Why the European dealer sector isn't real
In this section, the ICDP provides an overview of the factors having the biggest impact on dealers today.
Managing Director of ICDP
We all often talk about European car dealers, and there are two trade associations who have a mandate to speak on behalf of “European car dealers”, but the reality is that there are big differences between dealers across Europe, and the messaging needs to be more differentiated to be truly meaningful. Dealers do face some common challenges, but the timing and pace at which they will impact vary, largely because of the market characteristics, including consumer behaviour.
Looking at the dealer business model, whilst it is generally true that aftersales performance is key to the overall dealer profitability, the contribution made by new and used car sales varies widely. This is because we currently face exceptional conditions due to restricted supply. Still, in normal times, new cars make a significant contribution to overall dealer profitability in Italy and Norway, for example, but are only marginal in the UK. However, used cars are an important part of dealer profitability in the UK, much less so in Germany. In Germany, the aftersales contribution is exceptionally high, supported by a more loyal customer base (typically 6-7 years rather than 3-4 years in France and several other markets) and high labour rates, enabling high gross profit per hour. On the other hand, low labour rates in Italy mean that the potential contribution from labour profit is also lower, so dealers focus on very sophisticated trade parts approaches, which supports a more extensive network of non-dealer authorised repairers than many other markets.
"Whilst regulation is consistent across Europe, consumer behaviour is not. This means that the pace of change will vary across markets, and whilst that might take us to a broadly similar endpoint, there could be a difference of a decade in terms of when that occurs."
Steve Young, Managing Director of ICDP
These factors also feed into the structure of dealer networks. The European Car Distribution Handbook, updated annually by ICDP, shows that the average new car sales per dealer for Germany is around one third lower than that for the UK, which has the most concentrated dealer networks by this measure for any of the European markets. Dealer ownership is also more concentrated. The drivers of this cannot be attributed solely to the differences in the business models in terms of cause and effect, but the way in which the large groups (particularly in the UK) have leveraged scale to improve used car and aftersales processes certainly helps improve performance in these areas and compensates for any shortfall in new car contribution.
Turning to the general trends that will affect dealers, the key ones are arguably those related to electrification, digitalisation, and manufacturer changes to new car sales formats. These, in turn, are influenced by regulation and consumer behaviour, and whilst regulation is consistent across Europe, consumer behaviour is not. This means that the pace of change will vary across markets, and whilst that might take us to a broadly similar endpoint, there could be a difference of a decade in terms of when that occurs.
The timeframe for the switch to zero-emissions sales is defined by EU regulation, though some national governments and individual OEMs are looking to accelerate this. Reduced new car margins are typical of battery electric vehicles (BEVs), and they also have significantly lower repair and maintenance needs and profit margins due to the absence of the oil change requirement. This significant impact on the aftersales business is compounded by a generally negative trend even on combustion engine cars, as annual mileage driven is declining in most markets, and work content per car is also reducing. The effect of these is, therefore, that in markets where aftersales (particularly labour) is a key element of dealer profitability, electrification has a relatively strong negative impact. Electrification trends are generally moving faster in northern Europe, including the UK, than in the south and east (where older car parcs will also ensure that repairers, in general, are protected for longer as combustion cars will remain a larger part of the parc), so dealers in the north will be affected earlier.
Digitalisation is being driven by the combination of consumer behaviour influenced by their experiences in other sectors and a desire by OEMs to reduce distribution cost and benefit from improved data availability. Again, there is a north-south divide in terms of consumer adoption of online banking, for example, which is a key indicator of the willingness of consumers to commit to major purchases online. However, the trend is obvious everywhere, and even in the most advanced markets like Scandinavia, we are far from a situation where the majority of car buyers would like to buy a car online without visiting a dealer at some stage. This is, therefore, not a binary situation as manufacturers will need to create much more capable omnichannel environments with their dealer partners, regardless of whether a market is 20:80 in terms of online/offline preference or the opposite way around. In either case, the 20% is significant, and only the actual usage pattern will vary between markets, not the needed functionality. All dealers will therefore need to be prepared to invest in digitalisation and adapt their internal processes and staff profiles to support this.
Looking finally at manufacturer actions on sales formats, this is in part linked to digitalisation and the need to reduce distribution costs, but omnichannel can function under a franchise agreement if the terms and supply processes are adapted to support a more seamless process for the customer. However, the trend towards agency is already established, and we expect more OEMs to follow and for the scope to be broadened to more markets over time. A range of factors influence the markets that an OEM selects and the roll-out sequence beyond that, so we have seen Mercedes pick Sweden, Austria, Germany, and the UK in that order, whilst Stellantis is initially focusing on Belgium, Netherlands and Austria. What is certain is that agency or at least significant changes to franchise agreements will affect all dealers over the next five years or so, as the underlying drivers are common, but dealers in the same market or for the same brand will feel this impact at different points.
Coming back up to the European level, it is therefore clear that whilst we often find it useful to talk about European dealers, as there are arguably more similarities amongst them compared to Chinese or US dealers, for example, there are and will remain significant differences. In some cases, this will dictate the pace of change, but the direction of travel is the same, and all dealers need to recognise that the change will be fundamental. Most will have a future, but it will look different to today.