4 Articles - The Future of Retail Automotive

OK, so we've spent the past couple of days looking at the disrupted retail automotive sector as it is. We've looked at how:

  • Investors will reward those business models that directly address uncertainty around agency-based omni-channel distribution, the introduction of connected, autonomous, shared and electric technology ("CASE") and evolution of alternative as-a-service access models ("MaaS"),

  • While fairly un-defined as yet, the agency model may represent big opportunity for former franchised dealers who've husbanded those resources prized by OEMs in their direct-to-consumer model and

  • While independent superstores and virtual dealers have revolutionised used car marketing, franchised dealer groups (who've adopted an agency model of new car sales) will likely "double down" on their used car operations and better exploit their proprietary access to the better part-exchange and fleet "program" stock.

Now, let's look to the post-disruption future. While I still yearn for jetpacks and personal helicopters (that photo above is an already obsolete prototype flying taxi from Ehang), the ways in which we access transportation assets and mobility services are changing beyond all recognition. At the end of the day, it's still customers and investors that will likely determine which models win and which fall by the wayside.

New Car Retail

Cynics will decry the agency model as an opportunity for OEMs to push their formerly franchised dealers (shall we refer to them as "FFDs") out of business. However, if you believe that omni-channel distribution requires a local resource (be it for brand marketing, accommodating test drives or even just for the customers' local "piece of mind"), then who better to deliver these resources than the FFD? As in most negotiations, both parties require the services of each other on an ongoing basis and seek a balance rather than advantage.

Dealers generally sell new cars, sell used cars and provide after-sales service on both. As shown below, new car selling is by no means the most rewarding, particularly when accounting for the required investment in stock and big expensive showrooms.

Let's assume that manufacturers uniformly adopt a form of agency that allows FFDs to earn at least minimal profit on the services they provide. So long as the newly defined local agent participates in that initial new car customer engagement, they secure an advantage in:

  • Priority access to the initial part exchange and the eventual part exchange of the brand new car sold,

  • Priority relationship in delivering after-sales service on that new car (and on the two part-exchange converted into used car sales),

  • Reduced balance sheet exposure associated with new car inventory and real estate as agents will likely no longer require the larger and more ornate showrooms.

Post agency, the FFD starts to look more like a used car superstore attached to a retail service network with a small, but critical OM agency. Clearly a more nimble enterprise able to focus more precisely on profitability and return-on-capital by business line.

Once investors catch on to the new business model, they're quite likely to start looking to other business models. Before we start talking about Carvana's 3.5x revenue multiple, we can simply look to trading multiples of Motorpoint and Halfords. We can also look to value indicated by Itochu's planned divestiture of Kwik Fit.

Assuming a reasonable agency structure, it's hard to imagine that FFDs won't be more focussed and easier for investors to understand.

Used Car Retail

Long-gone is the age-old stereotype of the used car "hustler". Instead retail used car sales are all about scale and customer experience.

Superstores - Independent used car superstores took the lead in revolutionising how customers access good quality used cars.

Always a good idea, they generally demonstrate very simple business models well executed based on:

  • Large selection of "in-demand" cars,

  • Simple on-line and on-forecourt presentation,

  • Transparent "no haggle" pricing with available finance.

Investors have taken note with each of Carmax in the US and Motorpoint here in the UK attracting revenue and EBITDA multiples double and even triple their franchised neighbours. Those franchised neighbours themselves have also taken note with many either acquiring or developing their own superstore models. Penske-owned Sytner acquired the CarShop and other brands and are continuing to expand the concept. Pendragon's Evans Halshaw have developed their own Car Store model and many of the others are looking to do the same.

Virtual Dealers - The big bets being made on virtual dealerships are humbling. Imagine sponsoring two premiership clubs, the EFL, cricket, snooker, racing and goodness knows what else with an inventory only 1/10th that of Arnold Clark. But, bets they are and this isn't your average Friday night poker game.

Carvana has done a great job in the US. While they have yet to earn even a penny of profit, the company's $7 billion revenue compares very favourably with the $20 billion sold by each of Carmax, Penske, and Autonation. After only 9 years of trading, the company serves almost 300 markets across the country and their $25 billion of enterprise value dwarfs even the stunning £5 billion posited for each of Cazoo and Cinch.

Europe will likely be the battlefield where our UK-based virtuals will meet the formidable resources of Auto1 Group's Autohero and Auris' Driverama.

Franchised Used Car Operations - While superstores and virtuals have made a huge impact in digitalising used car retail, the devil is still in the detail of stock supply. Here, franchised dealers enjoy proprietary access to at least half of the 2 million used cars under 5-years-old in the UK (typically sourced in part exchange on new car purchases and from manufacturers' fleet "buy-back" programs).

With agency enhancing FFD focus on their used car operations (a silly acronym, but it works) you can bet that these enterprises will expand retention of part-ex and program vehicles while competing much more aggressively for stock in the open market.

Instead of such a vast wholesale auction presence, the trade market for used car stock will be dominated by a smaller group of larger more sophisticated retailers forging long-term arrangements direct with the larger suppliers.

Mobility Access

Mobility-as-a-Service ("MaaS") addresses the much-reported shift in consumer preference from ownership to usage. In retail automotive, this trend began with the emergent dominance of car leasing. As shown below, the term now covers a number of alternative access models from ride hailing through car sharing, daily rental, car subscription and longer-term contract hire/purchase.

The one common denominator in each of these model is that the responsibility and cost of fleet ownership has been transferred from the "user" to the "owner". However, each model is a "twist" in a mature sector and the promotional, operational and fleet-related resources required to deliver are likely to be already endemic in established businesses.

Any number of MaaS startups are sprouting up across North America, Europe and Asia and while they usually demonstrate terribly good ideas, many don't feature old-world fleet and operational resources. Likewise, held hostage to the significant risks in asset-rich businesses, daily rental & leasing companies, manufacturers, dealer groups and others often lack the flexibility to take on new operating models.

What's likely needed is some form of business combination levering the strengths of each in a customer focussed model that appropriately prices commensurate with the cost of service provision.


Retail automotive is at a point of transition arguably unlike any before in its history. New technologies are radically changing the vehicles themselves, their sales & distribution channels and the modalities by which customers access the broader mobility concept.

A tiny subset of the broader issues includes:

  • An agency-based "direct-to-customer" distribution strategy will fundamentally change the focus of formerly franchised dealer groups. Retaining their new customer engagement, relief from a new car stocking, management teams will focus much more keenly on used car and retail after-sales activities.

  • As a knock-on effect, FFD re-focus on used car operations will intensify competition among a smaller number of more sophisticated franchised and independent superstores fighting for stock access.

  • Demand for MaaS models will encourage new business combinations sourcing promotional, operational and fleet-related resources from those established businesses best able to supply.

To thrive in the future of retail automotive, businesses will constantly need to re-evaluate their capital and resources to address emerging trends. Formerly franchised dealers will need to identify and promote those services they can economically provide OEMs and their customers in an agency-based paradigm. In securing stock access, used car superstores (whether franchised or independent) will need to promote their utility in serving suppliers' objectives. In delivering effective MaaS products, service providers will need to combine in effective structures that source resources from those best able to serve.

Grace helps bring clarity to chaos in retail automotive. We help business leaders and corporate boards take more rational and well-informed decisions in turbulent times.