Tuesday, 14 February 2012

Micro Level Trends - UK Luxury Car Dealers - Organic & Acquisition Transformation on the Tentative First Step of the Upswing Cycle.

The general decline in new sales of luxury, super-luxury & 'supercars' from record highs in 2007 has been the natural consequence of the 'new norm' in the West. The Triad region saw unprecedented economic contraction, which in turn created virtual market stagnation, thus requiring such vehicle producers to markedly alter what were ambitious business plans and concomitant new model introductions. The same heavily adjusted business attitude matched by all producers, from the smallest low volume workshops to the might of German VMs; all having to weather the storm.

That major toll has likewise affected the operations of premium & luxury car retailers, a mixed bag of enterprises ranging from small family firms to large publicly quoted corporations.

That rapid change shifting from 'thrive' to 'survive' firstly of course seen across the US; then as credit retraction and economic contagion spread across Europe seen throughout the EU. The overall general consumer and industrial demand collapse of the West thus affected portions of the rest of the world, especially those countries that were commodities exporters, and had previously seen buoyant economies reflected in the car purchasing habits of the new wealthy and super-rich, typically the Russian and Brazilian quotient of the BRICs.

However their peers, China and India – as massive internal economies – have remained the only true exceptions, the core metropolitan hubs of China and India acting as the recent life-blood for luxury and sporting marques.

So the sales directors of (BMW) Rolls-Royce, (VW) Bentley, Aston Martin, (Daimler) Maybach, (VW) Bugatti, (FIAT) Ferrari, (VW) Lamborghini, (FIAT) Maserati and now (VW allied) Porsche have all sought to increasingly engender their respective histories and brand values into Asian markets. But thankfully, unlike the past experience new incoming volume producers with mainstream offerings, these brands were already well recognised and very much reverted by a very internationally aware and astute client set, one which in many cases had already many years before ascribed itself to the best cars the world had to offer; and in other cases were eager to learn about brand heritage and social and personal statements their conspicuous consumption conveyed.

However, unlike their upstream vehicle producer counterparts, most western retailers of these vehicles were unable to take advantage of that eastward shift in demand, the majority being themselves small or medium sized in enterprise stature, with operational and cash-flow problems in setting-up and financing overseas expansion into EM markets. And indeed facing stiff competition from indigenous companies or entrepreneurs within those territories, the more remote often the more troublesome.

[NB, within this, it is recognised by the sector and the authorities that luxury car showrooms are prime targets or created entities that may be used to aid money laundering schemes; large amounts of cash immediately converted into an easily (often self) transportable item for resale in a different locale or country].

Thus, only the largest of companies from the UK, US and Europe have been able to exercise their muscle in such geographic expansion, whilst also seemingly avoiding such pitfalls.

So the broad story for many within the the luxury and supercar retailing realm has been that of an unprecedented challenge to operational stability throughout 2008-12.

Though their have been short-term reasons for hope what with QE initiatives seeing money pumped into US, UK and European economies, such reasons to be cheerful have themselves dulled what should have been sector 'bright spots' given the reality about present day conspicuous consumption, especially amongst those working in the financial sector, an historic back-bone of high-end car sales.

But of course with every downturn emerge ever more potentially fruitful opportunities for those companies which are able survive the downturn, able to run 'flat' for a period, and simultaneously able to set-out future strategic visions and thereafter able to execute; via finely honed step-by-step adaption of the company, espousing internal metamorphosis and new persona and ideally financial standing for eventual positive growth.

To cite a comprehensive list of the Triad companies that faced this sizeable challenge would be largely fatuous.

However the more recognised names are those such as North America's massive Penske Auto Group, sparring against a plethora of small-fry state and regional competitors: Southern California's 'Chariots' for example. In Europe, the continent's largest privately owned luxury dealer group Porsche Holding Salzberg is being absorbed by Porsche's parent to be VW AG, whilst on a national basis the Eurozone crisis will theoretically effectively enforce cross-border consolidation amongst dealer groups, the real battle then being between the German's and Italians for supremacy of dealer locations, showroom sizes and so customer connectivity. In Japan, given the reality of a lacklustre economy for nigh on two decades, little appears to have changed in terms of dealer sector structure, with names like the Nicole Group continuing to hold a grasp on imported luxury vehicles with sales licenses agreed with European suppliers.

In the Middle East, the supercar hub that is the UAE is represented by dealers such as Al Nabooda and Al Habtoor, which themselves are essentially 'royal appointed' and as such effectively limit new entrants and provide sector stability. Whilst in South America, Brazil specifically, Aston Martin, Bentley and more recently Rolls-Royce have or intend to have partnered dealership presence.

But, even in a 'soft-landing' period for the economy, it is the immensity of China that has seen the lost sales in the West recaptured to support German, English and Italian production, SG&M and associated overhead,

The UK as a luxury car market could be said to be positioned somewhat mid point between the US, Europe and Japan. Not yet enjoying the 'great expectations' of North America, escaping the economic drag abound across the EU and with a more dynamic sector structure than Japan's participants and positioned upon what could be described as the first step of the expected economic upswing, with certain groups (as mentioned) with EM exposure to balance global earnings.

All of this makes the UK sector an intrinsically interesting arena for the investment community, whether British 'self-interest' spanning the broad terrain of in-direct institutionals to direct PE, to international investors from PE to SWFs seeking synergistic activities that can be replicated or directly imported to buoy their own growing economies and consumer tendencies.

The very brief following list categorises some of the better known UK participants by general size, so highlighting an expected 3-tier composition of dealer groups and specialist retailers:


Inchcape plc, (MktCap of £1,680m)
Pendragon plc, (MktCap of £85.50m)
HR Owen plc, (MktCap of £14.46m)
Sytner Group Ltd (a division of Penske Auto Group)


Clive Sutton Ltd,
Grange Ltd,
Marlow Cars Ltd (used dealer only)


SparksCars Ltd,
Romans International Ltd,
William Loughran Ltd,
Tom Hartley Ltd

This provides an interesting picture, in as much as that beyond the notional 3-tier classification, even within the top-tier of 'Large' players there is distinct and sizable company market valuation differences - spanning £1.68bn for Inchcape plc, Pendragon plc at one-twentieth its size at £85.5m and H.R. Owen one-sixth the size of that at £14.46m. Thus the smaller listed company is in fact one hundred and sixteenth the size of its mighty competitor. This indicates then that each notional competitor must infact follow its own very specific business path; in simplistic terms: regional for H.R Owen vs national for Pendragon (especially so after previous problems expanding in the USA) vs international (with ever increasing EM bias) for Inchcape.

Nevertheless, regard the core of UK business strategy, all essentially find themselves in the same boat, having to re-orientate the fundamentals of the company given the seizmic shift in events and the sector's general playing field.

That shift impacting all aspects of the business, but most pertinantly :

1. the basic product bias (new vs used)and variant mix.
2. the ability to source finance for working capital and expansion capital; given the still restricted reality of bank lending practices, though now slightly eased – again in theory - by further BoE QE raising the new ceiling by $50bn to $325bn
3. the critical 're-resourcing' of personnel across both management and staff beyond skeleton levels after previous necessary shrinkage.

Yet, at this stage, early in the new economic cycle, clearly it is the creation of a meaningful, contemporary and strongly coherant strategy that takes precedence. So as to ensure that credibility can be assured from investors, staff and critically the client-base alike. This means an evolutionary yet much changed face to any business, so as to tangibly and metaphorically throw-off the old and create a new business template and matured company persona.

The distinct aspects of that strategic planning are:

A. Early Phase Planning for Future New Vehicle Sales Up-tick
B. Improved Purchasing Access to the Used Luxury Vehicle Market
C. Ever Greater Reliance upon the Service dimension of Sales and Service
D. Greater Personalisation
E. Greater Experience Creation
F. Organic & Acquisition Growth for Expanded Catchment Area
G. Creating a New Dealer Group Specific USP
H. Organisational 'Rebalancing'

Each of these issues is very briefly described to add “meat to the bones”.

A. Planning for New Sales in the Mid-Term

Though presently dealing with the urgency of re-aligning the fundamental stock inventory mix, so as to dispose of older models and re-align toward 'more affordable luxury', an eye will undoubtedly be upon the incoming pipeline of new cars so as to obtain “assured” pre-order volumes from the factory and by doing so ensure discounted ex-factory rates from suppliers. Moreover, in an era of what are necessarily 'long in the tooth models' access to all new functional yet sporting models such as the Bugatti's Galibier (4-door coupe) and a possble sister Lamborghini model (visually derived from the Estoque concept plus Maserati's Kubang SUV will draw customer footfall into showrooms via special presentation evenings. These cars, initially available in limited numbers, will however act as attractors for new sales of facelifted versions of Porsche's Panamera and Aston Martin's Rapide, given that many 'middling' buyers are looking to downsize the cost and depreciation levels of their business and domestic vehicles, typically including a separate SUV and 2-door coupe or convertible, whilst retaining the runabout (eg Mini Cooper). However, the runabout category now affords an opportunity what with the previous release of Aston's Cygnet and Ferrari's Fiat 500 with similar vehicles expected to come from other prestige marques to solidify customer loyalty.

[NB it should be noted that over the last last 2 big economic upturns in 2002 onward and previously in 1992 onward it was the symbolism and innate commercial punching power of Porsche that gave the German firm and its dealers the 'out of the gates' advantage of volume and margins, once again expected under VW stewardship, versus others that offer higher margins but lower volumes].

Given the well known 'German grasp' in early stage confidence – a kind of run for safety in product quality and residual levels – those dealers offering other non-German marques may be required to provide 'quietly whispered' discounting, which will in turn will set demand-led ceilings for others; though it must be noted that the differential today between German and 'Other' is not as great, the greatest danger being factory and dealer over-stock forcing client discounting to shift metal and ensure a smooth flow from factroy to showroom. Thus demand, inventory and margin balancing will be crucial for many dealers, and from an investors perpective should provide insight into a dealer group's 'inventory days' and RoA efficacy, along with other Activity Ratio measures.

B. Improved Purchasing Access to the Used Luxury Vehicle Market

Whilst the early phase of the upturn will no doubt see more than a trickle of conspicuous consumers rewarding themselves, the fundamental basis of the now 'New Norm', including inherent spending prudence and sensitivity to the overtly apparent 'social divide' amongst even high earners means a renewed interest in 'late model' used cars (adorning ageless personal plates) is already evident and will become more so; an issue to which dealers must pay close attention.

Thus there should be an increased sales bias toward 'provenance proven' pre-owned, lower mileage vehicles which still retain their glamour yet escape the immediate depreciation experienced when driving a brand new car out of the showroom.

This fiscally driven trend will then have increasing influence across the UK's used luxury inventory base. And since such vehicles over a certain age – typically 7 years old - depreciate massively, the ability to successfully manage inventory between 2-3 and 5-6 years old will be vital. To do so will test the inventory sourcing and disposal capabilities of the 4 largest players in the sector, specifically in sourcing, this via:

- other dealers used vehicle stock (including via acquisition).
- company car sales by SME businesses seeking cash-flow injections.
- replacement sales by elite clients seeking vehicle renewal.
- company asset liquidation sales (if 100% owned).

C. The 'Service Dimension' of Sales and Service

With an increase in age of the luxury vehicle car-parc comes the inevitable need for clients to both maintain mechanical, structural and aesthetic quality, so as to retain enjoyment from owning the vehicle and simultaneously buoy residual value of the car.

Thus historically there has been a clear demarcation in the customers eyes between Sales and Service departments of a dealership, one effectively handing over to the other and so often altering the very basis of the dealer-client relationship. This typically from one extreme to the other – from the ethereal endless pander of salespeople hovering over signatures for five or six figure credit enabled paperwork; juxtaposed by the very tangible 'cold world' of service and repair costs where client ignorance of hi-tech mechanical issues grates leaves the customer feeling 'fleeced' by the hefty workshop invoices. Thus two very different 'seemingly “Jekyll and Hyde” experiences under often one roof.

Thus there must be improved merging of both worlds.

Beyond the central aspect of client satisfaction, the increasing threat of independent and chain service centres that are able to diagnose and service luxury vehicles – whether scheduled service or mechanical overhaul – is growing as a result of sector de-regulation. That poses a very serious threat for dealers, especially so on pre-loved vehicles sold where a manufacturers warranty (and so the dealers monopoly) will have been diminished even if not expired.

And from the vehicle technical improvement perspective – as noted by the auto-trade - it could well be the case that ongoing improvement in the reliability and durability of cars will inevitably reduce the intermittent periods need for servicing and repairs, thus revenue streams. This especially the case if clients drive less mileages, preferring to use media devices for personal contact than in-person conversations.

Today though such macro themes are not yet evident and the need for service with broader after-sales initiatives to maintain a captive client means that the post-sales dimension is more important than ever.

Whether large or small, dealers will have already well recognised the importance of the service aspect so as to retain all important customer loyalty during this depressed period. The golden rule in service stemmed from the hotel/concierge arena is to accommodate the client requirements through flexible policy. This notes the measured yet common-sense differentiation of basic 'needs' (fundamental expectancy), 'wants' (expedient tailoring of the service) and 'demands' (typically black or white between wholly reasonable versus wholly unreasonable). All undertaken with basic courtesy and if possible old fashioned manners. This no doubt the norm for many luxury dealers, but unfortunately requiring innate cultural change by others.

Thus, to use the rhetoric, far closer and suited 'CRM' - Customer Relationship Management providing for Customer Retention Management.- as validated by the two following points.

D. Greater Personalisation
The ability to access 'relationship data' in this electronic age has transformed the workings of the humble high street taxi service, thus together with web-enabled collated client information looks to be the transformation lever for client information storage and so improved communications building and thus the ideal of Personalisation.

[NB though it must be noted that the advantages of such 'client insight' can be a two edged sword if the basis of conversations rooted in such information retreaval appears mechnical and cold]

The ideal of course is for smooth delivery and expansion of the 'Tailored Service Ethic', ranging from the early phases of client introduction, through to say the co-creation of personalised vehicle specification detailing, through the plethora of after-sales initiatives through to the new possibility of vehicle 'life-extending' re-trimming as part of an eco-responsibility aswell as perhaps creating a very personal car collection.

The world of 'personalisation' generates many issues, not least the blurring between brand / product integrity as officially designated by the car designer or company CEO and the wishes of the client; a fine line that must be trod carefully to respect the demands of both parties.

E. Greater Experience Creation

The growth of the automotive experience arena has been prolific in recent years, and has become a bone of contention between carmaker and dealer, as each seeks to seize the opportunity to clutch the client closer and extract greater sums of money. Thus the carmaker and dealer must clearly define brand and service responsibilities and initiatives, yet that possible strain has not stopped the vibrancy of building 'client experience programmes'.

These ranging from factory visits to watch an ordered car assembled, to manufacturer built brand centres by way of auto-museums and now amusement parks (Ferrari World in Abu Dhabi the 21st century incarnation of GM's 1980s concept of the 'Test-Track' ride at DisneyWorld's EPCOT Centre in Florida). With of course driver training courses extolling the virtues of a vehicle used as a pathway toward race-track based hospitality events, and at the far reaches the offering of a manufacturer supported race track-day events and amongst the true wealthy adventurers the ability to have a factory-supported race car or whole race team for FIA events.

The merging of product, client and dealership has been taken further still by luxury progressives such as Ferrari, who have now set-up in conjunction with certain dealer groups its Ferrari Atelier initiative, where car showroom meets up-scale hotel so as to derive the perfect environment for the personal tailoring a newly orders supercar.

This then once again extends the development of 'lifestyle brand value nets', which in effect coalesce and deliver what would have possibly been separate but values aligned brand choices.

Thus Ferrari, at the behest of the Agnelli heir Lapo Elkann and well publicised via the FT some months ago, has sought through its Atelier idea to encourage its clients to co-create their ordered cars in suitably comfortable but contemporary surroundings. It creates an haute coiture high fashion-house feel that most critically attracts increasing female buyers – and as yet unnoticed by seeming all – actually encourages joint decision-making between man and wife or same sex partners regards the car, and by doing so no doubt compels participants to spend more in the process

F. Organic & Acquisition Growth for Expanded Catchment Area

Company growth is of course the typical prime ambition, this matter critical for those with public listings even if less so for family-held conerns. But no matter what type of ownership structure is in place, progressive executives and investors will be seeking to leverage present challenging conditions into a foundation for future opportunities.

Organic growth is of course the norm for most businesses, and methods to improve the fundamental business base have been mentioned, but during such contraction periods board directors rightly look to the possibilities of well considered, well executed and well implemented M&A so as to gain firm footing on that first step of the economic upswing cycle.

Already firms have been scanning and purchasing smaller entities which appear to have themselves run-out of financing or lost crucial supplier contracts. However, the opportunities that have arisen – exemplified by the sale of Broughton's (spanning the M4/M25 corridor) – have been schizophrenically valued. The price itself seemingly good by a measure of long-horizon sales potential reletive to the catchment area, but with the inclusion of intangible 'goodwill' a major component of the overall price; perhaps a greater portion than has historically been the case in previous decades.

Nevertheless, the Broughton's deal well exemplifies how larger entities are presently assessing the absorption potential of SME companies. And as part of that calculation the preditors themselves must asses the inevitable cost of infrastructure development on these new sites. Depending upon the location itself, ranging from basic alteration of company signage and showroom colourways to possible full re-modelling of showroom building, showroom interiors & exteriors, re-fitting of
back-office hardware, whilst also welcoming those retained staff and management into the new fold via training and team-building efforts.

This M&A costings must be realistic and set against a realistically constructed ROI model, which then provides indication of the mid-point offered purchase price. Though such M&A opportunities have been apparent, the combination of competitive playing field and low borrowing rates must not absolve the fundamentals of sound business planning.

G. Creating A New Dealer-Group Specific USP

Unlike mainstream vehicle dealers which can rely upon the high cost above-the-line advertising & PR efforts of volume manufacturers to generate showroom footfall, the luxury car dealer must seek to gain its publicity and attraction 'edge' far more so by its own efforts. Hence the usual PR initiatives as sponsoring a local private school event, a monied neighbourhood community event, advertising in the regional 'upscale' county magazine (eg Hertfordshire Life, Berkshire Life etc) and select local sports events such as rugby or rowing.

However, whilst credibly targeting the specific location, this is little more than the norm. Today facing an ever greater competitive threats from outside the locale by those old and new operators exploiting virtual but strong web links, all dealers must re-appraise their own personas, and try and create their unique competitive and charaterful positions, by going far further than simply advertising on the web-sites of that local magazine.

Thus time to re-appraise the outward persona and indeed the inward personality of the dealership, effectively deconstructing and reconstructing the ID, Ego and Super-Ego of the commercial entity.

One very obvious route to adding client value for those that do not already operate the 'concierge' type service is to effectively mimic Peugeot UK's 'just add fuel' marketing campaign, where much of the inconvenience of ownership – ie the usually separate administrative aspects including road tax and insurance - has been 'bundled' into the overall price and package.

However this is an obvious example of 'solutions provision', instead all aspects of the clientel's needs, wants and desires should be evaluated, as should the actual brand personality the dealer wishes to convey. Thus using well known others for 'service influence' - from something as obvious as Virgin Airlines' Upper Class offering, to the far less obvious but subtly powerful service offering of the Goring Hotel (London Victoria). However, the key point here is not to directly copy, but to draw influence and evolve a truly “unique manner”; note not style over substance.

H. Organisational Re-balancing

There is well recognised a need to fundamentally change dealer mindsets to suit the 'New Norm' generated by much altered economic and technological (IT) conditions. Thus an imperative to evolve an organisational structure. This in short to reflect the change from a pre-2008 mentality in which cars almost sold themselves to a new 2012+ mentality which requires far greater insight and subtlety at 'front of house' and far greater business assessment behind the curtains.

This then requires meaningful performance measurement in both enhanced quantitative and the qualitative methods. From the quantitative perspective ensuring that management budget and accounts are very closely entwined with sales targets vs progress. From the quantitative angle, the ability to properly understand positive and negative perceptions of clients.

In this vein, a corporate mission statement might relay “where authentic customer connectivity can be nurtured at both the physical and virtual customer interface levels', but such a 'removed' rhetoric' and jargon should be avoided and instead a true culture of mutual respect and human relationship understanding honed and nurtured. This admittedly hard to achieve in what has often been an ego-centric world between some dealer staff, their customers and of course the general public who are often deemed time-wasters by dealers, but who in themselves ultimately support the reverential esteem of the luxury marques themselves.

[NB Here, once again investment-auto-motives spotlights the decades long attitude of Morgan Motors, whose own MD (Charles Morgan) acts far beyond the role of marque figurehead and appears to have time for all; from inquisitive telephone calls from university students to high value vehicle orders by blue-chip company board members. All are treated kindly and respectfully].

As for intrinsic risks on the horizon, whilst all companies recognise the basic demand-side and supply-side risks, driven by macro PESTEL and micro Supplier issues, it is the increasing influence of internet based ventures which pose the possibility of 'new entrant' threat.

Although most dealers have embraced the web as both advertising display instrument for inventory and route to purchase used vehicles aswell as of course client information gathering, this approach is an extension of 'business as usual' – with extended tentacles. Possible threats come from those newcomers such as TrueCar.com which try to fundamentally alter (ie break) the historical dealer vis a vis customer relationship by acting essentially as a broker of vehicles.

So it seems that the very operational structures of dealers are undergoing or should undergo slow but fundamental change. The previously mentioned merging of sales and service departments then probably requiring greater circulation of staff throughout the different functions of a dealership than has historically been the case, which will in turn engrain cross functional knowledge and behaviour to the benefit of the client-base and so the business.


The release of credit agency Moody's 'Negative Outlook' on the UK outlook - from the EU relative perspective - should not markedly dampen what has been a slowly grown confidence in investor attitude toward UK companies. Especially toward those with greater national focus, and have assertained their strategic position at macro and micro levels and are readying themselves for the future. Other undoubtedly stable FTSE100 companies with greater EM and global exposure undoubtedly provide defensive investment routes, but as for the typical Buffet-esque value driven 'cigarette but' buy, their appear to be those in the luxury sector that are preparing for a resurgence over the years to come.

Positively that possible dampening of the UK economy will provide the timescale for much needed ongoing change in the auto sector, both at structural levels where divestment and integration can take place, at the visionary level so that new dimensions can be brought to established enterprises and at the people level, where it should be recognised that the value of true service to clients is well recognised when the immediacy of financial gain is not obviously apparent.

With increasing reliance upon used luxury vehicle sales and that of service, repair and value for money 'customer experience' UK dealers are no longer as exposed to what was in previous years a strong Euro, and so no longer suffer the FX conversion into Sterling. Infact as regards the matter of lower volume new sales, the fact that the Euro has weakened so much as a result of the Eurozone crisis infact means that importing German and Italian cars for those that desire new should provide additional margin per unit, with the additional benefit of the ability to strongly negotiate with vehicle suppliers to accept what look to be over-sized factory inventories.

[NB That FX tailwind for the UK against the Euro will have also played in favour of the likes of Rolls-Royce, Bentley and Aston Martin given the high level of 'content value' (ie bodyshells and engines) imported from Germany].

Ultimately, investment-auto-motives views the the Luxury element of the UK's auto-sector as ripe for transformation and thus investment opportunism.

This driven by those groups with the common sense to have cautiously weathered the storm to date with limited or no debt exposure.....the strategic vision to rebalanced their operational practices and procedures.....which underpins organic growth.....and the ability to call upon cash reserves or low-cost of capital lending to undertake directly synergistic (ie horizontal) acquisitions.....with possibly potential throughout the vertical value chain at the service & repair workshop level below.....aswell as potentially, the ability to access the top of the value chain when truly advantageous CRM soft-ware applications developed around concierge-type hospitality.

If the sector manages itself, its inventories, the market and its CRM well there should not be a glut of used Bentleys, Roll-Royces, Aston-Martins, Lamborghinis and Ferraris languishing in storage or in showrooms. Instead a revitalisaed approach to the business and sector consolidation supported by ever increasing access to wholesale credit for new customer credit-lines, will breath new life into the UK luxury vehicle sector.

After all it is those symbolic 'flying ladies', the 'prancing horses', the 'charging bulls' and the 'spread wings' which together have historically succeeded in stoking a now much needed 'animal spirit' amongst investors, entrepreneurs and executives.