Dealer networks – when will we see dramatic change?

I recorded a podcast last week, when one of the discussion topics was the recently announced cuts to the Renault UK dealer network of around 20% from 144 franchise points to 115, a move that has attracted descriptions like “radical” and “slashing”.  Based on some work that ICDP did with Urban Science last year, the reality is that with 115 points remaining, the average drive time for a customer from a Renault dealership is probably still less than 20 minutes for a purchase that they make once every three or four years.  I accept that the tolerance of a customer to travel far for aftersales is less, but the assumption that service is only available through a traditional dealership is outdated, and probably worthy of a blog of its own at some point.

We are in the process of gathering data for our European Car Distribution Handbook (ECDH) and I suspect that despite individual moves like that of Renault, the total number of franchise points in Europe on a like-for-like basis will only have reduced very marginally over the last year.  The average rate of reduction over the last 15 years has been 0.5% per annum, whereas we believe that this needs be closer to 10% per annum if we're going to achieve viable sales networks which work in conjunction with digital channels to give customers a true omni-channel experience.  Even pre-COVID, the average new car sales per dealer including both retail and fleet business was only hovering around the 300 level in the major European markets with the exception of the UK (consistently around 500).  Despite a long period of consolidation and consecutive years of improvement, the Netherlands was still only at 250 in the year prior to the pandemic, whilst Italy managed to breach the 400 level after a similar decade of network shrinkage.

This matters because regardless of whether a particular brand chooses to go agency or remain on franchise the margins available to dealers on the new car business are likely to reduce and electrification and other factors are progressively eating away at the contribution that can be made by aftersales towards running the dealership as a whole.  We also know as discussed in last week's blog that the used car business will become increasingly tough and only those operators who adapt to the changing world are going to see consistently strong profits from that department.  At the same time, the demands on the new car sales department will actually be growing as customers look for advice on the issues raised by electrification and other technology change.  Great customer omni-channel experiences will also require full integration of their online and physical journeys, implying high levels of process discipline in dealerships and significant investment in retail systems regardless of whether this is funded by manufacturers or dealers.

On this basis the core of future networks will be built around franchise points that meet some viability criteria that will be largely linked to volume.  I am not excluding the potential retention in networks for a long time to come of smaller owner-operators who play a supporting role and one which is potentially important in their local community, but the heavy lifting will be done by the larger operators and that requires a step change from the current level of new car sales per dealer. Few brands other than start-ups harbour any ambition to double their sales volume, so they cannot rely on this to solve network viability problems.  You also cannot cost cut your way to success because of the ever-increasing demands on dealers to deliver a great customer experience.

We are therefore left with two options.  One is that you halve the number of franchise points in the network and the other is that you share a facility with other brands in order to achieve a similar volume effect.  Going back to our exercise with Urban Science that I mentioned earlier, we showed that halving the number of franchise points in the UK network from 120 to only 60 would increase the average drive time from 17 minutes to a still very acceptable 21 minutes.  In our current consumer research we are digging into more detail in terms of how new car buyers would react to this assuming that aftersales convenience was unaffected through other actions.  Manufacturers hold back from making cuts of this order partly because of traditional thinking around aftersales provision but also subjective concerns about whether the loss of a dealership with whom a customer was familiar would in itself lose that customer to the brand even if the next closest was only a few minutes away in the opposite direction.  My view (which will be tested one way or another through our current research) is that with digital research now almost universal, then the customer can be largely secured for the brand before the dealer visits start.

The alternative also challenges traditional thinking but in a different way, still tapping into insecurities of network planners and sales management within the manufacturers. Sharing a space with another brand is seen as threatening because the customer may then switch when an alternative is available only a few paces away.  There are also concerns that the brand experience will in some way be affected by the presence of other brands in close company.  Again based on our existing consumer research and potentially to be validated by the current round, if the customer has zeroed in on one or two brands through their online research, would the simple presence of another brand in the dealership lead to them disregarding all of their previous efforts?  When I have spoken to dealers operating multi-brand showrooms, then they tell me that where brand switching does occur it is because of a specific push trigger such as availability or the culling of a popular model.  These are forces which will act on all buyers in all circumstances, not just those who happened to have visited a multi-brand dealership.  The roll-out of the Stellantis House concept will be an interesting test of brand loyalty in these environments.

I believe that the case for more dramatic network change is strong and will become stronger with each year that we ignore that.  Whilst it is undoubtedly bad news for dealers who lose franchises it is good news for those who remain, but with a stronger foundation for the future.

If you want to know more about network structure dynamics, then check out the European Car Distribution Handbook on the ICDP website here, or see the accompanying webinar here.