There is an industry-wide acceptance that a combination of e-commerce, changing customer behaviour, and new technologies such as VR will have a profound effect on the retail landscape going forward. The pace of change is accelerating and the reinvention of familiar high street retail brands will fuel customer expectations in terms of the purchasing experience, levels of customer service, the physical environment, and delivery methods adopted by the automotive sector.
Existing brands and their retail networks will be subject to a pull effect from new entrants to the market who don’t carry the burden of legacy representation and a push effect as consumers overlook brands who fail to adapt their sales channels to improve the customer purchasing experience across their retail estate.
An estimated 70,000 UK businesses were forced to close in 2020, 54 of which were from the retail sector, affecting 5,214 stores & 109,407 employees.
Conversely, more than 85,000 companies launched new online channels or marketplace channels, with e-commerce growing 4.5 times faster than before the pandemic.Source: Centre for Retail Research/Internet Retailing/McKinsey
For brands with legacy network obligations, change will be evolutionary, taking place over a period of time as opportunities arise to implement change, but this can’t begin to happen without a road map, a clear vision of what the future looks like. We are beginning to see forward-thinking manufacturers focus on what a new retail landscape might look like, but this fails to address the complex property issues.
Franchised retailers have delivered average returns of 0.81% RoS in 2019 and 0.94% in 2020 (inclusive of Government support), far lower than ASE Global’s benchmark figure of 3% RoS for a viable and sustainable sector. Property is a significant business overhead and the cost of keeping large dealerships fully operational is looking prohibitively expensive.Source: ASE Global
Driven by the need to improve viability, brands with historically large networks are already slimming down, spreading a decreasing revenue stream amongst fewer participants to ‘shore up’ viability. This works if other variables remain static, but other property users are also responding to the e-commerce revolution, with industrials – especially distribution and trade counter services, able to outbid motor retail for sites by a factor of more than 2 to 1.
Today’s full-service dealership is located for sales exposure and the aftersales function shoulders the high-cost burden of a prime retail or roadside location.
In order to level the playing field with other property sectors what’s required is a ground-up re-assessment of the industry’s utilisation of property as a resource and whilst solutions may vary according to brand, retail group and market area, the one size fits all dealership in its current format will gradually become unviable and obsolete.
There are currently around 4760 full-service car dealership sites operating across the UK. Most of these assets are controlled by independent franchise retailers, with limited participation from the manufacturers – a notable exception being Volkswagen Group, who hold headleases on around 175 properties. Several other manufacturers control sites, but these are numbered in the ten’s and are often tactical acquisitions in significant, high property value locations.
This means that Franchise retailers are shouldering the bulk of the property risk and will need close cooperation and support from their brands to evolve and transition in the new and emerging automotive ecosystem.
Based on current leasing cycles and the time required to implement an appropriate property solution, we believe future strategy should be determined by reference to a 10-year time horizon.
We can make an informed guess at what the retail landscape might look like in 10 years’ time and have identified the following key emerging trends:
- Acceleration of online sales channels for new & used vehicles with the emergence of new players and channels; Cinch, Cazoo, Motors UK, Heycar etc.
- Greater reliance on digital sales tools
- Brands moving to exclusive online and direct sales, with or without fixed pricing – VW & Volvo recently announcing that EV products will be direct sales from the OEM with OEM-controlled pricing
- Primary customer sales relationship is ‘owned’ by the Brands and today’s Franchise arrangements migrating to an agency model
- Future property requirements driven by customer fulfilment/service facilities rather than sales showrooms
- Continuing requirement for brand/product engagement, test drives & vehicle handover, utilising a variety of experiential/fun property formats
- Further brand consolidation leading to multi-brand sales sites
- Dealer Group consolidation with a focus on regional domination
This points to a greater dependence on fulfillment functions, with fewer showrooms operating at current densities of representation and more diversity in terms of the size and location of the physical retail space occupied.
Future success will be dependent upon the speed at which retail networks can adapt to a lower-cost model which is more in tune with consumer sentiment. It is therefore important that property strategies are developed now to deliver flexibility and cost efficiency whilst divesting any long-term non-strategic lease obligations.
How can this be achieved?
The obligations that sit with leasehold property and assets that are owned freehold are different and warrant separate consideration.
Before discussing the action points for each it’s worth establishing what a ‘safe sphere of operation’ might look like for a typical retail business, accepting this will be different from brand to brand and for metropolitan/urban vs. provincial/rural territory allocations.
In our view, historic requirements to display a comprehensive product line within a showroom environment, replicated at locations that are separated by an optimum 30-minute drive time has no relevance in the future automotive landscape. A surprising number of existing property commitments still reflect this legacy objective.
A ‘fit for purpose’ future model requires, at a maximum, hub & spoke representation on a regional or ‘market area’ basis. For most brands ‘Statement Showrooms’ with full CI should be located within an hour’s drive time of the customer. These facilities require a degree of permanence, principally on account of their set-up cost and strategic relevance to the brand. There are arguments for and against making these multi-branded – from one manufacturer’s portfolio, or across disparate manufacturers.
The spokes require minimal or no showroom facility, saving significant property costs. Workshops will operate at historic densities and can incorporate handover bays & VR studios for upselling new models. We believe this will take up to 10 years to implement, but anyone not operating under that model by 2030 will find it hard to be competitive.
Scale will be increasingly important, both geographically and within the facility itself, so the fixed property asset is utilised as efficiently as possible. Multi-brand and service factories operating in shifts &/or with two techs per vehicle is likely to make economic sense in higher-value areas.
- Drive for future flexibility and diversity to weather any future storm. Every lease renewal provides an opportunity to re-gear to a shorter more flexible commitment.
- Where current leases exceed 10 years to expiry open a dialogue with your landlord, who will be aware of alternative use values and the current low capitalisation of traditional motor retail assets, to explore whether an early release is to mutual benefit.
- Work existing fixed assets harder – consider opportunities to dual or multi franchise and explore whether service throughput can be increased through the introduction of shifts or dual tech servicing.
- Look to separate sales & service functions, migrating hub aftersales functions to grey box solutions able to handle fulfilment functions at scale or diversity into a multi-brand environment.
- Many motor retail sites have equal or greater alternative use value – understand the value of your asset and investigate alternative use values.
- Be prepared – best value is often dependent upon the grant of planning consent and to fluctuating market demand. Take the necessary steps now to ensure any uplift in value is captured by your company and not a future purchaser.
- There have been a spate of sale & leasebacks in recent years to release capital and prop up poor performance – reign back, trading future flexibility for a long-term commitment on stock which is not optimised for future retailing is short-sighted.
Once more freehold and leasehold property require different approaches:
Freeholds strengthen the balance sheet, lowering the cost of borrowing money, but the transactional costs in acquiring and subsequently disposing of the asset are considerable and acquisitions should not be contemplated as a short-term fix unless there is a future redevelopment angle. Furthermore, the recovery of capital spent on the built environment (as opposed to the ground on which the building sits) will take around 15 years at current rates of return. It, therefore, makes sense to ensure you are specifying a building that is flexible and future-proof.
Leaseholds require a fixed-term contractual commitment and whilst nearly all leases include provisions for assignment & underletting, there is an implicit acceptance that the rationale for committing to the size of the facility and its associated rent obligation in a particular location will endure for the length of the lease. Acquiring leaseholds may be necessary for financial or availability reasons, but retail exposure should be mitigated by taking short-term leases of no more than 10 years duration. Where longer leases are imperative because buildings are bespoke (typically 20/25 years), these should be underwritten by the OEM.
It’s not all bad news. Our Industry hasn’t evolved its retail property model for decades and looks outmoded by comparison to other retail sectors. E-commerce is having a profound effect on the way we consume products and other retail sectors stand to lose more in terms of the capital and resources they’ve invested, creating openings and opportunities for the Automotive Sector, where almost all major players are starting from the same point.
The future automotive retail offer is incredibly strong, combining cutting-edge technology, solid environmental credentials and the promise of safe, time-efficient door-to-door travel. We are finding that landowners, particularly the large property companies, are very engaged with the concept of future automotive and are willing to create the space, literally, to help the industry to innovate. Provided that opportunity is recognised and with the right insight and determination to move forward, the Automotive Sector can play a leading role in shaping the future physical retail experience.
First published by Stuart Copeland – Stonac Ltd, Robert Stephens – RS & Co and Richard Adams – Accendia Consulting for Auto-Retail in July 2021