European automotive retail 2010—revolution or evolution?
The block exemption regulation (BER) revision in 2003 sought to redefine control of Western Europe's automotive retail landscape by giving franchised dealers a greater share of the channel power that OEMs had cultivated over the years. Goals included enabling the creation of multibrand outlets, opening up aftersales parts and service to new players, and permitting dealers to sell cars both across borders and to "unauthorized" car resellers. Three years on, most of these intended consequences have yet to gain significant traction. Why is this? To better understand the issues surrounding this critical question, McKinsey began an initiative focused on defining automotive retailing excellence (DARE). The DARE initiative shows that in order for change to really happen, the opportunities provided by deregulation are not enough. Indeed, what matters are the dynamics among value-chain players—namely, the customers, dealers (including new retail alternatives), and OEMs.
At first glimpse, European auto retail as a business proposition doesn't appear attractive. For example, even when compared with traditionally low-margin retailers such as discounters or supermarkets, German auto retailers (during 2003 to 2004) in some cases earned before-tax margins that were over 90 percent lower. However, best-practice auto dealers tend to earn much higher returns—in extreme cases, 400 to 500 percent above average—and attract large customer followings. Furthermore, these top performers may have limited incentive to change. In any case, even the largest automotive retailers don't seem to be able to actively or deeply reshape the industry. Worse still, many European dealers continue to suffer from being "subscale."
OEMs generally view the risks and costs of changing the retail landscape with trepidation, due to the massive amount of business at risk. For example, the retail network of an OEM with a 10 percent share of the German market might have a workforce of 50,000 and physical assets totaling US $2 billion. This network intermediates huge amounts of cash, since the revenue associated with new-car and spare-parts sales can total more than US $9 billion. DARE interviews reveal that most OEMs don't generally take a positive view regarding the traditional monobrand franchised dealers. They often shun multibrand dealers and tend to set higher hurdles for these players in terms of standards (e.g., mandating dedicated sales representatives for each brand).
Given the lack of players with either the will or the resources necessary to actively shape Europe's automotive retail environment, it seems highly likely that the market will continue to evolve relatively slowly, with few "revolutions" in sight. Customers don't appear to be demanding major retail innovations in terms of format, while there are other levers for making an outlet more attractive that customers expect, such as customer-oriented sales and frontline performance. Also, there are few signs that even the most successful dealers will snatch significant amounts of power away from the OEMs.
On the other hand, the incumbent OEMs themselves will likely allow (or even try to convince) struggling monobrand dealers to combine in order to form more successful multibrand operations. In addition, attackers keen to build new networks or to co-op the networks already established by other OEMs will also benefit from pursuing the multibrand option. In both cases, the issues that must be resolved are similar.
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