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      Europe’s car dealerships: agency model, online sales shift, electrification pose credit challenges
      WEDNESDAY, 19/10/2022 - Scope Ratings GmbH
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      Europe’s car dealerships: agency model, online sales shift, electrification pose credit challenges

      Disruption of Europe’s car-dealership business will increase rapidly in the coming years amid the shift to the agency sales model, the growing proportion of online sales and the rise in vehicle electrification, says Scope Ratings.

      More intense competition, lower pricing power, upward pressure on capital expenditure – given the need for investment in digitalisation, electric-vehicle (EV) equipment and knowhow – will squeeze profit margins and likely constrain future cashflow.

      “The transformation of the automotive industry is forcing car dealerships to adapt,” says Claudia Aquino, analyst at Scope.

      The agency model involves the manufacturer becoming the retailer, while the dealership remains the physical point of contact with the customer. The dealership receives a commission on the sales but holds almost no stock and has no power to adjust the price.

      Road bumps ahead: summary of main trends facing car-dealership sector

      Dealerships face challenges partly because the electrification revolution is transforming original equipment manufacturers (OEMs) amid a broader shift to digitalisation and changing consumer habits related to rapid growth of e-commerce, accelerated by the experience of pandemic-related lockdowns.

      Among the OEMs, economies of scale are as important as ever, hence the recent mergers and acquisitions that led to the creation of Stellantis NV, as the industry looks for new ways to increase margins and retain customers. OEMs are acting more and more like retailers and/or consumer-services companies, visible in the increase of recurring revenues.

      “The ultimate impact on the leading car retailers in Europe – such as Bilia AB, Emil Frey SA, Inchcape PLC, Lookers PLC, Pendragon PLC and Vertu Motors PLC – is far from clear. However, we see a deteriorating credit outlook in the short and medium term, not least considering the headwinds of rising interest rates, high inflation and the threat of recession,” says Aquino.

      At the same time, the agency model will require the dealership to hold little or no vehicle inventory – cars or spare parts – in a phenomenon likely accelerated by growing demand for EVs, thereby reducing dealerships’ funding needs and other costs such as rent and staff, while encouraging a push into customer services such as financing and insurance.

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