View all newsletters
Receive our newsletter - data, insights and analysis delivered to you
  1. Analysis
May 27, 2002

Supermarkets, cars and baked beans

Supermarkets have irrevocably changed the shape of the nation over the past quarter of a century. The busy high streets of post-war memory are now characterised by boarded-up shops. Small, independent butchers, bakers and greengrocers have been replaced by charity shops, takeaways and building society branches. Anytown looks like Everytown. Report by Richard Feast.

Supermarkets have irrevocably changed the shape of the nation over the past quarter of a century. The busy high streets of post-war memory are now characterised by boarded-up shops. Small, independent butchers, bakers and greengrocers have been replaced by charity shops, takeaways and building society branches. Anytown looks like Everytown. Report by Richard Feast

A cornerstone of the success of supermarkets is in persuading consumers that they offer low prices. No matter that the reality frequently does not match the promise – financial results indicate very substantial mark-ups – the public perception is that supermarkets are cheap places to shop. It is curious, then, that the one arena supermarkets studiously avoid is selling new cars.

They have solid reputations for providing value for money. They are super-slick when it comes to sales and marketing. They are Disney-esque in their obsession with customer service.

And if there is one place a consumer does not feel he or she is getting value for money, it is in buying a new car. On the face of it, supermarkets and new cars ought to be natural allies.

They are not, and few people can imagine the day when they will be. Despite wholesale price cuts last year, a recent European Commission report confirmed that new car buyers in the UK still pay considerably more than their counterparts in the rest of Europe. Manufacturers say the blame lies with exchange rates and national taxation levels, and insist that transaction prices, as distinct from list prices, make the UK and Europe comparable.



The concept of supermarkets selling cars is not new. Back in the mid-1980s, the ASDA chain made a high profile foray into the new car business. It began to offer popular Fiat, Peugeot and Rover models to its daily trolley-pushers as part of a strategy to expand sales of non-food items. In effect, sections of certain ASDA stores became mini car dealerships, complete with display cars and service areas. List prices were the same as in conventional dealerships.

Customers were offered Glass’s Guide valuations for their trade-ins, which were promptly sold through British Car Auctions.

Alan Pulham, now director of the National Franchised Dealers’ Association, was working for Peugeot’s dealer development team at the time of the ASDA trial.

He was impressed, as he recalls: “They did the business and played by the same rules as dealers. Everything was very transparent.” So why did the experiment not last long?

Today, the official line at ASDA – now part of America’s giant Wal-Mart corporation – is that the scheme was killed “because it wasn’t working”.

That is not the way Garel Rhys, professor of motor industry economics at Cardiff Business School, remembers it. “The scheme itself was quite successful,” he maintains.

“What happened was that the country entered an economic slowdown, and consumers stopped buying cars and fridges. But they couldn’t stop buying food. That’s what caused ASDA to change its mind: food sales remained strong at the time, but demand for cars dropped.”

ASDA’s decision went to the heart of supermarket thinking, as Prof Jonathan Brown explains. “The return that a supermarket expects is not based on an absolute. It’s a return based on floor space. Does the baked bean area produce a better return than the one for cereals?” says Brown, a former Debenhams executive who is now a director of the automotive consultancy HWB International. For groups that are experts at maximising the yield per square metre, selling cars is not on the agenda.

Nevertheless, price differences remain significant enough to sustain commercial alternatives to traditional franchised dealers. Parallel vehicle importers and internet retailers jumped into the new car business at a time when those paragons of good value, the supermarkets, stayed well away.

Technically, the opportunity exists for them to move into the sector. The European Commission identified no such development when it drafted the proposed changes to block exemption regulations. Still, the Commission maintains “


“a supermarket could become a dealer if it satisfies the same criteria laid down by the manufacturer as any other potential dealer”
a supermarket could become a dealer (mono or multi-brand) if it satisfies the same criteria laid down by the manufacturer as any other potential dealer and if the car manufacturer accepts it as such”.

Some chains elsewhere in Europe, notably in parts of Spain and Belgium, have started car supply schemes over the past couple of years.

One formula involves offering discounts on a handful of specific models sourced from cheaper parts of the European Union. This type of cherry-picking is considered the most likely approach if supermarkets in the UK do move into car sales.

Spanish group, El Corte Ingles, sells cars at fixed prices on the strength of its brand integrity. Yet another is run by a workers’ co-operative. None of the ventures has so far had a significant impact on traditional buying patterns in their regions, but they are being monitored by motor traders and supermarket chains alike in the UK.

ASDA ran a short-lived car retailing scheme in the 1980s (see sidebar), but insists it has no current plans to revive the concept. Part of the reason is space. The group says it has the largest average store size in the UK (3,900 square metres), but that is still not big enough to branch into vehicle retailing.

In addition, selling cars goes against the philosophy of the group that now owns ASDA-Wal-Mart, the world’s biggest retailer. Its sites in the United States are over four times larger than ASDA’s, but the only services it offers drivers are fast-fit tyres and oil change centres. Selling cars is not part of the Wal-Mart thinking. It is at Tesco and Sain sbury’s – but for specific reasons. Neither chain wants to get into the new car business per se, but each has a financial affiliate that is happy to underwrite a customer’s car purchase or PCP. So do plenty of other general retailers, as well as banks and building societies. The attraction is the income generated by the finance deal rather than the profit on the vehicle itself. However, that in itself is a worry for motor dealers, according to the National Franchised Dealers’ Association.

“Supermarkets will concentrate on the peripheries like insurance and finance. To some extent, dealers have let it happen, but they are waking up to the problem. They can’t let those things slip away like they did with replacement tyres and exhausts,” warns Alan Pulham, the association’s director.

If supermarkets are wary about selling new cars, one reason above all shapes their thinking: return on sales.

A typical net return on sales in the retail motor trade hovers around 1.5 per cent to 2 per cent, though a good dealer with a popular prestige car franchise might get 4 per cent. The supermarket sector is in a wholly different league. A group expects to earn 8 per cent net and frequently hits 10 per cent.

That means a supermarket group’s investors would be deeply unhappy if it elected to switch some of its precious highyield floor space to selling and servicing cars – with all that implies in terms of investment in dedicated people, equipment and spare parts.

“Supermarkets would be mad to get into cars,” believes Prof Jonathan Brown, a longtime retail specialist and one of the founders of HWB International.

“For groups that are experts at maximising the yield per square metre, selling cars is not on the agenda.

“In addition, selling and servicing cars would require supermarkets to hire dedicated specialist staff. That would not be a welcome prospect for a sector whose economics are based on a lot of casual labour, low skill levels and minimum wages. A good salesman at a car dealership can earn £25,000 a year. No one in a supermarket – apart from seniors managers – gets that,” says Brown.

Other issues affect supermarket thinking as well. Part of a group’s reputation is based on the perception of providing lower prices than those of its competitors. But any supermarket chain would have difficulty doing that based on trade prices it can expect from producers and importers in the UK – a fact reflected in margins in the motor trade.


“Supermarkets could source vehicles from lower-cost countries in Europe, as they have already for jeans and perfumes. “
Supermarkets could source vehicles from lower-cost countries in Europe, as they have already for jeans and perfumes. But they still could not compete on price with a dotcom seller or parallel importer whose only overhead is a Portakabin, desk, telephone and computer.

Other developments within the motor industry put further obstacles in the way of any supermarket moves into car selling.

The car market has fragmented for a start. Where a medium-sized family car was once simply a four-door saloon, today it could be a hatchback, estate, coupe, people-carrier or cross-over. Once it invariably had a petrol engine and a manual transmission; now it could have a diesel and an automatic.

At the same time, the industry is making progress in its efforts to offer bespoke cars. Building a specific car and then delivering it to the customer on a pre-determined date is now possible thanks to modern factory technology and logistics. The attraction for manufacturers and dealers is clear. In place of stocks of unwanted models that have to be discounted, they have satisfied customers who have paid in full for the models they do want. “This is not what supermarkets are good at,” observes Prof Garel Rhys of Cardiff Business School. “They buy in advance and they buy in bulk.”


Related Companies

Topics in this article: , ,
NEWSLETTER Sign up Tick the boxes of the newsletters you would like to receive. A weekly roundup of the latest news and analysis, sent every Friday. The industry's most comprehensive news and information delivered every other month.
I consent to GlobalData UK Limited collecting my details provided via this form in accordance with the Privacy Policy
SUBSCRIBED

THANK YOU

Thank you for subscribing to Just Food