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Motor Vehicle Dealerships an Industry in Flux

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Motor Vehicle Dealerships an Industry in Flux Motor vehicle dealerships An industry in flux September 2019 KordaMentha Motor vehicle dealerships Key takeaways New car sales are down, month on month, for 16 consecutive months since April 20181. 2019 sales are down 8% on 2018. This is not news to you, or to industry participants, but market wide trends are far from the whole story, even if this downturn reverses in the near term; challenges, options and opportunities warrant a deeper dive, so read on! 01 02 03 04 Declining sales Brand is Premises are specialised; the Consumer and and tail revenue everything dealership model is changing technological change 16 consecutive months of New car dealers are typically Improvements are specialised and Consumer behaviour is in transition. declining sales – revenue exposed to one or two brands, can’t readily be repurposed for Consumers are looking for a more streams start with new car with limited options to change traditional industrial or retail uses. convenient ‘retail’ experience, and sales – selling margin, finance brands in the short term, and no A move toward shopping centre, brands are responding accordingly, and insurance, servicing, dealer immediate influence on product. high street and convenience challenging the current dealership fitted accessories: no sale, no tail If a dealer’s brand range is not locations has commenced, model. Technology is changing revenue. resonating with the market, there challenging property values in behaviours through on demand is little that can be done. Brand is dealership strongholds. The services (ride-sharing, car-sharing), absolutely key to identify dealer wholesale to public, mega outlet, electric vehicle and driver- distress, current or coming. warehouse second hand model assistance/autonomous vehicles, is growing, challenging used car which are expected to further revenues for traditional dealers. depress new car sales. 2 KordaMentha Motor vehicle dealerships Introduction The long-term upward trend of new car sales has reversed. Is this a blip, or are we at an inflection point driven by societal and technological change? Dealers who have over-capitalised on new premises, and new entrants in outer metropolitan areas, are especially vulnerable. Trend Sentiment Pressures New car sales in Australia have exhibited a long-term • Consumer sentiment is flat but holding. The industry is under pressure from changes in consumer upward trend, driven by population growth, robust economic behaviour which increasingly make car ownership more • The sub-index ‘time to buy a major household conditions, and geography and urban planning conducive optional, or otherwise decreases the frequency of vehicle item’ is likewise relatively flat although with a 3.6% to private transportation. While short-term dips are evident, replacement (through lower use), including: increase in July 2019 to rise to its highest level since most notably through a 15 month period during the GFC December 2018 (certainly correlated with house • Increased density living closer to city centres, public when sales dropped from c. 90,700 in February 2008 to c. price expectations) we may be seeing some green transport corridors and services reducing reliance on 73,000 in April 2009, the long-term trend is strong. shoots. personal vehicles The present downtrend is only 16 months old, but is now • It seems counterintuitive that this sub-index can hold • The inexorable rise of ridesharing longer than the GFC dip. The absence of a specific macro up concurrently with the longest period of decline in externality to drive the downward change such as the GFC, • Enhanced and expanded delivery services such as sales in the last 20 plus years, unless there are larger and against a backdrop of low interest rates and reasonably Uber Eats, online groceries and Amazon. forces at work. robust consumer sentiment (until very recently), suggests While the long-term trend has encouraged investment that a more significant structural change may be underway. in the sector, are we approaching an inflection point of significant structural change, driven by societal and Australia new car sales – long-term trend2 Consumer sentiment3 technological pressures? Consumer Family finances Time to buy a major House price Dealers who have over-capitalised on new premises, and 120,000 sentiment next 12 months household item expectations index 160 new entrants in outer metropolitan areas are vulnerable. 140 Aggregators are already active in the market seeking 100,000 outcomes through economies of scale, rationalisation of ? 120 back office functions, robust systems and controls. 80,000 100 80 60,000 60 Nov Aug May Feb Nov Aug May Feb Nov Aug May Feb Nov Aug May Feb Nov Aug May Dec Aug May Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul 03 04 05 06 06 07 08 09 09 10 11 12 12 13 14 15 15 16 17 17 18 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 3 KordaMentha Motor vehicle dealerships A highly fragmented industry • There are 3,500 new vehicle dealerships nationally, • Motorcycle Holdings Ltd continues a path of Dealerships Dealerships 54 674 of which 85% are owned by individual operators or acquisition, with 31 dealerships and a significant Revenue Revenue family groups4. multi-channel accessory retail operation. $0.8b $12.6b • Beyond these, the other larger participants include • There is a significant imbalance of power between four listed companies: dealers and manufacturers, with typically short-term Dealerships Dealerships 311 1,066 – Automotive Holdings Group Ltd (AHG): dealership agreements (1 to 5 years), and ability Revenue Revenue 115 dealerships for manufacturers to unilaterally decline to renew $5.9b $19.9b – A.P. Eagers Ltd: >145 dealerships agreements on short notice. – Autosports Group Ltd: 37 dealerships • Manufacturers maintain market power by restriction – Motorcycle Holdings Ltd: 31 dealerships, nine of the number of dealership points held by any given accessory retail locations. dealer group. • Other larger participants include Suttons Motors Pty • Aggregators benefit through economies of scale, Ltd, Paterson Cheney Holdings Pty Ltd, and Autopact rationalisation of back office functions, and the Pty Ltd. Each of these groups still only account opportunity to put in place robust and sophisticated for a small percentage (<2%) of total market share systems and processes to control costs and margins. (by number of dealerships) in their given areas of • Consolidation may be tempered by manufacturer operation. restrictions. The outcome of, and any manufacturer response to, the A.P. Eagers Ltd takeover will be of Trend and movement interest. Dealerships 277 • Market share concentration has remained steady Revenue Dealerships over the past five years but is anticipated to rise $4.7b 728 Revenue through consolidation of existing dealerships. $13.7b • The most current example being A.P. Eagers Ltd pressing its takeover of AHG. If successful, the combined group will have 229 new-car dealership locations in Australia, 13 in New Zealand, and 68 Dealerships Dealerships new-vehicle truck and bus dealership locations in 108 80 Revenue Revenue Australia. The merged entity would have 11.9 per $1.3b $1.2b cent of the new-car dealership market in Australia. 4 KordaMentha Motor vehicle dealerships Real estate considerations Challenges to traditional model Real estate implications • Digital disruption and consumer trends are working • Real estate changes will occur across dealerships against the traditional dealership model. nationally – whether this is a wholesale shift away from the standard form dealership, or a more • Consumer behaviour is changing. Consumers are Real estate strategy diverges nuanced and case-by-case migration to new form looking for a more convenient ‘retail’ experience. premises. depending on whether the Brands and dealers are responding accordingly, dealership premises are for example: • Planning restrictions on entry by new dealerships. – Mercedes Me store in Collins Street, Melbourne • Given their often high-profile locations, dealership owned or leased. Opportunities – Genesis in Pitt Street Mall, Sydney sites may be suitable for a wide range of retail, and challenges exist for both – CarZoos in Westfields, Brisbane commercial or industrial alternative uses. – A.P. Eagers Ltd reported plans to move into ‘mini • Conversely for certain locations, particularly outer owned and leased premises. auto malls’. metro, a car yard could be the single credible use, • Similar trends can be seen in South-East Asia and meaning a property owner (whether owner-occupier worldwide. or landlord model) could be ‘all-in’ with the dealership land use regardless. • These responses from brands and dealers are consistent with the proposition that large format • Transformation of dealership sites to alternative uses destination dealerships are being supplanted. is site specific and dependent on the highest and Specialty car showrooms and dealerships are best use of the underlying land. transitioning to flexible spaces within shopping • The best case is for a controlled process to manage centres and ground floors of office buildings. the tenancy and leasing transition. Benefits of this approach include: • The worst case is for a ‘hard landing’, negatively – Transition of dealerships from transaction hubs impacting consumers, dealerships, and property to experience hubs owners. – Increased accessibility and exposure to consumers – Less intimidating for consumers to browse than traditional dealerships, especially as the approach adopted by staff is largely
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