I’ve had a few conversations in the last couple weeks about network density. These all related to franchised dealers, but the same questions and debates are applicable to the density of independent parts distributors and other networks.
The core questions are how many is too many, impacting overhead cost and outlet performance, how few is too few, losing customers and creating customer dissatisfaction?
The general ICDP view is that current franchised dealer networks are too dense for most brands and markets. This means that the new car sales per dealer are depressed, that customers will quite likely be sat with two or three dealers of the same brand within an acceptable driving time, and that the investment in facilities is excessive because manufacturer standards means that each point – whether it sells 300 new cars or 600 new cars annually is likely built to broadly the same footprint and standard.
There is also an indirect effect on retained margin as the denser the network, the higher the level of intrabrand competition – customers who can easily play one local dealer off against another, with the dealers potentially dipping into volume bonuses to win the deal.
In our consumer research, new car buyers declare that they will travel up to an hour to buy a new car, more for a used car, less for aftersales. My personal experience now with my dealer hat on at Auto West London supports this.
We have a number of customers who are choosing to travel an hour or more to see and test drive the cars. Data shared with our members by Urban Science shows that customers are actually travelling an hour for their new car purchase, even in a market which we consider heavily over-dealered like Germany.
Urban Science also modelled a scenario for us using UK data, which showed that halving the typical network size from 120 to 60 outlets, only increased the average drive time from 17 minutes to 21 minutes, substantially within that one hour maximum.
The case seems to be clear – slash the network size by half, cut intrabrand competition and improve dealer viability, all without any customer detriment.
Acknowledging that if this was done, then there might need to be some specific planning for aftersales provision to maintain drive times at an acceptably convenient level, this appears to set out a clear strategic direction for network planners.
However, we do not really see this happening with only very slow declines in network densities for most brands in most markets – no culls, nothing truly dramatic.
That raises the question of why, and I share my three recent experiences.
The first was a discussion with an importer of a niche brand – not exotic, just a product that only appeals to certain customer segments, but is priced in line with volume or lower premium brands.
The executive asked how many points would be required in my view to cover the country, and the number we agreed on was around a third of the current network size. In reality, the current network is closer to that of a more mainstream brand like Volvo, than it is to what we both thought was probably necessary. The answer in that case is multi-branding – the brand shares facilities with other niche brands. Each with their own customer profile.
The second instance was a discussion related to the Kia network in the UK. Kia is consistently the highest rated brand in the UK based on dealer attitude surveys, with high profitability scores from the dealers.
It has become the fourth largest brand in the UK, ahead of Ford, with BMW and Audi not too far ahead. Is this all down to a lean network? No – they have the third largest network in the UK, only behind the traditional ‘home brands’ of Ford and Vauxhall.
So either success is not the result of a lean distribution network, or there are other factors at play that counteract the effect of the large network.
The third generic case is that of the Chinese new entrants. In almost all cases as they come to Europe, they have set high volume ambitions supported by a desire to build dealer networks that are similar to those of established brands with a parc built up over many years.
According to our European Car Distribution Handbook, MG had 118 sales points at the start of 2024, with BYD already at 55, since when they have added around 20 with plans to be at 100 by the end of 2025.
Omoda Jaecoo started later, but quickly built to 70 and plans for 130 by the end of 2025. Are these brands creating tomorrow’s legacy or are they going to be up there with Kia, strong on profits and earning high respect from dealers?
Nobody has the data or the time to do the sort of multivariant analysis that would link brands, dealers and customers together to show what drives success, so I will just venture an opinion.
The most important factor in building successful networks of independent businesses (as opposed to wholly owned networks such as that of LKQ for parts distribution) is the quality of the relationship – between manufacturer and dealer, and dealer and customer.
If there is not a strong and trusting relationship, then everything in the end comes down to price, and if you can’t manage pricing, then you can’t manage profit. In ICDP, we will continue to push the message about network quantity, but we should never lose sight of network quality.