Consolidation & restructuring

Putting in place a long-term sustainable business strategy

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The changing face of automotive retail

Within the changing automotive market, there is an imperative for automotive companies to evolve. This needs to be planned carefully, with a long-term strategy put in place to proactively support future growth. 

As has been highlighted in the sections of this report relating to alternatively fuelled vehicles, digital customer journeys, the subscription economy, and connectivity, significant change is already taking place within the automotive sector. It would be naïve to think that traditional automotive business models were not already coming under pressure to evolve. 

Since the last financial recession in 2008, market consolidation and restructuring of dealer networks has already made an impact, with several large acquisitions. Examples included Marshall Motors Holdings plc acquiring Ridgeway and Lookers plc acquiring Benfield Motors. National Sales Companies have been reducing the physical footprint of their dealer networks while others have pulled out of markets or model segments. Examples include Ford reducing to 180 of its sales franchise dealerships, Mitsubishi exiting the UK and European markets, and the consumer trend to move from purchasing city cars to SUVs. 

It comes as no surprise that 2020 has accelerated some of these trends. The impact of a global pandemic, an economy in recession, and the impending exit from the EU, with or without a trade deal, has pushed companies across many sectors, including automotive retailers, into survival mode. 

"We believe there will be further consolidation and potential changes to business models, such as agency and online retailing. If that was not enough, regulatory pressures from the FCA will continue to impact upon vehicle finance brokers and dealers. Rental companies and fleet companies will question the use of their fleets as the uptake of communication and collaboration software, such as Zoom and Microsoft Teams negates the need of many to commute, as well as the shrinking of airport vehicle rental income for daily rental companies."

Owen Edwards, Associate Director, Grant Thornton

Feedback from dealers

In a Cox Automotive dealer sentiment survey completed for this report, a third of respondents (33%) indicated they expected the number of UK franchise dealer outlets to decline by 11% or more by 2025. This is in line with or above current rates of around a 2% decline, year-on-year.

Around a quarter (24%) of respondents expected to see the same level of decline in the independent sector. In contrast, a third (33%) expected the independent sector to remain flat or increase over the same time.

For used car supermarkets, the news was even stronger, with around a quarter (24%) expecting to see the number of outlets increase and 58% expecting the number of used car supermarkets to remain flat over the next five years.

Interestingly, with the growth of digital sales channels and direct to consumer retail, the increase in used car business, and ongoing consolidation in the market, it could be argued that the distinction between the three segments is no longer as clear as it once was.

In some cases, large dealer groups are already focusing, or considering a focus on, digital used car operations, which are being classified as used car supermarkets. Examples include Arnold Clark Motorstore. It is arguably a natural move for dealers to expand into a market where costs are lower and the volume of vehicles sold is high, if done correctly.

Used car supermarkets have been quick to evolve digital and e-commerce strategies and there have been several new entrants in this market. Examples include Cazoo.

Consolidation patterns

Consolidation in the automotive sector slowed in the last global recession and, at present, the number of acquisitions for 2020 has been limited. These have been small dealer groups or individual dealerships, of which most were already in the pipeline before lockdown. However, the Grant Thornton team anticipates acquisitions will increase in the following three ways.

  1. Regional companies looking to increase their presence and make their businesses into viable operators. These are likely to be small dealer groups acquiring smaller dealer groups or individual dealerships.

  2. International buyers. While limited to date, and constrained by uncertainty around Brexit, there is a watching brief to see if operators can acquire UK assets at a cheaper price.

  3. Public limited companies and large dealer group space, where the impetus is on continued earnings growth through the economies of scale generated by acquisitions. 

In downstream markets, the team believes there will be other opportunities for consolidation and restructuring among fleet and leasing companies and automotive manufacturers. In the first instance, current fragmentation in the fleet and leasing sector may be overcome through consolidation. Secondly many such organisations are diversifying into the broader Mobility as a Service (MaaS) environment, meaning there may be fewer but larger companies in the medium to long-term.

Within the automotive manufacturing space, PSA has already acquired Vauxhall/Opel and is now looking at FCA. There are several complementary trends at work in this space.

  1. There will be further consolidation of the manufacturers because investment required to meet changing EU and China vehicle emission targets will continue to increase. In order for the OEMs to generate profits from expensive-to-produce electric vehicles and to pay less in the way of emissions fines, there is a need to gain economies of scale through manufacturing large numbers of electric vehicles.

  2. There will be additional brands or new brands in the market. New brands such as Nikola are coming to market, while long-established manufacturers are spinning out their electric vehicle brands, such as Hyundai’s IONIQ. When this spin-off was announced, Hyundai’s share price increased by 10%. Creating such new brands, based on this evidence, can add shareholder value. Geely has a similar strategy with its brand Polestar.
  3. The investment in EVs and CAVs has meant that joint ventures are becoming more common, as seen by Fisker partnering with Magna to manufacture its Ocean electric SUV.GM is working with Nikola on its pick-up truck model, the Badger.

Increasingly there have been a number of IPO or reverse takeovers in order to source investment from equity shareholders. Nio listed on the US Nasdaq in 2018 and more recently this was followed by Li Auto, a Chinese EV/Hybrid automotive company, taking advantage of the meteoric rise of the Tesla share price. 

One step ahead

It is critical that businesses have a strategy which is viable for both the short and long term. With a robust and proactive business strategy, which evolves as the situation changes, companies should be able to stay one step ahead. If carefully planned, this should provide opportunities for survival in the short term and organic or acquisition-founded growth in the medium to long term.

Running an organisation which survives or even thrives in these conditions requires having a strong grip and a short-term three-month rolling business plan to ensure management is focused on performance and cash flow. As previously noted, Grant Thornton recommends organisations review planning in line with at least three scenarios – best, middle, and worst case. 

Communication is critical when disseminating the business strategy in order to ensure effective implementation. Many business plans fail due to poor communication. It is proposed that targets are set for all the senior leadership team and then filtered down. If the business is in survival mode, it will be important to conserve the cash, so this should be reviewed regularly in order to act quickly if needed. A short-term focus should be placed on day-to-day changes, such as how to increase sales volumes/vehicles, hours sold, and parts sold. Areas such as margin, costs and so on, will take longer, perhaps weeks or months.

Looking longer term there will be changes in the automotive industry across the supply, distribution, and retail market. As new patterns and ways of working come to the fore, management also has the difficult task of considering the medium and long-term strategy of the organisation. This may well mean adapting the vision and aspirations, with a realignment in expectations of what can be achieved.

"With an evolving market, businesses need to be ahead of the curve with their strategy, but at all times maintain a healthy cash position. The automotive industry is currently going through a difficult time and tougher times are expected with the uncertainty of Brexit and risk of a global recession. Planning for the future is critical for automotive companies to evolve."

Owen Edwards, Associate Director, Grant Thornton