Squeezed in the middle

Attention of late has mainly been on the larger players in our sector – the long drawn out sale of Pendragon, the UK dealer group to an even larger group (probably Lithia, but we don’t yet know for certain), the continuing saga of would-be used car disruptor Cazoo desperately trying to cling on to what is left of their dream, the further expansion of LKQ and Alliance Automotive in parts distribution or the completion of the ALD acquisition of Leaseplan to create a giant in the leasing sector with over 3 million vehicles globally, or the expansion of Halfords, the UK retail and repair chain to become the largest repair network in the UK by far, exceeding dealer groups and other independent chains with 650 autocentres.  In amongst all these headline-grabbing moves, it is easy to overlook the many more players who make up the bulk of the sector, and who need to navigate their own route forward, but now wonder what the future holds.

They are typically privately owned, usually with the owners directly involved in the management of the business and often either in the second or third generation of the founding family, or facing that transition in the near future.  Their fortunes are usually directly dependent on the actions of the larger players as suppliers of the products they handle or as local competitors, but with access to much larger resources to support their business.  For example new car dealers – whether as franchisees or agents – are still subject to termination by their manufacturer partners.  Used car dealers require a reliable supply of suitable product, traditionally from manufacturers and large fleets.  Repairers need rapid access to parts from manufacturer and independent channels, but also repair information and data from the manufacturers.  Parts distributors need to source parts and compete with car and parts manufacturers’ own distribution channels.  Lease companies need to source cars at prices that allow them to be competitive with manufacturers’ own captive finance companies.

It is understandable why in that environment there is a degree of blinkered thinking, that certain dependencies are taken for granted – constants that need not be considered when thinking about future development.  The reality as many have discovered over the last couple years is that these constants can and do change.  Manufacturers continue to rationalise their networks with as much focus on the number of investors as the number of franchise points, leaving long-standing and often performing dealers with limited choices for the future of the affected facilities and employees.  The channel mix for new car sales switched massively during the last three years when supply was restricted, affecting deals for lease companies and the supply of used cars to all types of dealer.  And as retention becomes ever more critical at a time of structural market decline, the extension of service plans and other retention mechanisms will make it harder for independent repairers and the related parts distributors to maintain their market share, let alone absolute volumes.

These pressures are more significant for the mid-size players than for the smallest ones.  Small truly owner-operator businesses with limited investment and a very local focus may well survive better than their slightly larger peers who have expanded, and in doing so become slightly more corporate and distanced from their customers.  The strength of the smallest players is that they are hands-on, dealing with their customers on a daily basis, and often interacting with them outside of their business context in the local community.  These close relationships will often influence buyer behaviour so that their loyalty is to the business owner, not the brands or products that they sell.  As long as they choose to be in the business and remain financially viable without driving overhead or risks into their larger trading partners, they are likely to survive.

That leaves the players in the middle the most exposed to external changes.  Their local connections are likely to be less robust, they employ more staff and have larger investments.  They are more likely to be using external funding rather than retained profits to cover capital spend, which creates a monthly bill that has to be paid regardless of the ups and downs in the business.  In a more uncertain world, the risks to their business of a change in direction by their larger trading partners and competitors may threaten their very existence.  The risks therefore need to be recognised and considered in strategic planning.  The probability of them happening may be relatively low, but the consequences are high.

That is not to suggest that the right solution would be to anticipate some of the changes and jump first, though in the case for example where a dealership needs investment and is not delivering good returns, there would clearly be a case for choosing to terminate the existing franchise, and either invest in a new brand or change the use of the site.  What is needed as a general approach is to mitigate the effects of these risks – drive the performance up wherever possible rather than ‘coasting’ and look at extensions to the business that reduce the dependency on any parts that are at risk.  The options clearly depend on the specific business type, but may include adding franchises, growing services, improving online reach and forming new partnerships.  It becomes a win-win.  These actions will enhance the value of your business if someone comes knocking and wants to buy, they will also deliver improved returns if you choose to stay the distance.

Being in the middle may result in an uncomfortable squeeze, but there’s no harm in getting your elbows out and pushing back.