The EU is pushing through dramatic changes in car dealerships. Catherine Cronin reports on what's happening
It's a tale worthy of a short film: earlier this year in southern Italy two car dealers were locked in a power struggle. One lost his franchise after making several unfulfilled promises to upgrade premises. A neighbouring dealer who satisfied the car-makers' standards was given the franchise instead.
Shortly afterwards, the new dealership was destroyed in a mysterious fire. Days later the previous franchise holder was found tarred and feathered and tied to a signpost.
The story shows the impact of losing a franchise in a market where average new car sales per dealer is among Europe's highest.
Since European competition law changes took effect in 2003, dealers can sell any new car they wish if they meet the standards set by each car-maker. These range from the size and decor of the showroom area to staffing levels, structures and training.
In October, the location clause comes to an end, allowing dealers to open other franchises anywhere in Europe provided they meet the criteria.
Standards vary between carmakers but one thing is clear, the EU has lost more dealers in the past two years than in the preceding six, according to Philip Wade, senior partner of HWB International, publishers of the GMAP European Car Distribution Handbook.
"Since 2002, some 17,280 sales outlets or about 20 per cent were banished from the franchise system," says Wade. "Sales franchises dropped faster than service with Block Exemption (the name given to the EU competition rules on selling cars) used to speed up rationalisation as increasing market shares by Japanese and Korean brands meant European makers wanted fewer dealers, but with higher standards and car throughput."
The Irish franchise network was already well rationalised, he says, so the fall-off here was pretty small. Estimates suggest that, excluding Rover, about 98 franchise sales points or 11 per cent have closed since the start of 2003.
However, 58 new sales franchise points were added to the list in Ireland in the same period so the net reduction over the two years is a more modest 4.5 per cent - or 40 franchises. The figure doesn't include dealers who will lose out when MG Rover finally winds up operations here.
According to SIMI, many of those leaving the market have opted to become service-only operations, or used car dealers. Others are capitalising on property values and selling out.
While the reduction in numbers are not that noticeable, what's obvious is the mammoth investment by those remaining. SIMI puts it at €1.4billion.
"The levels are truly frightening," says Pearse Flannery, chief executive of Irish motor industry consultancy, Pragmatica Business Solutions, "some invested up to €10 million."
Those who invest are chasing a return so either it's bad news for car prices - or dealers are fairly bullish about the future.
"Ireland has a lower car ownership than the rest of Europe," he says. "As an island it will never reach European levels, but economics and demographics are good. Our research suggests new car sales could reach 225,000 next year."
THE ability of one dealer to take on several franchises is creating bigger motor groups here, such as EP Mooney and Windsor in Dublin, Martin O'Reilly in Sligo, Kevin O'Leary in Cork, Bolands of Waterford, Kearys and Johnson & Perrott in Cork, Monaghan Brothers and the Tom Hogan group in Galway, ICR in Limerick and Tullamore.
"Big dealer groups weather the storms very well," says Dr Tom Donnelly of the Coventry Business School Automotive Industry Observatory. "Small is not beautiful in the automotive industry, as the Rover fiasco illustrates."
Philip Wade feels that, compared to other parts of the EU, Ireland doesn't have a great crisis - "but dealers all over are on tighter margins. They can't pass costs on to customers, there's less room for manoeuvre and no easy money to be made."
FOR viability, a volume brand dealer needs a minimum of 100 new sales a year and 200-250 used sales, according to one mainstream volume distributor. Luxury marques have other benchmarks. Given that average dealer new sales here is 200, the Irish figures are certainly up to the bar.
But the European Commission must keep a watching brief on motor distribution, says Garel Rhys. professor of motor industry economics at Cardiff Business School. "As well as the new standards, car makers give dealers little latitude to change new car prices. And dealers may be reluctant to exploit their full rights in the new regime as they're not confident the Commission will support them.
Since 2002, there is now lighter manufacturer control, but it's still in breach of the Treaty of Rome."
The changes due in October, allowing dealers to open outlets anywhere in the EU, will create an even more interesting market.
A number of British dealer groups are reviewing the Dublin and Cork markets, according to Flannery. And, of course, Irish groups may be tempted to travel.
Averages hide a multitude but in 2003 new car sales here averaged 202 per dealer, compared to 270 for the main European markets - in Britain, where fleet business is huge, the figure was 491. These figures may just tempt some large Irish operation to consider trying its hand abroad.
Then, there's Italy, where the average for the whole country was 420 per dealer the same year.
Competition and better value don't necessarily mean lower prices for cars
Some three years ago the European Commission said changes to the law on car distribution and servicing would bring greater competition and better value for money. However, says Garel Rhys, proofessor of motor industry economics at the Cardiff Business School, even its press release at the time suggested competition did not imply lower prices.
"It was obvious they didn't have complete faith it would lead to prices being harmonised downward," he says. "Eighty per cent of new car sales in the EU15 are to France, Italy, Spain, Germany and Britain. Smaller markets are not considered yardsticks for car pricing and anyone who thought harmonisation would mean lower new prices in markets like Ireland was living in a post-Eden nirvana.
"Car prices in the newer EU states have been slowly harmonised upwards and are not very different from Germany and Britain at a pre-tax level so I wouldn't be expecting a honey pot there."
As the Irish car market is about the same size as a big region in Britain, Rhys also contends the danger is that a small number of big dealers might emerge.
"There's a dealership in Colchester with the franchises for all the brands on sale there. The owner won't slash prices, but will maximise profit from every brand. In smaller territories, you have to be careful that rationalisation doesn't go so far under the guise of efficiency that it changes the market to one where too much power is vested in the hands of a few retailers.
"Market power is market power no matter who has it. Everyone knows manufacturers are big and thinks retailers are big cuddly bears but it's the latter who principally end up in front of Monopolies Commissions globally."
However, Pearse Flannery, of motor industry consultancy Pragmatica Business Solutions, argues that larger groups can be good for customers as they can buy in dramatic volumes and command better sales terms from car-makers, part of which can be passed onto customers.
One can't help concluding that at least, when it comes to price, the Irish motorist appears somewhat hammered for the moment, says another analyst. "They are buying in a market more block exemption compliant than many, with significant investment by dealers and up-ward harmonisation of pre-tax prices topped off with punitive VRT and VAT."