Independent study calls for overhaul of Block Exemption

An independent study into the future of car retailing in the UK and the European Union, recommends that the current system of exclusive distribution should be abolished, and that while selective distribution should remain, it should be in a reduced form.

The research study, entitled 'The future of Block Exemption and motor vehicle retailing', concludes that exclusive sales territories and manufacturer branded dealerships restrict competition and customer choice. Manufacturers should not be allowed to restrict the number and type of retailers they supply to. However, the study finds that car manufacturers should retain the right to select retailers that comply with defined quality standards.

The year-long investigation carried out by independent motor industry analysts MFBI, comes at a time when the European Commission is considering whether to renew the motor industry's Block Exemption from European competition law to operate a selective and exclusive distribution system for car sales and servicing. The current Block Exemption is due to expire in September 2002. MFBI's report has been submitted as evidence to the European Commission.

MFBI's report says that a new regulation should be adopted that no longer exempts manufacturer' exclusive distribution agreements from European competition law, and that only a much reduced form of selective distribution should be exempted. MFBI believes that it has been the ability of car manufacturers to impose 'rigid' quantitative and qualitative restrictions upon franchised dealers under selective and exclusive distribution, which has 'restricted competition in the supply of new cars and aftersales services'.

Selective distribution enables car manufacturers to both choose and restrict the type and number of resellers they deal with, while exclusive brand dealerships effectively prevent consumers from making direct comparisons between competing brands at a single point of sale, says the report. The study says that allowing car dealers and other retailers to sell several different competing brands at a single point of sale rather than just one brand, would increase competition between brands, produce greater downward pressure on new car prices and increase customer choice.

Robert Macnab, MFBI's senior partner and co-author of the report, says that consumers want multi-franchise sales outlets. “If they are trying to decide between three models from three different manufacturers, they don't see why they should have to travel several miles from one dealer to another just to make a comparison. They think there should be more choice under one roof.”

MFBI believes that a new regulation would allow a wider range of competitors to enter the market including banks, other finance companies and multiple retailers. It would also allow used car supermarkets to legitimately extend their activity into selling new cars. Under the existing regulations, car manufacturers can refuse to supply other retailers unless they agree to sell only that manufacturer's range of vehicles, and they can also limit the number of resellers they deal with.

MFBI says the current distribution system should be liberalised to allow retailers to form buying groups to prevent the existing smaller franchised dealers from being squeezed out of the market on price by larger and more powerful retailers. In reality, the Block Exemption enables car manufacturers to operate a tied distribution channel that is effectively obliged to sell every unit of production that the car manufacturers supply to it. This means that dealers are currently forced to sacrifice their own profitability to maintain a high level of car sales that is demanded of them by the manufacturers.