Dealers, deals and data
Interesting news this morning which has ramifications beyond the UK concerning Pendragon, ranked the seventh largest dealer group in Europe in our 2022 rankings. The business has been ‘in play’ for some years, since the Hedin Group first bought a stake in 2019, subsequently attracting formal offers from both Hedin and Lithia. Although still subject to shareholder agreement, Pendragon announced this morning that it is recommending an offer from Lithia to buy the dealer operations and leasing business, leaving Pinewood, the wholly owned software business to continue as an independently listed business. The Lithia UK businesses will transfer to Pinewood, and a new joint venture in North America will provide a platform for further geographical expansion of Pinewood into North America, with Lithia’s almost 300 dealerships as the first obvious target.
The total value of the deal is less than the offers previously made by both Hedin and Lithia, so it remains to be seen how the shareholder vote goes, particularly with respect to Hedin, but there has been no sign of other bidders since Hedin withdrew their last offer last December, so I would assume that it will go ahead. ‘Do nothing’ is not an option as the whole process has been a distraction from driving the business forward in my opinion. The combined Pendragon/Jardine business under Lithia ownership will be around the same size as Arnold Clark, so vying for top spot in the UK.
My comments this morning however, are not so much about the dealer side of the business but about Pinewood and dealer software businesses in general. Pinewood has a well-regarded and capable dealer management system (DMS) which in the UK is mainly used by Pendragon with other dealers having shunned it because they did not want to run their business through a system ultimately controlled by a competitor. Pinewood has therefore focused until now on growing overseas, mainly in Northern Europe where Hedin is a key client and also in Asia. The latter has ended up in a legal dispute which is yet to be settled and has definitely been a factor in deterring bidders for Pendragon as a whole. Under the new arrangements, the constraints on Pinewood expanding in the UK have been removed, and they have new opportunities in North America. This however raises a broader question about the future of DMS in automotive retail, not only from Pinewood but also from the other major providers such as CDK, Keyloop and Reynolds and Reynolds.
The dealer IT environment has been built around the core of a DMS which is fundamentally an enhanced accounting system. Other applications including CRM, workshop scheduling systems and the various manufacturer tools have been bolted onto the DMS as point solutions. The DMS providers have tried to respond to this by providing some of the functionality within their DMS product or by acquiring or forming partnerships with point solution providers to provide one stop IT shopping for dealer groups. They have had some success, but the outcomes are highly complex and group specific, which understandably creates a resistance to change anything unless forced on them.
In parallel, manufacturers are looking to offer a consistent omni-channel platform to their end-customers, and regardless of whether they choose to do so through a franchise or agency relationship with their dealers, they need to have a retail system which links online and offline buying journeys. This reaches into areas that have been historically supported by the dealer specific DMS and point solution environment. Sitting behind many of the manufacturers’ solutions are core products from some of the biggest IT providers in the world such as Salesforce, SAP and Oracle.
ICDP research clearly shows that for the vast majority of car buyers, the physical dealership remains an important, almost essential, part of their buying journey but brand selection for most buyers happens in the online world, before they visit dealerships. Whilst product characteristics and reputation will be the main driver of that brand choice, there must be the possibility that a poor online experience could deter some customers from a brand so that the quality of the technology solution employed becomes a competitive differentiator. Other ICDP research shows that the physical dealer property is only a hygiene factor in the purchase decision – that a poorly presented, maintained and organised dealership would deter buyers but otherwise is not hugely influential. If that same principle is applied to the online environment, then the customer facing systems need to be well presented, reliable and easy to navigate, providing all the information that the customer needs to make their brand decision and lead them in most cases onto their physical buying steps.
Pinewood is potentially securing new backing and new freedoms to compete more effectively with other DMS providers, but all of them need to carve out a position where they not only support the operational processes of the dealership but can offer solutions in the retail environment that offer a credible alternative to the IT majors who are seeing new opportunities in automotive retail. We are (hopefully) emerging from a period when there was over investment in dealer showrooms which failed to address real customer needs. In my view there is a need for those who develop or specify retail systems to step back and look at the IT needs of all the stakeholders involved in IT retail to determine an appropriate and flexible architecture that does not replicate the errors of the physical world in the virtual one.