How many mergers & acquisitions in the UK retail automotive industry is too many?
Alastair Cassels · December 22nd 2023 · read
The recent announcement of Rybrook’s sale to Sytner (Penske Automotive) looks set to usher out what has been a seismic year in UK retail automotive M&A. In a year that started with Lithia’s acquisition of Jardine Motors, saw Lookers Plc acquired by hitherto unheard of Alpha Auto Group in September and Pendragon Plc subject to a bidding war ultimately won by Lithia, we have seen c£1.3bn flow into the UK car distribution networks from overseas.
There has also been plenty of activity below the threshold of these mega deals and some trends seems to be emerging. This rapid consolidation in the market comes with its challenges and I suspect that these deals provide an unwelcome distraction from more existential matters in the manufacturer boardrooms.
Manufacturers have always liked to have a degree of balance in their networks. A third, a third, a third at one point seemed a mantra that many would cite as their ownership/franchisee strategy.
One third PLC or large dealer group, one third private dealer group and one third independent operators. This was of course before any material influence of the internet and digitalisation and prior to the heady days of 2.7m unit new car markets.
Slowly but surely, we’ve seen the big get bigger, the mid-size either stagnate or sell up and the independents squeezed out of the OEM plans. Markets consolidate, it's what capitalism is about, and the auto sector cannot be immunised against it, especially now as we face the greatest transformation pressure since mass production began.
So, if consolidation is inevitable what does it mean for customers which should be the number one concern for vehicle manufacturers.
By way of a case study, I’m going to single out BMW UK largely because it is probably the franchise, we have seen most demand for over the last two years. The BMW network stands at 136 locations. That’s largely unchanged in recent years despite the erosion of the UK market volumes by c0.5m units per annum. By comparison Audi (115) and Mercedes (124) Volvo (98), JLR (113), Toyota (181).
At the start of 2023 Sytner were the largest BMW franchise operator with 18 locations. Having added Specialist Cars (Stevenage, Luton and Tring) to the operations. The Rybrook acquisition will increase Sytner’s BMW portfolio to 22 locations. Which will equate to 16% of the outlets and likely more in sales volume terms. Most OEMs had a notional limit of 10% exposure to any one partner, but this is now proving difficult to maintain as the pool of acquirers diminishes.
BMW dealerships are not cheap. They often have large and high-quality facilities in affluent conurbations, have MINI and Motarrad franchises attached and have been highly profitable in the last 2/3 years. Buyers have been prepared to speculate large sums on goodwill payments possibly feeling insulated by BMW’s 5-year contract term and Munich’s vision for the next century of luxury mobility.
It is the high-water mark for BMW dealership values and many owners are being tempted to “cash out” at this point. Earlier this year we saw Lithia build onto its two Jardine BMW sites with the acquisition of Arden BMW’s two Kent locations. The pending Pendragon deal will take them to 11 locations.
|Number of outlets
|22 (assumes Rybrook deal completes)
|11 (Assumes Pendragon plc deal completes)
We expect more independent franchisees to follow this route. With so much uncertainty around agency, electrification and future investment levels, the temptation to sell up will be high. The challenge for BMW and other OEMs is managing the structure of their networks so that the best interests of customers are continually met.
Some years ago, Vauxhall found itself partnered with an increasing number of Pendragon plc locations. Acquisitions of Lex Auto Group, CD Bramall, Reg Vardy and Dixons consolidated c35 dealerships in a short time frame and once the CMA had opined the brand was left to consider how to manage the largest partner.
The upside of sales having a single point of contact to negotiate with was offset by the buying power that Pendragon could exert.
The dilution of positive culture of the independent dealer group eroded customer experience and the desire to focus a business plan on selling Used cars at a ratio of 3:1 placed pressure on OEM relations.
The banking crisis and subsequent recession of 2009 precipitated a devaluation of Pendragon shares to that of a penny stock and cast the threat of insolvency or merger with another large dealer group. The largest dealer group in the UK was forced to operate on cash trading terms with its some of its stock funders. The ensuing period resulted in ongoing tensions around investment levels and performance quality.
Spin forward a few years and GM is going through bankruptcy proceedings in the US. Opel Vauxhall looks set to be sold to Magna and the dealer network exists in a state of flux. Dealer groups like Pendragon now must provide re-assurance to investors, funders and customers that there is no need to panic and even though 20% of their revenues come from one brand, there are plenty of offsets. The reality is that events always have consequences. Tenant covenants on leases suddenly don’t look as robust and forced pricing changes as insurance, staff in the affected brands feel insecure and may elect to move and investment is put on hold.
The resulting tensions between OEM and dealer partner can be hard to manage. Either party can feel over exposed and vulnerable to the fortunes and strategic direction of the other and without strong relationships there can be fractures. Ultimately these fractures seldom serve to improve customer outcomes and therefore everyone’s value is eroded.
This brings us back to balance. It works both ways. With the introduction of Agency sales, it could be considered that higher exposures to a dealer group are less relevant as the commercial terms and customer journey are standardised. However, dealers/agents still sell used car, still service and repair vehicles are an integral part of the customer experience. Finding the sweet spot in any relationship might not be as easy as prescribing an arbitrary percentage of sales share but it is in the best interests of everyone to be mutually comfortable with the potential exposures in more difficult times.
This is where brands need to think outside of the easy solution and explore more creative thinking when it comes to partner selection. Sytner are a high-quality operator but how many are too many for any one car brand.
If other investors are to follow Arden, Specialist Cars, Stephen James, Helston Garage then BMW et al may wish to have more franchising options akin to the likes of Lloyd Motors.ie a family-owned business with local scale, strong balance sheet but no plans for world domination.
However, this requires some risk taking and leap of faith to look outside the obvious solution. That means taking a risk on a good retailer regardless of their “premium”, “volume” or even “passenger car/bike” experience. Cultural alignment and a passion for exceptional customer outcomes may be more important than a track record of similar sales operations especially as we move into the Agency fulfilment model for new car distribution.
The sale of Helston Garage in late 2022 heralded such a risk by Volkswagen Group. They opted to block the 100% sale to Vertu and diverted their brands operations to a new to group operator in Yeomans. This is a bold move but one designed to ultimately achieve best customer outcomes in the long term. It’s also no comment on the quality of Vertu’s operations which are highly regarded. It is an example of balance. Not always the easiest option but a strategy that may have mutual benefit in the long term.
Mercedes market area approach of previous decades provided a managed consolidation which allowed them to balance a network and ensure that viability remained strong and dialogue with the entire network could easily be managed. I am sure this has helped them implement their own version of Sales Agency and helps align OEM and investor to the strategy.
The auto retail sector has been consolidating and will continue to do so. The question remains – are there enough consolidators with access to capital, management bandwidth and growth ambition to maintain balance in the distribution model. Recent evidence suggests not, with this year’s mega deals not serving to develop the bench strength of OEMs despite avoiding a super merger between incumbents. Let’s hope there is an opportunity for others to step up and provide an alternative for OEM franchising departments.