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Wheels on the web: the future of auto retail

Changing consumer behaviours are leading car dealerships to invest heavily in their online operations, but will people really buy their cars over the internet?
October 24, 2019

Who would be a car dealer nowadays? The historically cyclical sector has found itself in a slump in recent times, driven by declining registrations for both new and used cars, tightening environmental regulation and the threat of tariffs should the UK crash out of the EU under a no-deal Brexit.

While many within the industry believe the contraction in volumes is temporary, they also say there are longer-term structural changes in the industry, which could force out smaller players.

As the battle for customers moves from the forecourt to the search engine, profound technological change looks set to alter the maintenance and capabilities of cars, with the rise of electric vehicles requiring different equipment, expertise and parts for their ongoing maintenance, while the increasing sophistication of onboard software provides dealers and the car companies themselves – known as original equipment manufacturers (OEMs) in industry parlance – with a wealth of data that could radically alter how they interact with their customers.

 

 

Online shopping

Auto retail would hardly be the first industry to be disrupted by the rise in online shopping. It is more than two decades since Amazon (US:AMZN) first started selling books through the internet, gradually growing into “the everything store”. Ocado (OCDO) meanwhile, has pushed the UK’s largest supermarkets into investing in their online platforms and delivery networks. 

Still, the decision to buy a car is far more consequential – in many cases second only to property in monetary terms – so customers are far less likely to commit without seeing it offline first. 

“The vast majority still want to touch that car,” said Mark Carpenter, chief executive of auto-retailer Motorpoint (MOTR). 

This is just as well for the dealers, as without the need for a physical dealership network – and the investment required to establish one – there would be little to prevent disintermediation of their markets by the OEMs, who could introduce online-only distribution models. Some, like Peugeot and Seat, are taking tentative steps to sell direct to consumers, but as it stands, tightening environmental regulations and the technological requirements of the next generation of vehicles seem to be keeping them busy elsewhere. Auto-retailing peer Vertu Motors' (VTU) latest annual report noted: “The manufacturers appear to have enough challenges for investment and change without seeking revolutionary new distribution models.”

Online car marketplace Autotrader (AUTO) lists cars on behalf of retailers as well as other consumers, functioning in much the same way as housing platform Rightmove (RMV), which hosts property listings on behalf of estate agents, deriving revenues from them.

However, while many customers feel uncomfortable completing a car purchase entirely online, it is not yet clear just how much of the process can be taken online or automated. 

“All of the research is online already, has been for 15 years,” said Mr Carpenter. “The question for us is how much of the journey starts online, and does it complete online?” He added that people, in general, seem happier buying a new car online than used ones.

Robert Forrester, chief executive of Vertu Motors, said that the conversion ratio for “pure online” transactions was “about 0.6 per cent”.

Nevertheless, retailers have woken up to the importance of their online platforms in driving sales. Auto-retailer Lookers (LOOK) recently migrated from an outsourced website to one that it owns itself, leading to increased conversion, while Vertu has invested in improving its performance, reducing the load time of its website by 43 per cent and developing a chatbot to automatically book customers in for servicing.

However, this is only the beginning. As cars come to contain more and more sophisticated software, and electric vehicles require new and specialised equipment for servicing, a survey by consultancy McKinsey found that industry experts predicted that servicing would become “significantly” more important than parts in the aftersales market.

 

From forecourt to 'experience hub'

While customers will doubtless still want the chance to test a vehicle before they take it home, many in the industry believe that shifting more of their operations online will drastically change the shape of their physical estates – with declining overall numbers, but increasing focus on “experience centres”, with a greater emphasis on customer experience to create positive brand associations. 

“It will fundamentally change the cost base of the industry,” said Andy Bruce, chief executive of Lookers. The group has opened an Audi experience centre in Farnborough.

The number of dealerships has been in decline in recent years, according to Daksh Gupta, chief executive of auto-retailer Marshall Motor (MMH). He said that as the trend continues, the larger players with money to spend would acquire their smaller rivals and consolidate into fewer, larger stores.

“[The] smaller, more urban centres will be the ones to go,” he said, adding that as electric vehicles became more prevalent, the capital requirements of investing in tools and training for servicing them would become an added pressure on the market’s smaller players.

However, there is some evidence that bigger may not necessarily be better. Research from broker Zeus Capital showed that the market capitalisation of auto retailers such as Lookers and Vertu sit below their freehold and long leasehold value, implying investors are expecting pain ahead. 

While many expect the market to trend towards fewer, larger sites, Mr Carpenter said that such a hypothesis could prove costly if it turns out to be wrong. Instead, he argued, groups with the ability to “flex” the size of their estates in response to demand would be better placed in the long run.

“Most of our sites could be repurchased quite easily,” he said. “Those big dealerships can’t be repurchased.”

However, research from McKinsey indicated that there were routes to survival for market participants of all sizes: “Smaller players may occupy profitable niches while large players need to focus on organic and inorganic growth to achieve the necessary scale and maintain high entry barriers.”

This is easier said than done, of course. The current troubles in the auto retail sector have pushed down valuations, making for an attractive buying opportunity, but which groups will be the leaders in this changing world? And which will find themselves swept aside?

As the industry consolidates, Mr Bruce said those that are likely to be successful are those who are able to buy out the smaller players to grow their network.

“I sense that manufacturers used to want to divide and conquer, in a world where there’s this multi-channel online journey, it would suit them to have fewer suppliers,” he said. “I think they’ll be attracted to big players with sophisticated businesses who can invest in this technology.”

Beyond this, investors should look at management’s track record – in terms of tenure and for dealmaking and integrating acquisitions.