Automotive OEM: Dealer Network Dynamics

Andy, could you explain the different sales channels for a typical OEM?

Realistically, one way or another, all transactions tend to go through the retailer network. Clearly, at one end of the scale is a normal retail customer going in and buying a car solely for their private use, and at the other end of the scale, you have the large blue chip companies, the leasing companies and the large daily rental companies. The manufacturer is expected and does have an active involvement in the negotiations, and probably, to a large extent, sets the terms and conditions including the financial terms. But, even then, there is probably a financial transaction that takes place through the retail network because the cars obviously have to be prepped, receive a pre-delivery inspection, and the relationship with that end user also has to be taken account of. So, I guess that bookends the handling charge for the retailer.

So, the retailers are very much in the midst of it, but the manufacturer's tentacles are still there. In terms of the actual relationship, it very much depends if it's a one man band or a retail customer versus very large corporates where there's a huge expectation to be involved across the industry. Indeed, because of the discounts available to those large operators, the retailer could justify doing that. It's outside their margin control anyway. So that's the generic that takes place.

What's the split roughly between those buyers then; individuals, lessors, rental companies etc?

The pure retail market is a minority of the market in the UK. You've got the three chunks there: you've got Mrs McGuinty who's buying a Nissan Micra, she's a pure retail customer; then you've got the large leasing companies etc; but you've also got a whole bunch in the middle of that, what's defined as 'business.' These are fleets of more than 5 or 6 cars, where those purchases have been made with corporate money, but the decision making as regards to which car to buy, can be made more upon a retail subjectivity aspect. You'll find that the leasing companies play very much in that middle ground, because the smart way to buy a car now is to pay for the running costs and the depreciation rather than having your whole capital tied up between the hull of the car. The leasing companies and the financial services companies facilitate that through a variety of different products. So, there are effectively three chunks of the marketplace, I would say.

What is the split between the different types of dealers in terms of exclusive versus multi-branded dealers?

For virtually every car brand, they want exclusivity. Within certain parameters, they can dictate exclusivity. There's certain things they can't do, because European legislation and block exemption legislation leads to some shared activities back of house, that can be admin, that can be servicing, it could be parts distribution. But, the retail environment can be kept very much in a brand by brand basis. If you actually look at the retailers as a whole, you've increasingly got consolidation, and this will happen even more. Some very large publicly quoted retail groups are multi-brand with way over 100 franchise points across the UK. They tend to try and work on getting a critical mass with a car manufacturer. So, within their own business plans, they have their chosen brands that they wish to work with and wish to develop a relationship with, so that they are to a large extent a preferred partner for that brand. Having that critical mass gives you a critical mass of understanding as well, of how the brand works and how the business model works in that brand. Nowadays, there are fewer and fewer situations whereby you've got a single retail point operated by another driver, because the cost of running a franchise, the profitability of running a single-point franchise, and the inability to create economies of scale are hugely restrictive. In reality, now that manufacturers can look at clicks options as well as bricks options, that there is no future for a single owner driver. You can count the days almost. Increasingly, you get a huge consolidation across the UK car industry, whereby the top 10 will dominate the marketplace, albeit the manufacturer brand is the brand that's put forward rather than the retailer brand.

What is the typical relationship between the OEM and the dealer? How does this relationship work if the dealer is selling many different OEM brands that each have exclusive retail storefronts or footprints?