Car Distribution in Europe
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Europe's 97,000 new car dealers will spend Christmas waiting to hear what the European Commission's Competition Directorate proposes for the new Block Exemption regulations in September 2002. The draft is now expected early in the New Year.
Dealers can gain some comfort from the Andersen Report, issued by DG IV last week. Its complex analysis shows that there are no simple answers to reorganizing the way cars are sold and serviced. Each scenario involves some trade-offs, so there is no clear-cut route to increasing consumer benefits.
The problem for dealers is that their fate is largely in the hands of car manufacturers and likely to remain so, whatever the draft regulation contains. An underlying theme of the Anderson report is that the regulation should not be so rigid that it limits diversity and experimentation within the franchised dealer system. If the Commission follows this lead, manufacturers may be free to adopt a variety of formats, selling cars through other types of channels as well as through franchised dealers. The question remains whether dealers can maintain business viability under such conditions.
One important aspect has been deliberately side-stepped by the Commission: the protection afforded dealers in their franchise contracts and compensation for loss of future earnings. This is a major plank of the US legislation, enacted at state level, which gives dealers considerable freedom of action by severely limiting the conditions under which manufacturers may terminate the contract. In addition, manufacturers in the US may not sell cars direct to the customer nor supply cars for sale except through dealers.
The European Commission argues that protection for dealers is not a matter for the Competition Directorate, but should be left to national legislation on contract law. Indeed, some European countries offer much greater protection to dealers than others - the UK is notable in giving dealers virtually no right to compensation for contract termination.
One can see the logic of the Commission's position but the current regulation does contain 'Black Clauses' intended to limit the power of manufacturers to control dealer behaviour and it extended the period of contract notice. A new regulation that fails to take notice of the risks to dealer investment would be very unbalanced. This is especially true if the new regulation itself prompts major restructuring within the franchised system.
As the GMAP European Car Distribution Handbook 2001 shows, Europe's dealer networks are evolving anyway, under pressure from competition, IT innovation and economics. The general trend is for dealer consolidation, with a steady decrease in the number of main dealer contracts but a slower fall in the number of outlets. However, the story is far more complex within each make and market.
Each car manufacturer has its own route to building a network that is both effective in selling cars and supportive of the brand by giving excellent customer service. An overall strategy for Europe is translated into action at national level by the local distributors. For some makes, these are all wholly owned subsidiaries, but around half of all distributors are independent companies, acting under contract to the manufacturer.
Each national representation plan has to take into account a host of local market conditions - legal, cultural, geographic and so on. Even within one market, local factors influence how the plan is translated into action. For example, consolidating several dealer territories into one larger market area has proved far more difficult to execute in practice. That is why so many manufacturers employ complex computer modelling techniques to determine the ideal location of each outlet. In future they may have to tale account of not only their own and competitive brand dealers, but also a range of other new types of car retailers as well.
Not surprisingly, the Anderson study for the Competition Commission could employ only very approximate analysis methods for assessing the impact of different regulatory scenarios on dealer populations.
A further aspect, largely ignored by Andersen, is the rapid developments in build-to-order supply. Unlike most other retailing sectors, European car distribution is moving away from a stock based system. Research pioneered by the International Car Distribution Programme (ICDP) and its affiliated 3 Day Car research project has highlighted the consumer benefits of a fully connected supply chain. Since car manufacturing is very capital intensive and operates on low margins, gearing production to market demand is crucial in driving industry profits - at supplier as well as assembler level. Given the complexity of car model ranges (possible specification variants run into the millions), accurate flows of information up and down the distribution chain are becoming vital to production planning.
For car manufacturers who have already invested heavily in lean distribution, any disruptions to these information flows are likely to be resisted. For some taking more direct control of retailing may be the lesser evil. A large retail store chain is likely to be an unpredictable - and therefore unacceptable - retail partner except under the direst circumstances.
The Internet is also emerging as a tool for making the dealer system work more effectively for the consumer. Web connectivity between manufacturer, dealer, logistics company and others is starting to improve the information flows and the capability for customer responsiveness. For example, real time tracking of an individual customer order all the way along the chain to final delivery was all but impossible using older EDI technology.
Consumers can also now use the Internet comparison shop around dealers of different makes (or among dealers of the same make) from home. The rationale for multi-make car supermarkets (for new or used cars) is therefore much reduced in a virtual world. What counts is the ability to deliver the right car in the right place at the right time.
Most dealers are small, local businesses (average sales per main dealer outlet in Europe in 2000 was 275 new vehicles) unable to afford large investments in IT equipment and training. Web based systems, with manufacturer support, are solving this problem, boosting their ability to serve customers. The European Commission faces a difficult task in framing a regulation that promotes innovation in car retailing yet does not inadvertently reduce choice of product, retail outlet or service provision. Most vulnerable to structural change are the rural communities likely to be ignored if the smaller dealers are swept away and the smaller brands unable to afford adequate representation in a world of large retailers focusing on best sellers.
Several years ago, the UK government's competition regulators enacted the 'Beer Orders' to unravel the links between big brewers and their tied pubs. Since then, some brewer have got bigger, by mergers and acquisitions, some dropped brewing to become pub groups, some disappeared altogether. Meanwhile, the small independent brewers of real ale now find it harder to gain distribution and village pubs are disappearing at an alarming rate. Some of these changes would have happened anyway, under competitive pressure in a changing consumer market. Nevertheless, the lesson of unintended consequences should not be ignored by Brussels regulators.
Briefing from HWB International Limited.
GMAP European Car Distribution Handbook 2001.