Is crossing borders the next frontier for dealer expansion?

I seem to be writing a lot of blogs related to dealers at the moment, but that’s because there’s a lot going on.  The reduction of the number of dealer investors is well-established, leading to the emergence of the very large national and regional groups that have taken a growing market share in many markets.  The Top 10 dealer groups accounted for over 20% of the total car market in the UK, Germany and France in 2019 and 40% in the Netherlands.  This was almost double the level in 2015 in France and two-thirds up in the Netherlands, both of which have seen a rapid increase in consolidation.

In ICDP, we identified over 150 mergers or acquisitions (M&A) in the big 5 European markets last year, and that is almost certainly missing many smaller ones.  The pace in 2021 seems to have accelerated, so there is no sign that this consolidation will plateau any time soon.  We are however, possibly reaching the point where some players are achieving a scale with specific brands in their home markets that the OEMs start to feel uncomfortable with – and their permission is needed for any change of control.  There are also some investors whose ambition exceeds the potential of their home market, or who will face scrutiny by local regulators due to their overall market share.  These factors are all feeding into more deals that cross national borders.

This trend was demonstrated by the announcement last week that Hedin of Sweden had reached a final agreement to acquire the Stern dealer business in the Netherlands.  Hedin have been particularly active in doing cross-border deals, also having acquired dealer businesses in Norway, Switzerland and Belgium, and currently owning more than a quarter of UK-based Pendragon.  However, they are not alone in looking abroad.  Van Mossel in the Netherlands has grown rapidly through acquisitions in Belgium and Netherlands, and Car Avenue has spread out from France into Belgium and Netherlands.  These now-international players join other groups who have long operated outside national boundaries such as Emil Frey, Penske and Inchcape who make up the Top 3 in our European rankings.

Given how international the automotive business is, the question now is perhaps why retail has lagged behind manufacturers and suppliers?  Retail in general has a chequered history of cross-border expansion.  Although there are some major consumer brands who also operate globally at retail level such as Apple, Nike and Zara, pure retailers have often struggled.  Examples include Marks & Spencer, Tesco and Walmart who have all expanded, then withdrawn from international investments.  Academic literature and experience indicate that retail carries specific challenges related to the opportunity to apply scale benefits from the acquirer location to the new markets, differences in consumer tastes and the fragmented nature of retail on a store by store basis at market level.  An additional challenge in some retail areas, but not as relevant to automotive, is the need to source produce locally – such as fresh foods.

In car retail, there are differences in typical operating practices between markets, but in principle the opportunity is the same – do the best that local conditions allow in new car sales, and push F&I, used cars and aftersales to achieve a balanced business.  In today’s world, all of this needs to be overlaid with continuous development of digital channels and capabilities.  The better dealer groups have operating models and centralised capabilities that can be applied in less developed markets and would yield improved performance compared to what would be typical.  Some manufacturers would welcome the effect of more sophisticated groups entering these markets as they believe this would result in a knock-on effect of all dealers having to raise their game.  However, the other challenges of local knowledge and fragmentation can only be addressed if the acquired business also has local scale and capable management.

For exactly the same reason that dealer groups tend to focus geographically on contiguous areas within their home markets to ease the management task, a few dealerships in a foreign market will almost certainly add more overhead cost and risk than the benefits that might be achieved.  Similarly, attracting capable local management in the acquired business requires scale that makes the opportunity attractive, as trying to manage a new foreign acquisition at long distance is unlikely to be effective – even without the additional barriers of living in the Covid-age.  Local scale also helps to achieve benefits in those areas where corporate scale is not transferable such as relationships with NSCs and suppliers for services and supplies that remain local rather than international.

An acceleration in international expansion by dealer groups is therefore likely as large groups look for new opportunities where there is the potential for higher rewards than their home market, but it does require full commitment – jumping in with both feet.  A toe in the water is almost certainly going to confirm the challenges, but not realise the opportunities.