Diversification is key for dealers

Although getting customers into showrooms to buy cars remains the bedrock upon which dealerships are based the issue of business diversification has never been more relevant. Dealers that wish to grow their operations in the future should now be looking at the alternative revenue streams available to them — the aftermarket being one of them. Peter Cooke, KPMG professor of automotive industry management at Nottingham Trent University, believes that within the next decade dealers will have no option but to look beyond their core business if they are to grow or even survive. He said the most successful groups would be those that managed to broaden their revenue streams most effectively. “Dealers are losing out on profit from all angles, new car margins are under pressure and servicing intervals are also moving outwards. “What we are seeing is the dealership looking at ways of widening the range of the relationship that it has with the customer because it is losing out on the hard metal and on the servicing,” Cooke said. Highlighting the need for flexibility, Cooke said: “Dealers will have to constantly look at new ways of doing business and new ways of generating profit and accept that the sources of profitability are going to change fairly rapidly.” One group that has led the way is Lookers. The group's purchase last year of parts distributor FPS in a £31m deal was the most high-profile acquisition in the UK aftermarket in recent times. Lookers has openly embraced a policy of diversification from its core business and has enjoyed a successful start to its foray into the aftermarket. City analysts estimate that the operating profit margin on car parts is around 5 per cent — far higher than new car margins — and the figure is likely to stay around that level. In Lookers' latest annual profits statement — the first since the FPS acquisition — the parts distributor contributed over £1.6m to overall operating profit within five months of ownership. While that may not seem a large amout, put into context, aftersales contributed 15 per cent to Lookers' turnover in 2004 but pulled in 50 per cent of gross profit — and that figure is expected to rise. Lookers chief executive Ken Surgenor said the dealer group had always intended to move into the aftermarket and the acquisition was an important step in its strategy to broaden the base of its revenue streams from within the automotive industry. “It was around three years ago that we formed the strategy, Surgenor said, “but opportunities don't arise that often and we had to wait for the right one to come along. “We looked at parts distribution businesses and parts wholesalers and in the end we're glad we waited because we're delighted with the business.” Surgenor said the margins in the parts industry offered greater security and were not as variable as those in the new car market, which were prone to market fluctuations. He added that Lookers also benefited from the FPS acquisition because the business fitted into the group's existing structure. “FPS fits in with the existing logistics of the Lookers business — we already have van fleet and overnight parts deliveries to our sites. “The margins in parts are higher and the aftermarket doesn't fluctuate like the new car market, so we benefit from a steady stream of income,” Surgenor said. Lookers now plans to grow with FPS rather than acquire other parts businesses and is in negotiations to expand the main distribution centre in Sheffield. The turnover of the parts business is currently 88 per cent in favour of sales to motor factors and parts companies and 12 per cent in parts distribution. Surgenor said the potential for growth in the parts distribution market was vast and would be the main focus. “There is a great opportunity to grow that side of the business,” he said. Manufacturers have also turned to the aftermarket to grow both their own revenues and those of their dealers. Increasingly car makers have had to produce more innovative ways of encouraging customers into servicing their cars more often, as the increased reliability of modern vehicles results in drivers now having less reason to visit dealerships. Marketing schemes such as menu pricing for routine servicing jobs along with the fast-track one-hour service at the prestige end of the market — pioneered by BMW — have been implemented in a bid to drive up profits. Over recent years Renault has launched a series of aftersales initiatives and its latest involves promotions across its dealer network aimed at three-year-old cars and the older vehicle parc. The campaign was launched last month and focuses on retaining the brand's existing customers and targeting customers of older Renault vehicles who do not normally visit the franchised network. Each dealer will be expected to sign up to three promotions a year, which will include offers on servicing and MoTs. Stephane Boucher, Renault's manager of parts and service marketing, said the brand was now in a position to cope with increased demand. “Thanks to increases in service capacity combined with our apprentice programme, the network now has the capacity to cope with increased service volumes. Now we need to refocus on marketing our services again,” Boucher said. He said that the emphasis would be on dealers to highlight the offers and get more customers into the franchised network. “Dealers need to be communicating attractive service offers to their used car customers and those customers who did not buy their car from the Renault network,” said Boucher. “We know Renault owners prefer to have their car serviced and repaired by the manufacturer, we must now persuade them that we are not as expensive as they think,” he said. Whether more dealers follow the path of diversification pioneered by Lookers and more manufacturers encourage dealers to focus on the aftermarket remains to be seen. But the pressure on the new-car market may soon dictate that the decision is taken out of dealers' hands — leaving them no option but to jump into the unknown. At a glance: a guide to increased profitability - Broaden revenue streams - Look at other sectors that offer high operating margins - Target firms that fit within your existing business structure - Accept profitability sources may change frequently