not all brands have declared an interest in agency, they are universally having to adapt to an omni-channel world with more money invested in digital channels and capabilities and the related need to rethink the provision of physical sales and service outlets.  We will see an acceleration in the rate of reduction in the number of sales points, with some becoming service only, or service and used cars.  That does not require a ‘gin palace’ standard outlet, nor do they need to be in the most expensive locations.

We will therefore end up with property that is no longer required at all, or which is too large, too expensive or in the wrong location for the alternative automotive use.  The opportunity to find alternative use for the property is also limited at a time when the whole retail sector is facing the challenges of digitalisation and the Amazon effect.  We will need creative solutions to avoid huge property-related writedowns on dealer balance sheets.  Whilst individual dealers can start to address this themselves on a site by site basis, there is also the opportunity for manufacturers and dealer associations to work with property companies to look for alternative uses and create a path that allows the timebomb to be defused, rather than detonated.