Cross-border complications

Yesterday we held a webinar for our research programme members looking at dealer consolidation in Europe and in particular what was going on in respect of cross-border deals.  The consolidation trends creating ever larger groups with a higher domestic market share is well established and in some markets like France, Netherlands and the UK, the share held by the top 50 groups exceeds 50%.  There are some groups who have been established in multiple markets for many years such as Emil Frey but they have been joined by others who are expanding rapidly with multiple cross-border deals.

Since the start of this year, we have seen the acquisition of Jardine in the UK by Lithia of the US which I commented on in an earlier blog, the acquisition of four Mercedes-owned sites in the UK by Hedin and then this week the acquisition by Van Mossel from the Netherlands of Hugo Pfohe, a large Hamburg based dealer group, as well as many smaller cross-border deals involving just one or two points.  In our tracking of dealer M&A (which we know is only a partial picture) just five buyers have made almost 90 deals since the start of 2020 acquiring almost 500 franchise points in total.  This select group is led by Van Mossel who have expanded their dealer network to support their very substantial leasing operations followed by Hedin who are now positioned comfortably in the top ten nationally in their home market but also individually in Belgium, Finland and Netherlands.  Third and fourth places in our ranking of the most active buyers go to Emil Frey and Car Avenue, both very active cross-border with Vertu Motors of the UK completing the list with 10 deals that we have tracked, but unlike the others all domestically in the UK.

Cross-border deals are generally driven by reaching the limits of the home market (as viewed by regulators or OEMs), the perception that the ‘grass is greener’ in another market, or specific encouragement from the OEM, as we see currently with BMW.  However, securing the benefits can be tough.  Many of the synergies that can be relatively quickly captured in a domestic deal are much more challenging when acquiring cross-border, particularly when the markets are not contiguous.  The position for Car Avenue with a tight focus around the north-east of France, southern Belgium and Luxembourg is very different to the position of Hedin whose interests now cover from the UK to Slovakia and then right up to the Nordic region.  Whilst the geographical scope for Car Avenue is within a two hour car journey, for Hedin it is more like a two hour flight.

 Relatively distant operations require local management plus some degree of central oversight, offer few operational synergies such as sharing used car inventory, and typically would be reliant on a different supplier base for everything from IT systems to utilities.  Third party funders may not cross borders, requiring new relationships to be formed or existing relationships.  Regulatory approvals and tax registrations will need to be transferred with the acquired business or applied for like a startup if the deal only involves the purchase of assets.  Whilst not the biggest challenge, these still have the potential to be showstoppers in the short term if not properly addressed.

 This is not a path that has been uniquely followed by car dealers.  Other types of general retailers such as those focused on groceries and department stores have also tried to expand internationally and in many cases failed.  Academic research indicates that those who have been successful like ALDI have built on strong success at home, quickly building local scale to generate standalone economies, brought something new to the market like deep discounting, respected local needs and picked their timing for when the market was ready for their proposition.  Companies that have failed with international expansion as often as they have succeeded have not paid sufficient attention to these factors and destroyed shareholder value as a consequence.

 The trends indicate that cross-border dealer consolidation will increase and that in five years we are quite likely to see a number of supra-national players who enjoy scale at the national level as well.  We do not yet know exactly what the management model will look like for this type of business, but it seems that some degree of delegated authority will be essential with clear direction on minimum levels to be achieved on critical KPIs.  Cost synergies may remain limited, but these supra-national dealer groups will be joining OEMs in looking for a supplier base that can support them across the business.  As the digitalization of automotive retail continues to advance, more benefits may be possible in this area, particularly in the development and utilisation of AI tools to support local decision making in a way that reflects a central philosophy.

 Cross-border will remain complicated, but it may become easier to drive incremental benefit so that one plus one equals three in terms of synergy.