Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Andy, can you share a bit of history or context to what has been driving the consolidation of the franchised dealer market in the UK, over the last five years or so?

Things are changing quite a lot at the moment. I think, if you go back five years and you look at the situation, it was still business as usual, to a large degree. What that meant was that manufacturers, generally, didn’t want to overexpose themselves to any particular retailer, particularly the large public groups. So there was this unwritten rule that nobody could have more than 10%, either by count of the network or by volume of the network. At that particular point, you were really into developing what you thought was a long-term relationship, on a bricks and mortar model, with a particular retailer. Some of the smaller volumes of the large company brands – let’s take Toyota as an example – were quite averse to getting involved with the public companies. They wanted local heroes. Whereas some of the larger brands, such as Vauxhall, Peugeot, Ford and so on, had no choice but to get involved with the public companies, from a large-scale perspective.

I think one thing that’s been driving it from that point, five years ago to relatively recently, was also the fact that the OEMs required a large capex to be spent on creating brand environments. Of course, for some of the local hero, owner-operators, it was expensive, but for the larger PLCs, it was possible.

It’s been moving to a bit of a consolidation till, I would say, about 18 months ago. But now we are at the point where that is really accelerating beyond belief and are in a very different situation than we were then, or even two years ago.

Historically, how would OEM’s define the retail environment they would want for their brand?

To start with, you had a sales planning volume because they knew what they wanted out of the territory. That then dictated a certain size of operation, in terms of showroom space, work bays, used car display, parts area and so forth. But they wanted it very much bespoke to their brand. There was an overall design of the brand, particularly with the premium brands. That dictated the situation, to a certain degree. That was quite a traditional way, for a long period of time.

Some people have come to the party relatively recently, with those brand environments; some people established it much earlier. I was at Porsche for 12 years and we established a brand-new environment in 2004, pre-Cayenne, which is still there to this day. Latterly, when I was with Jaguar Land Rover, we brought two brands together, in the same environment and created, globally, a brand concept for the first time. That’s how it’s been so far but, to answer your question, it’s been based on territory potential plus brand environment; a quantitative aspect and a qualitative aspect.

They would say, I want to sell 100,000 vehicles in this region and then you have to build me the facilities to serve that territory?

Let’s use Guildford as a random example location. Somebody would say, this is what we want in Guildford and, five years ago, that would probably have been the conversation. That has then migrated, increasingly, into actually, Guildford is not enough. We want a market area approach so we want Surrey. We want you to cover Surrey. You, Mr Dealer X, we want one in Guildford, we want one in Weybridge, we want one in Epsom. This is our plan for the territory. In certain metropolitan areas, it may have been that that also included boutique type facilities where it wasn’t a full facility but it was a boutique showroom environment or it could have a been a bespoke aftersales center only. But effectively, it migrated into this approach of what the facilities required in the area to do the job. So it started up at one particular point and then went to a market area approach. Not for everybody, but increasingly, that was the trend.

Would they say that you needed to spend a certain amount of money on the showroom?

For the facility itself, the OEM would have gone through a lot of procurement activity, in terms of preferred suppliers for things such as signage, flooring, desks and workshop equipment. Effectively, you were working on menu pricing, by and large, and that dictated the price. You had the land cost and facility cost, in terms of the shell, but all the interior fittings were very bespoke to the manufacturer and, to a large extent, they were dictating who the supplier of those individual elements were, as well.

You, literally, had very little say over what goes in the showroom? You just had to purchase the products and build it?

OEMs are not retailers so you’re actually applying your expertise, in terms of how the logistics of the business would work properly and how you saw that. You would be working with them, but with a palate of their brand facility, their brand requirements and their particular style and feel.

How is that changing today?

To start with, it’s affected both bricks and mortar and the online element. In terms of bricks and mortar, I mentioned before this unwritten rule that nobody gets more than 10%; that’s gone out of the window. Quite frankly, it wasn’t legally applicable anyway but it was still there. That has disappeared because, in reality – especially post-Covid – it’s now recognized that a lot of the smaller retailers can either not afford some of these large investments or do not want to afford them. That has led to a certain degree of consolidation anyway. Increasingly, you’ve got a large number of public companies with a disproportionate amount of facilities, nationwide, with one particular brand. 10 minutes ago, the market was 2.3 million in the UK and then it was 1.6 million last year, so the opportunity becomes a lot less for anybody. I think we are all envisaging the fact that taxes will rise and disposable income will fall so the market might take some time to get back to where it was. Therefore, there is a consolidation just because the opportunity is less and, frankly, the profitability was also under threat, anyway.

In the bricks and mortar world, you’ve got an increasing move towards fewer franchisees, who have got multiple sites, on multiple brands, throughout the UK, either on a regional basis, or nationally. Then when you look at the online situation, that’s very interesting, because that was there as a trend but, I would say, at a relatively low level. When I was talking about omnichannel 18 months ago I often had to describe, to people in the industry, what omnichannel even meant. They were nowhere near it. The car industry has been one of the last to get involved with online activity. That has really accelerated during the Covid period. That is partly needs must because, suddenly, people are into delivery at home like never before. And partly because there have been some disruptors in the marketplace who provided new competition. The online situation is a whole subject in itself, outside that question.

How is the OEM approaching online for new car sales?

That’s a really good question because, historically, you are operating with a franchise agreement which gave you a margin, it gave you a set of standards and it gave you a certain contract period whereby you had to perform. That was either a five-year fixed period or it was a period in perpetuity, with a two-year termination clause.

What’s happened now, because of the online activity, is that the OEMs have realized that digitization gives them an opportunity that they never really had before. That opportunity is to get a bit closer to the customer, in terms of pricing and dealing. Formally, the franchise agreement with many brands, is starting to be replaced by what we call an agency agreement. That means that, effectively, the manufacturer will be responsible for vehicle pricing and supply and will own the stock of new vehicles. The retailer’s job is fulfilment. Clearly, it’s a bit more complicated than that but, fundamentally, the onus is increasingly being taken by the manufacturer and electrification, to a large degree, has accelerated this too. So the manufacturer has a more direct responsibility in trading their websites; price, specification, volume, customer relationship management and so on.

The relationship between the retailer and the OEM is going through a period of change at the moment. Not with everybody but certainly with some people, quite substantially. I think you will see different skillsets in the manufacturers because they’ve got to have, not only brand marketeers now, but also operational marketeers, who can look at the analytics on the website and change pricing all the time, particularly on the finance products.

Is that because online information is free and transparent and, therefore, you have to have a market-based pricing system?

To a large extent, it’s all about transparency now. Historically, what happened from the customer journey perspective is that they were doing some of the journey at home, in their own time, on the web. In particular, looking at car manufacturers and car configurators, on their own websites, specifying up their ideal car and then, rather clunkily, sending that specification to a retailer who would or would not then follow up.

Now you’ve got a situation whereby that same customer can specify that car but the next stage of the journey, online now, is that, yes, I’ve got a part exchange; what is the guaranteed price for my part exchange? That would be up there within 60 seconds. Okay, I want a ticket to the next stage. What is the finance situation here? Then you start going through a finance authorization. Effectively, the whole transaction could be completed online. The issue with the OEM is that they want to control that more and more and more because you’re almost getting into no-haggle pricing from now on and agency agreements certainly mean no-haggle pricing. But a large number of retailers – particularly the larger ones – can now do fully online sales, on pre-owned, all day long, with a manufacturer support on new. Not all the manufacturers are there yet, on new, but increasingly they are. In doing that, they are all realizing that the historic franchise agreement will not facilitate what they want to do and that’s why they are moving to this different agency agreement.

Again, we’re coming out of lockdown into a period of real transition in the industry, which the retailers are not pushing back against because, from a financial perspective, the fact that they suddenly don’t own the stock means that their financial parameters look massively better than they did before. They own the pre-owned stock, but they don’t own the new car stock and that takes an enormous burden off some of their credit lines. A real transition period from now on.

They will just become an agent for the new vehicles and take a small commission for fulfilment, or a fee per vehicle fulfilled, and then to have purchase the pre-owned either by auction or trade-ins?

To start with, it can’t be a small handling charge because, otherwise, it wouldn’t work. The handling charge has to be very much in line with what a retailer was probably retaining before.

That 8% metal margin would have to be, effectively, the handling fee?

I think what the retailers would look at, with the manufacturer, is the retained profit rather than the pre-discount profit. It is understood that manufacturers quoting manufacturer recommended retail price is for the birds, in reality; unless you are Porsche or Ferrari or someone like that. It’s a historic thing that will disappear over time. It had limited validity, anyway and now it’s been totally seen through. As 30% of the retailer’s profit is new cars, they still need that margin there. But they will still take the responsibility for the used car that they will buy through that process and that’s where, probably, even more unit profit is. Then of course, 40% of their profit comes from the aftersales part of the business, anyway.

From a consumer perspective, this is good news because it creates price transparency, it removes haggle which a lot of customers don’t like – particularly by gender and age group – and it creates more of an environment of trust. At the same time, the industry is consolidating and some of the retailers have got their own brands that they want to develop. There is lots going on.

In terms of that pricing structure, how do you think the new gross margin for franchised dealers is going to evolve over the next five or six years?

I don’t think it will be very different from now, to be honest. It can’t be because, with the manufacturer agreement, facilities are being built and invested in. They can’t be written off; they can’t be amortized straightaway. That is a fixed asset that has to be recognized. I think the size of the networks will reduce substantially. The UK is not a big country, geographically, and therefore, people are increasingly prepared to travel to buy and the cars are extremely reliable anyway. It’s not as though you need a local guy for servicing because your servicing can be every year or two years; that’s not a big deal anymore. You are going to get a consolidation of the network and the same margin and structure, which means that the retailers should look at improved profitability. Up to now, the vast majority have been looking at a return on sales figure of only about 1% and that’s not great.

Over the next five or six years, as you think we are going to see online penetration increase, how will the OEMs approach the new build out of retail units?

On the first point, the bit that needs clarification is that this is all about omnichannel now, rather than online. This is a very emotional purchase; the customer still wants to touch, feel, sit in and drive a car. Test driving is very important, especially when they are experiencing electric or hybrid cars for the first time. But what they absolutely do want is control. They want 24/7 control, to dip in and dip out of the journey, as they see fit. Historically, when it was a question of, I go in the showroom, I make an appointment, I go through the test drive, the retailer values my part exchange and then I do a deal, is not the case now. You could do a deal at 11 o’clock at night, online, having gone in the showroom that day and not having been prepared to sign up at that moment in time; you wanted to come back and discuss it a bit more. If there was any tension – and sometimes the tension is perceived – it was taken out of the process. I think we should be talking omnichannel more than online. Strict online will happen but I think it will be a very low percentage. Omnichannel will be de rigueur.

Then to come to the second part of your question as to whether there will be big facilities in the future, I think it’s a lot less likely that you are going to have new builds. I think what you do need is that when you walk into that brand environment, there’s got to be a good reason to go in there so it’s got to be more than a showroom. It’s got to be a fantastic brand environment whereby you’re not just buying into the car, but by buying into that brand environment, that lifestyle, what is that saying about you. That applies particularly to the premium brands.

It might well be, of course, that that still sees a proliferation of metropolitan boutique type facilities, as well. One of the reasons you want to go into one of those environments is that, at the same time as this digitization revolution, you’ve got the electric car revolution and people do need to be educated in terms of how this works for them. It is a bit of different driving experience and it is certainly a different ownership experience and they’re going to need that face-to-face discussion and expertise to take them along the journey.

It’s omnichannel, it’s about customer control, it’s about bricks and mortar being strong but it’s about an identical equivalent process, with sheer transparency between the online process and the offline process, so that you are not clunkily having to start again.

From an operational point of view, if the dealer is becoming more of an agent rather than a traditional retailer, would those new showrooms be much smaller, more brand experience type showrooms, rather than holding all the inventory there, to serve that region? Would you not centralize that inventory elsewhere or pool into it and then serve the customer from that larger pool? How do you see it changing, operationally?

I think you’re going to get a mix of different environments. You’re going to get what we traditionally used to call hub and spoke. You might get one big mothership operation whereby you really do experience the brand; smell, touch, feel, history, legacy of a brand. But then, let’s say, in a location 10 miles away, there might be a smaller operation that fulfils your needs as well. You can actually go to the hub location, but you’re buying from the next town, which is closer to you. However, at the same time, because of the consolidation that is taking place, I think you are also going to get facilities that cover more than one brand. For example, you’ve got PSA who have got Vauxhall, Peugeot, Citroën and Fiat. It won’t be a surprise to see all those brands being put together, within the same building envelope, with different brand environments, in that building envelope. There are certainly economies of scale there and a back of house workshop covering all four vehicle brands together.

To a certain degree, some people will not do that; Audi will be standalone, even with BMW Group. But I think you could get that tendency. There are some brands, like Vauxhall at the moment, who need to partner with another brand, otherwise the viability of the franchise would simply not stack up. That’s the case for many of the smaller volume brands. I think you are going to get a mix of facility formats; strong brand environments but also, localization of facilities that suit the customer.

Again, it’s all about putting the customer in control, taking the tension out of the system and making sure you can develop a good relationship with them.

It’s interesting how you said that, on the new side of things, the dealer is effectively becoming an agent that doesn’t have to buy inventory and just serves the OEM on an agency basis and can then deal with the aftersales and the used business. But the new still needs to maintain their gross margin, to make the economics work.

Yes, absolutely. The way they do that is by the fixed handling charge. 83% of cars are bought on finance so the customer is buying the vehicles on pounds per month. If a customer buys a car for £250 a month from Volkswagen – a Volkswagen car from a Volkswagen retailer –effectively, the retailer is on a fixed handling charge. Increasingly, the only variable in the deal becomes the part exchange value. Everything else is more or less fixed. The retailer is not dealing anymore; they are facilitating the transaction.

It becomes less about buying and turning inventory and more about just facilitating the interaction?

Yes, and that builds trust with the customer, anyway, because they can see, on the website, this is the price of the car. Actually, you can go on the website and this is the valuation of your used car, as you described it, at the moment. Therefore, the net cost is X. These are the finance rates and that’s what it will be, depending on your personal financial circumstances, which is probably a bit of a variable now, with the different FCA rules that have come in.

What type of used cars do franchised dealers typically sell?

Traditionally, their source of used cars was part exchanges plus vehicles they bought from the auctions. That hasn’t materially changed. What has changed is the scale and the importance of that operation. Nowadays, all retailers will look for a one-to-one selling ratio, between new and used and they probably make a greater profit per unit on used as opposed to new. They will certainly generate part exchanges but they will be buying cars all the time from the auctions and, indeed, trading cars to the auctions. They will be making sure that they’ve got stock there that is appropriate.

Some retailers will concentrate on vehicles that are only up to five years old. Some independent retailers will concentrate on a wider age group of vehicles, as well as being multi-brand. Some of the new disruptors in the market will actually concentrate on vehicles that are just up to three years old. Fundamentally, you’ve got a part exchange stock, you’ve got your own ex-demonstrators, but you’re also buying vehicles from auctions and other traders.

What is the mix that you aim for between part exchange and auction?

You would never define the mix because, in reality, it’s a question of where you can get the supply from. If you look at what’s happened over the past 12 months with the new car market, it means you have got the opposite to a bubble coming in two years’ time. Only 1.6 million new cars produced means that when people reach the end of their finance agreement, instead of expecting 2.5 million ex-new cars coming on the market, that are three years old, there are only going to be 1.6 million of them so there is going to be a huge shortage in the future. That means people will dial up their auction activity and their buying activity because, otherwise, they will just not have the stock required to do the job for themselves.

Just on the point of the gross margin, when looking at the US market versus the UK market, one thing that I noticed was that the gross margin of used vehicles in the UK is fairly high; it seems higher than new, effectively, at 7% to 8% or a bit higher. Whereas in the US, the used gross margin is much, much lower than the new. I think that is because of the price transference that the US has seen, in the used market, which doesn’t seem to have occurred in the UK. Why do you think there is a higher gross margin in the UK, for used versus new?

I was based in the US for three years, myself, and I think, to start with, the UK retailers are better at pre-owned than the US retailers are, as a general statement. I’m not saying that the US dealers are poor; they’re not; they’re very, very good. I think that the new car margins are probably strong with some brands, in the States and, of course, you have got a different balance of power between the OEM and the franchisee because of the way that the franchise laws work over there. It’s not just one lever that you are pulling there; there are umpteen factors behind it. And of course, you’ve got 17 or 18 million cars being produced there so you are going to get a variation on things.

In the UK, you’ve got retailers that really come from that used car background and have concentrated on that for many a year. Because the OEMs have pushed them into reducing margins on new cars – the market in the UK has been a push market as opposed to a pull market, from a consumer perspective, for some years – that means that the retailers simply had to concentrate on pre-owned vehicles to make the whole business case for the dealership to work.

The OEMs would pressure new margins to drive volume and, therefore, that made the dealer focus on the used car?

It was a sub-conscious rather than a conscious activity but, for sure, it’s happened.

Given the fact that we are moving online, pricing is more transparent and market-based online, do you think that is going to increase or pressure pricing in used, going forward?

I don’t, in a way, because you are taking out the concept of negotiation. There is only about a 2% variation between transaction price and sticker price, for the organizations that I know well, so you’re almost into no-haggle to start with. Vehicles are keenly priced; consumers know what their part exchange is worth, all the time. They’ve got various opportunities to dispose of their used car with and so on. I think the bandwidth on pricing is quite limited and the retailer has to make a certain margin to be viable. Of course, there are umpteen guide books out there that tell you not just what the wholesale price or the auction price should be, but also what transaction prices are, locally. That’s one of the aspects of digitization; you can see what prices are for cars, in a territory. That’s been a case in the market for a period of time but it’s increasingly the case now, just by scraping the web.

So you think used gross margins are somewhat stable for the dealers, going forward?

I think it all depends on supply and demand. When supply is tight, obviously, margins are going to go up. When you’ve got too many vehicles coming through – maybe due to the fact that the new cars are being pushed and some of those new cars are, effectively, new cars with no mileage on – the whole market slightly disintegrates. I think the agency agreements on new will, if anything, benefit used.

How does the OEM impact the pricing of those used vehicles that the franchised dealer sells?

Legally, they can’t; there can’t be resold price maintenance there. I guess the only way they can is, again, through supply and demand. You have got some premium brands who have schemes with the retailers whereby you get a certain bonus level on buying their ex-employee cars, their ex-press cars, their ex-marketing cars, and you are expected to buy a number of vehicles per year from them. Therefore, they are influencing it by your stock management and that, to a certain degree, will influence margins on prices. But outside of that, they can’t have an input.

Let’s say that you are selling a new Audi A3 from Audi, with a 2021 plate and there is a new 2018, 2019 or 2020 plate coming. If you were to price that at market price or below that market price, would Audi be annoyed because that then degrades the new vehicle they have, if there is a huge price difference?

The manufacturer’s expectation is that they are responsible for demand generation on new cars. They are responsible for the advertised finance rate – the pounds per month rate – and increasingly, the retailers don’t take any responsibility for new car advertising; they just take a responsibility for used car advertising. If, let’s say, VW would expect it to be £250 a month and you start doing it at £200 a month, you would start to create disharmony in the network and, probably, disharmony with the manufacturer. They would be limited in what they could say to you but there would be no motivation to doing it anyway because the market price is £250 a month. Unless you’ve got an absolute glut of vehicles, which certainly isn’t the case and is not likely to be the case for some substantial time, you would just be giving away margin when there is no more product coming through.

I’m thinking about Motorpoint, for example, that sells nearly new vehicles. Can the franchised dealers really sell nearly new vehicles, like Motorpoint, or does it make that dynamic between the OEM quite difficult?

They do exactly that. They do exactly what Motorpoint are doing there. The vast majority of retailers, with franchises, are selling cars up to five years old. Motorpoint, I think, are selling cars up to three years old. They’ve got a tighter perspective on it and that’s part of their business case, but there’s not a huge difference as regards the stock. Of course, what you’ve got is the fact that Motorpoint is a used car market, effectively doing fixed price selling and providing a multi-brand consumer offer and doing it very successfully, no doubt about it. They also have an online presence now. But there is nothing that they are doing that a large retail group cannot do and, one might say, is not doing.

What do Motorpoint do so well?

I just think they are very good at what they do. They are very good at buying new stock, at reconditioning those cars and they are very good at the marketing. They have kept their locations outside some of the higher cost areas of the south of England. They are hardly a geographic group but they’ve certainly not got a proliferation around the London area. They have got a consumer offer that they stick to and are doing it very efficiently.

Fundamentally, there is no big gap now between what they are doing and what a large retail group is doing. One might say that the large retail groups have also moved, to a certain degree, into similar used car supermarkets. But what the large retail groups have got is two other profit centers; they have got a new car profit center and they’ve got an aftersales profit center. That’s much more substantial than Motorpoint. To a certain degree, the market cap of the different organizations defies logic and, really, that’s because investors are looking for businesses to turn themselves from analogue businesses to digital businesses.

There is probably a big business PR job to be done, to make sure that everybody understands the fact that there is not a huge gap in the first place. Motorpoint went to market with 200 million, in the first instance; now it’s got 248 million, I think. That type of organization is in vogue at the moment but, in my personal opinion, that gap will narrow very quickly because the very large groups – the oligopoly in the industry, the top six – can do everything that Motorpoint and similar can do, and they can do it more effectively. But there is this gap, in terms of perspective of the financial market.

Why can the franchise groups do it more effectively?

Fundamentally, because they are bigger. The most profitable group in the UK is Arnold Clark and they are making way over £100 million profit. They are the best used car dealers in the UK. They are multi-brand; they are now national and they do a lot more pre-owned than new; I would say a two and a half to one ratio. But there is not a large group out there now that cannot have the buying power – probably more buying power – of Motorpoint, because their scale is significant to start with, and they’ve got two other profit centers. They’re not totally dependent on the used car market and, therefore, looking forward, they are not exposed to the fact that the new car market went down by 700,000 cars in a year, with that surfeit of used cars coming through in two years’ time, that will fundamentally affect anybody who is only selling used cars. They’ve got a wider church of profitable revenue.

Back to the point you mentioned originally, where these franchised dealers are moving to sell more brands and become more of an agency, you think we’re going to see the franchised dealers converging with a used car supermarket model, on the used side and somewhat on the new side, and there is not much advantage for Motorpoint in procuring these nearly new vehicles, below 15,000 mileage, versus the Arnold Clarks or these other franchised dealers?

I think Arnold Clark is head and shoulders above anybody, quite frankly.

Why is that?

They’ve been doing it for a long time, they’ve got a great geographic spread and they’ve got systems and processes that are embedded and they do it time and time again. They’ve also just got the sheer scale and volume. Therefore, they’ve got to that size and they’re making £110 million profit. As a private company, as well, they are not exposed to some of the vagaries and the time-consuming aspects of the city.

You’ve already got other retailers, like Sytner for example, who own used car supermarkets; you’ve got Pendragon, who own used car supermarkets. They had a problem with some of their used car supermarkets but they own them. Vertu have got some used car supermarkets. But I think one thing that is particularly pertinent to the large retail groups is that they understand the fact that the profitability that they have at the moment is on aftersales, per site, then pre-owned on site and then on new. Of the £100 profit that they are making, as a business, only £35 of it is from a used car. So giving away the other £65 would not be sensible for them. They can expand laterally into those used car supermarkets, for sure, but their core business model now has to be omnichannel activity on new and used cars and aftersales and they might have some businesses like that, but their core is their core.

Do you think Motorpoint has any advantage in their model of nearly new vehicles, with somewhat larger plots and a larger prep center for refurb?

They’ve certainly exploited the economies of scale. The prep center is a classic whereby a centralized prep center means that you’ve got efficiencies and effectiveness, not just in terms of logistics but in terms of TAT times and the speed at which you are putting a car through because you’ve got everything in one consolidated place. Motorpoint will transfer cars, at a customer cost, between various retail points. They are very good at what they do. There are others coming through – Motorpoint competitors – and the large retailers are doing similar activity already, as well. There is not a huge difference between the two. The difference is only that one is considered to massively in vogue at the moment and one is considered to be out of vogue, whilst they transition in terms of the new omnichannel and online environment.

Could you share a bit of context to when you first started looking at – or even rolling out – online, four or five years ago, in the UK?

Even four or five years ago, there wasn’t a huge level of activity. People were going through the various steps of getting parts of their IT sorted but the past 12 months has seen a revolution. It would be very unusual now to go on a retailer’s website and not to be able to do the whole transaction online. The only difference between the large retailers and some of the new disruptors in the marketplace is the amount of marketing that has been spent on presenting a brand condition. If you look at Cazoo and Cinch, there is hardly a TV ad break that has not got one or the other. In a way, they are pioneering as regards the communication to the customer in terms of a used car offer; more pioneering than the actual offer itself. The offer is very similar, frankly. But they are spending huge marketing dollars and, therefore, the viability of the business is not profitable at this stage because they are over dialing up the advertising. In Cazoo’s case, of course, two football teams are being sponsored on their shirts.

Cazoo just purchased Imperial which is, effectively, a used car supermarket which is traditional in every way and they are using the lots as a collection center. Is the national marketing and hugely scaled marketing, from the Cazoos and the Cinchs – above the other traditional ones – an advantage in driving traffic of consumers to then sell similar products from a similar operational set up as the traditional players?

The Cazoo one is very interesting because Chesterman has been very successful in previous careers, with Zoopla. To start with, you thought, this isn’t going to work; there is no USP there, really. The Imperial acquisition then reinforced the idea that they were becoming more traditional. They didn’t really buy Imperial to keep them as used car supermarkets; they’ve kept them as fulfilment centers. They have slightly repurposed them but they’re not so different from anybody else now, in reality.

In fact, where they are different is that they’ve got less stock. For the company that I’m chairman of, we’ve got 9,000 cars in stock at any one moment in time; Cazoo have got less than 4,000. The choice is there but I think Cazoo have been very clever in establishing their brand name. It is expensive to do so and you need deep pockets to do it. They’ve certainly done that and be it Aston Villa or Everton, they are establishing their brand name and riding the wave, at the moment.

But the fundamental business proposition is not avant garde, at all. All they are doing is dialing up the communication of the customer offer that was there already, to a certain degree. But they have been useful because it has helped to accelerate the rest of the industry to say, you can’t spend £40 million on advertising because that is more than your PBT but the consumer offer, per se, is no different.

In the case of Cinch, which is a BCA company, they’ve already got fulfilment centers because they’ve got huge auction houses and those auction houses, to a large extent, have not been opened for physical auctions, for some time. They already had the footprint there and they’ve probably seen the fact that the valuation of a business like Cazoo is, I would say, disproportionate at the moment and would like a piece of that particular action.

I think, in both those cases and particularly with Cazoo, the advertising on TV features heavily the concept of delivery to your home. You try and do home delivery in central London; it’s a no-no, really. That’s why fulfilment or click and collect is very important and I think you see an increasing tendency towards click and collect. Why not anyway, because you’ve probably got a part exchange vehicle. The hassle has been taken out of the negotiation of the deal. It’s all transparent and there’s no reason why it can’t be click and collect and I think that’s how it will all settle down.

They are a consumer alternative but, to go back to your question, there’s nothing they are doing, apart from the degree to which they have dialed up the marketing, more than a large PLC group.

Their argument would be, our online-based model, where they have fulfilment centers, rather than bigger, expensive showrooms, or smaller dealer lots, where they have larger centralized prep centers, similar to Carvana in the US, where they refurb cars at scale, that filters through to a lower unit cost, to sell the used car at a discount compared to what the franchised dealers or Motorpoint can actually sell at. When you scale the inventory online, make that available as one pool of inventory, you can then, effectively, sell cars cheaper than other players.

But they’re not selling cars cheaper. Actually, there would be no reason to sell cars cheaper because the business is not profitable to start with. The supply of used vehicles is relatively fixed, at the moment. We are in a shortage of a supply and that is extremely unlikely to change in the next 36 months.

Is that a geographical element of the UK, where most of the OEMs are European or US based and they have to ship into the UK? Also, we drive on a different side of the road, which also means they are right-hand drives as opposed to left-hand drives, which means you can’t ship them out anywhere else? Does that make it different from Carvana in the US, for which the supply is a bit more fluid than the UK?

I think the right-hand drive/left hand-drive element is a factor. But fundamentally, the source problem is the new car market going down by 700,000 units and that is just working its way through the whole system. That is the fundamental problem. You’re quite right; that would be resolved if you had a situation whereby you could actually sell left-hand drive cars, such as in Europe. If you’re in Germany doing this and then, suddenly, you can take cars from Holland or Italy, you would resolve the problem straightaway. But that’s not the case. That adds to the flavor of the challenge. At some time in the future, could they operate on skinnier margins? I don’t know. It’s theoretically possible, maybe, on some products. The large retail groups are selling used cars than them anyway. That means that their buying power is already phenomenal. They are buying cars at the auctions, as well. To make a profit out of a used car, you’ve got to buy it right in the first instance and Cazoo have got no greater buying power – you might say less buying power – than a large retail group.

Where is the advantage in procuring those vehicles, from auctions? Does anyone have an advantage in sourcing them?

Not really. I think the advantage is in your procurement expertise, knowing the market and knowing how the wholesale price is trending. Moving forward, using analytics and getting that closeness of day-to-day data between wholesale and retail prices is a huge advantage.

It will certainly be more competitive, as well, when Cazoo and Motorpoint and the franchised dealers are all looking to purchase these vehicles through auctions.

But recognizing the fact that the franchise network size is going down by number anyway, because of what I mentioned before, in terms of people just giving up that type of business and the consolidation.

I was looking on Vertu and Bristol Street earlier, online, and the inventory available seems to be different. I think there was much more on Bristol Street than Vertu. Are the franchises looking to have a holistic view of the inventory, like Cazoo? They would say, all of our vehicles are available on one site, for the consumer, to give you the full perspective of our inventory.

Let’s say you can go on a franchise site from Vertu, such as a BMW site in Sunderland, and you will see the BMWs there. If you go on the Vertu used car site, you will see everything. One of the challenges, for the large retail groups, is developing used car multi-brand offers, from a marketing perspective. Not in terms of what they are doing, but it’s the spend of getting that message out there, the search engine optimization and activities like that. And probably developing partnerships with people, as well, because there is more than one route to market and there are other trusted consumer brands out there that you can cuddle up with that effectively drives business to your site anyway.

You’ve got to salute the franchise flag but, at the same time, you’ve also got to have a multi-brand offer through your own website. But it’s driving people through to your own website that is part of the issue.

Let’s say that the franchised dealers have larger buying power, have a larger pool of inventory, can display it online, can effectively fulfil it for a similar cost – let’s say it’s even more expensive in the worst case, than a Cazoo – but Cazoo is spending five or six times the amount of marketing spend, so they drive five or six times the amount of traffic to their website. How do you compete with that?

You can’t compete with their marketing spend, that’s for sure. But one advantage you have is that you’ve already got the relationship with the customer in the first place. You’re selling 90,000 to 100,000 new cars every year; you’re selling 90,000 to 100,000 used cars every year. You’ve got 200,000 relationships that have been developed every single year and you’ve got CRM activity to make sure that you can churn those cars because they’re all on finance agreements. You become the go-to place and, as a consumer, you become subject to some proactive marketing on, I want to buy your car from you and it’s time to change your car.

You’re not going to compete with Cazoo’s advertising and how long they can continue with that advertising will depend on their overall profitability. They’re doing what one would do to create brand breakthrough at the moment and it’s perfectly understandable and probably a very smart way of doing it. From the other end of the telescope, they’re fighting with franchise networks who have already got historic relationships and huge databases that is also facilitated, every single day, by workshops looking after those customer’s cars. They’ve not only got the data but they’re actually seeing the cars on a regular basis, back in the workshops and making offers to buy that car back and maybe churn that customer before their 36-month agreement is finished. Let’s say it’s at 30 months, they might say, now is a good time for you to change; this is the finance rate and the deal now. We can move you to the next car with a very insubstantial change on the monthly payment.

There are different dynamics there. One has got an advantage in marketing power and the other one has got an advantage on customer control.

What about the unit cost of selling a vehicle in the old, traditional, physical world versus this new bricks and clicks world for the franchised dealer? Is it materially lower because you get to cut out some cost?

It is possible that, over time, you start looking at a sales remuneration. If you are doing all the activity and the salesman is just fulfilling the deal, then you might look at some of those situations slightly differently with regards to performance related pay and things like that. It may well be asked, do you need as many people? That’s why there will be a difference. Quality people are hard to come by and the churn rates of sales execs in the industry are more than 30% a year, so you want to keep people there, for sure. But there are probably some changes that will take place, over time, because the skill level will have to be different.

We’re back to the fact that it’s not really online, but it’s omnichannel. Customers will go there and talk to a trusted advisor who will do the fulfilment on that deal. They will, quite rightly, expect that trusted advisor to be perfectly knowledgeable about the product itself. If you’re spending £60,000 on a BMW, you want to know that this guy has been on all the training courses and he can explain to you, in detail, why this car may be suitable for you, in a consultative way, without overselling it to you.

You don’t need sales reps, in every dealer lot, that deals with every single customer that comes through the door, in the same way that they used to, so you can potentially cut out a portion of the sales reps and a portion of their commission?

You still need to make sure that everyone who walks through that door is being dealt with in the way that they want to be dealt with. That means quickly, as well. Whether or not that changes the numbers of sales execs I would question. It depends on how the pattern between omnichannel and non-omnichannel works, over a period of time. It’s more likely that, increasingly, the vast majority is going to go that way. There is a qualitative issue whereby you need to make sure you have the right people who are trained, remunerated and have got the right attitude, more than anything else, to actually deal appropriately with the customers and give them a good experience.

If you look at what Cazoo would say, they would say they are cutting out all that cost, with less retail footprint, which is obviously cheaper for us but also, we don’t have that sales rep commission that we have to pay on the performance side of things.

Yes, sure. But at this moment in time, they’ve also not got the level of transactions that justify anything. They’re not in profit. They’re doing a great job on marketing but, at the moment, there is not a financial business case, in terms of the P&L. That’s maybe somewhere in the future, but it’s not there yet. Even then, you’ve got to fulfil the deal and you’ve got to do a handover of the car. That means that, increasingly, in the age of electrification, the customer will need to have things explained to them and that involves people. Otherwise you could get to the stage of having a poor experience because they didn’t know the car did something.

They’re doing last mile delivery, as well, so they have these trailers with the cars on the back and they’re delivering them which is, obviously, super expensive.

Yes, absolutely. That’s what I was saying before; I think click and collect is probably the way forward, more than just delivery. Where I live, if somebody tried to deliver a car here, they would never get their truck back up the driveway; it would be absolutely impossible. Imagine trying to do that in a tight street in Clapham; where would you park the thing. It’s not possible, really.

I’m not knocking what they’re doing but I think, in reality, it’s going to be a bit more complex than that. They’ve developed a brand very, very quickly, but it’s not in profit yet, it’s not got the level of transactions per month yet and it’s not got the level of stock yet that says that it is going to be in profit any time soon, I would suggest.

If you were running Motorpoint, how would you look to position it versus Cazoo, given that Cazoo are blitzing the market with advertising spend, building a brand, driving traffic and, effectively, have the same setup as Motorpoint?

I think the differential aspect is the marketing spend. For Cinch, Cazoo and webuyanycar – another BCA company – their marketing is the major differential. Motorpoint is more like a franchised dealer as regards the challenges it has got with a Cazoo. Cazoo have got to turn their marketing spend into a business case.

What about Motorpoint versus the franchised dealers, in terms of their structure? Do you think they are at a disadvantage because they haven’t got the two other profit pools and the relationship with the OEMs on the new side?

I would say yes, but they would say that then allows them to focus, lock stock and barrel, on what they do very well and, I would say, that’s a fair point from their perspective. There is no doubt at all that they are clearly doing well in that regard. They have carved out a position in the geographical location where they are represented, which is Midlands and North, but they’ve not got those two other profit centers and they’re not new now. It almost proves that businesses can sit side by side.

I think where you’re going to get the real transition and revolution is what’s happening with the franchise retailers, the consolidation and the fact that you’re going to get huge multi-billion turnover groups there. The possibility of an eight billion turnover group is not that far away, to my mind. That’s substantially larger than a Motorpoint or whoever, really; that’s the difference.

What do you think the market misses, from a valuation perspective in the city, in not understanding or grasping this opportunity that the franchised dealers have in shifting it online?

I think retail, generally, is out of vogue at the moment and, with Covid, that is understandable to a certain degree. There is also this question as to how an analogue business, in an online environment, cut its cloth in terms of fixed facilities. How does it transition? I think there is a huge education job that needs to take place because some of the valuations put behind Cazoo have got no validity at all, in reality. Motorpoint’s market cap is extraordinarily large for what they are doing, frankly, when you consider the property portfolio of some of the large groups.

I think we are at a moment in time whereby certain things are in fashion and certain things are not in fashion. Therefore, the job for the large retail groups is to develop the digital business quickly, without a shadow of a doubt, market that digital business quickly, probably develop some partnerships there at the same time and do a huge education job on the validity of how they are going around and doing their business. Those are the core ingredients of success.

It will happen. Will it happen for a small regional group of four or five sites? I suspect that the answer is no, it won’t. Will it happen for somebody who has got 150 to 200 sites? Yes, I think it definitely will.

What is the biggest challenge for those bigger franchised dealers?

I think digitization is a huge challenge, frankly, but it’s not a question of IT capability; it’s a question of transforming the business from a bricks and mortar business, to a bricks and mortar and digital business, with exactly the same data at any one moment in time, so the customer is in control and doesn’t have to go through any clunky processes. That’s the challenge that is taking place. But it is there and once people come out of the pandemic and get back into a normal shopping environment, we will see that more than ever before.

It’s quite remarkable, in a way, that the car retailers have done so well during three lockdowns. It’s quite extraordinary. When you see the March results, that will underline that particular factor. Showrooms are closed and although the transactions are still remarkably high, there is a huge level of pent-up demand out there. They’re not likely to buy houses in the short term and they can’t go on holiday but they want to spend their money. They’ve saved a lot of money in the past 12 months and I think you’re going to see a bonanza. For the first time, I think people will really experience the control that an omnichannel environment will create for them and I think things will take off. There will be a greater appreciation that things have to change which people can’t really see, sufficiently, at the moment. It’s not the same for everybody, of course; I’m talking about the really big guys. They’ve jumped the hurdle, for sure.

Given that you mentioned that click and collect is, typically, going to be the best model, do you see the bigger franchises moving more towards having the new franchise showrooms that we mentioned, that might be slightly smaller, with the new agency agreement, but also having larger prep centers for reconditioning on the used side and then using those old dealerships for the fulfilment centers? How do you see, operationally, the franchised dealer network changing?

I don’t think it will change much because, if you’ve got a franchise to start with, you want to bring people into that environment and you want to do click and collect from there because that’s where your staff is based and that’s where you can show them, not just a product, but the brand they are buying into. That’s where you can create the relationship with the aftersales center, who are going to look after them during the ownership experience. It’s not just a question of the delivery of the car; it’s the start of the relationship of the ownership, really, which is critical.

We’ve invested a huge amount in these brand centers so people want to show you why you are buying into BMW. What is that all about? BMW and the like would want exactly that as well, quite understandably. I would say again, on top of this is the situation where you’ve got an electric car revolution and the need to explain that is absolutely pertinent, as well. That’s the X factor in this, at the same time.

That could also completely change the aftersales business for the franchised dealers, as well?

In a decade’s time. But the vehicle part that’s out there is the vehicle part that’s out there and that’s not going to change much between now and 2030. But you’re right; a service over the air and software updates are already happening. Moving forward in buying a new car, electrification means that you no longer get really interested in buying a sexy V8 engine car; the engine will become a hygiene factor. What you’re buying is brand, design, customer experience and connectivity. The connectivity and customer experience bits are really important and that’s where the retailers can really step up. Keeping that connectivity updated so that it’s personalized and individualized and bespoke to that customer, is what’s going to happen, as well. The brand and design bit is the OEM’s responsibility.

Final question, Andy. Let’s say we’re looking back in seven years’ time and Cazoo are winning the market in used and are selling more volume than all the franchised dealers, what do you think the reason would be?

I don’t think it’s going to happen. I just can’t visualize that situation. I think Cazoo are here to stay, there’s no doubt about that, and they will provide customers with an option. But I think the biggest change you are going to see, as opposed to today, is the fact that the retailers will have moved from, not just saluting a franchise flag, but into multi-brand, online, omnichannel, pre-owned, as well. Therefore, the gap is less because the consumer assurance that is required in buying that car will migrate to very similar aspects. It’s then a question of how well you do it. How well you do the fulfilment; how well you look after the customers. That’s not going to change.

We’re going to be in the world of 24/7 customer control, quite rightly, and it’s how you step up and make sure you can do that. There’s a place for Cazoo; there’s a place for the large retail groups. I think what you’ll see is less physical retailers and some national brands that you consider the same as Cazoo. That’s where it will be; they will one of many.

So it’s very unlikely that we’re going to see Cazoo being able to offer online cars 10% or 15% cheaper than the bigger franchises that could actually drive such huge volume to them?

Not if they want to make a profit, no.

Today, it doesn’t seem as if profits matter to some people.

But eventually, it will. You can sell the sizzle for a period of time but, eventually, investors want to see dividends and you only get dividends if you make profit. That’s a key part of this and that’s not going to go away any time soon. I think one of the reasons why the market caps have been kept down on some of the retail businesses is that we’ve gone through a period now where you’ve not been able to pay dividends. You can’t have furlough money from the government and then pay dividends. I think that will change more in 12 months’ time.