January 2012 AM interview with Trevor Finn, Pendragon chief executive.

This is the unedited version of an interview that appeared in the February issue of AMe.

AM: For a start really as it's still early January, what's your view of the year to come?

Trevor Finn: New cars we'll talk about, because that's the one most people talk about first. I think the aspirations have been established by everybody who wants to sell new cars this year. The production schedules are being aligned accordingly, cars will come, and the cars will get registered.

So for us it's quite an easy thing to predict. The only thing that's difficult to predict is do we make any margin, and do the car manufacturers make any margin on the cars they sell? That's the thing that changes. But it's not going to be any less competitive than last year and arguably it depends on the appetite car buyers. It could be a little bit more competitive, but must be an attrition taking place in capacity as well. Somebody once said to me a business model that's centred around attrition isn’t necessarily a very attractive business model to invest in.

Used cars will be the same as last year probably, very similar in the sense of the market. Service and repair probably a similar thing again, you know another year.

There's more competition in that area for that business, but that's not going to go away and it's not going to lessen either so the only thing to consider is are there any bright spots? Not any that are visible and there are quite a few dark clouds, but the trick is to keep yourself out of trouble.

AM: So how, as the head of the biggest dealer group in the UK, how do you ensure that your teams are motivated? When you read the headlines it’s easy to be downbeat, but at the end of the day there's still jobs to be done and cars to be sold and repaired, so how do you motivate people?

TF: There are lots of sort of employment tactics you've got like incentives. But I think probably what you're talking about is not feeling the world is against you as opposed to the individual 'what's in it for me?'

In this business obviously the 'what's in it for me' is important but I think inside our organisation if you look back to 2008 we had a very tough time when credit supply was chopped off, buyers stopped buying vehicles and we had a situation whereby your suppliers, in the form of the car manufacturers, might have been out of business next week, your customers might have been out of business next week and the banks might have been out of business next week.

That kind of environment is a much darker place than we currently looking at. So compared to 2008 we can be positive almost on every front. We've got a lot of people who've been with the group a long period of time and are used to being in an organisation that moves forwards. Post-2008 we've been moving forwards and we'd expect to go forwards again in 2012. So I think you'll find there's quite a positive, albeit realistic, approach to what the future is and therefore motivationally I think everybody's got the right stimulus to be reasonably positive.

AM: My perception was that 2008, 2009 saw pretty much all dealer groups get their businesses in shape for what had happened, and I don’t perceive that many businesses have added a lot of fat in the interim, so I think the industry is still pretty lean to cope with the current market conditions.

TF: I think when we went into 2008 it was a little bit like driving into a big fog bank and nobody knew what was inside the fog bank, which was quite a scary thing because you're going in and you don’t know what's in there. Looking at 2012 people will see the fog bank, but this time they're much more familiar with what's in there and what to do. Therefore there isn’t the level of pessimism there was last time we were on the edge of a recession.

AM: What do you see as the main challenges for the industry this year in the medium and longer term in the UK? One dealer told me before Christmas that his view was that this was the new norm.

TF: We used to say "these are the good old days" and we've been saying that for a long time. I think we used that first at our leadership conference maybe 10 years ago and it's still as valid as it ever was. Actually if you look back over the last 20 years I've done this job, every single year has become tougher.

So there's absolutely no realistic possibility of that changing. This is as good as it gets. That's always been the case. It's never proven to be otherwise, but it's quite often hoped to be otherwise. So in our minds everything gets tougher for any industry.

Everything is faster, quicker, more competitive, more transparent. Whichever business you look at, it's got to be getting better in order to stand still, or you've got to be getting better to stand still. From a leadership point of view, if a lot of people are doing what they were doing five years ago, the way they did it five years ago, their output isn’t as great as it would have been five years ago.

AM: In a business such as yours you have to be the visionary, or the leader of the visionaries and you have to predict how your business and the industry is going to change in the coming years. How do you cope with that? What responsibilities does that put on your shoulders?

TF: I suppose responsibilities are the same as they've always been because I've been doing the job for many years. Not many people have had the same job for 20 odd years or the same employer for 30 years, so I've had lots of changes in what I do, and the job has changed materially while I've been doing it.

The interesting thing with Pendragon as a business a lot of people here have been here for long periods of time, there's a lot of continuity and that's got positives and negatives. The positive is that things feel familiar.

Going back to the analogy that I used about the fog in 2008, if you've been around and you've got information that you can say "well I'll draw back on that experience", you'll probably say "well that actually was quite similar". So for me a lot of it is trying to spend the time being out there trying to find ideas and look at things people do and steal it or adapt it. That hasn’t changed and the responsibility I've got probably makes this the perfect job.

AM: So what things particularly is Pendragon eying up for the future?

TF: We're interested in smarter ways of doing things using technology. So we've got a big thrust on systems and processes, which to be fair is not new because as you know we're quite heavily into that area with respect to making us more efficient and effective. So process which we'd link to cost, because generally speaking it improves your cost and your productivity.

We handle millions of phone calls through this facility a year which makes it unique. So there are some things about the group that are unique because of the scale which people are probably unaware of.

A big piece of the business nowadays is aftersales. New cars clearly a lot of that is manufacturer driven, so you know clearly that's a big focus for us all the time to make sure we are optimising from a new car point of view and then finally used cars where once again we want to optimise the opportunity there. So it's the usual headings, but under that there's a layering of 'stuff' that we do.

AM: On aftersales, are there group wide processes to ensure things like vehicle health checks are done and opportunities are realised?

TF: Absolutely. Yes, mind-blowingly. Here (Pendragon’s Nottingham HQ) is the centre of all that kind of stuff but yes things like vehicle health checks, service plans, and all the usual stuff, but as you say it’s all ‘usual’. The interesting thing for us of course is even if we initiated it and invented it , it becomes ‘usual’ very quickly in the industry, because everybody then says ‘we’ll we do that’.

A case in point is vehicle health checks. But do their systems allow them to systematically follow up on any work that's identified without human intervention. So there's lots of technology stuff that you can have that can make life easier. When the telephone rings and it's a customer on the phone a computer screen will automatically advise the person who's taking the call that there's some outstanding work from six months ago that wasn’t booked in.

That's smart technology driving your business, whereas actually most systems wouldn’t identify that. You'd make a booking, get the customer into the system and then maybe if you're lucky it would come up on the customer's file, but it wouldn’t pop up initially when the customer is ringing. This isn’t a big deal, but it moves the needle in you know the broader context of the world.

AM: So how much is the web likely to help the industry and/or Pendragon specifically in terms of reaching existing customers and winning new ones?

TF: It's as significant as the telephone, more so. I can't think of a single business on the planet, or a single person on the planet potentially, who isn’t affected by it. Even people who haven’t got internet access, who've never used a computer are being affected by it.

AM: At our Franchised Dealer Conference in the summer somebody asked you about the internet and you said ‘in five years' time this will all be gone’.

TF: What I tried to say was the way we do things today won't still be taking place, it won't be happening it will be gone. The way we sell new cars today will have gone.

Going back to the fog in 1989 to 1992 and that recession, we overlay our performance in 2008 to-date and it shows we have all been here before. If you take out scrappage, the recession is nowhere near as deep as 1989 to 1991, it didn’t go down even as deeply, even taking scrappage out, and the climb is at a very similar rate.

AM: So even after 1991 it took nearly a decade for the market to recover?

T: Yes you're right, yes. That was last time so why would it be any different?

If you know that then you don’t have to necessarily get yourself all excited about how it's going to be great again in two years' time do you?

AM: One thing that has changed though is that dealers have put in a lot more investment in facilities, so they've a lot more debt and fixed costs to deal with, so that is one aspect I suppose that will change things, or potentially makes it more difficult do you think?

TF: It makes it more difficult. If you look at what's happened over the last cycle of events, investment has gone up massively in some brands, and the emphasis of the business has totally changed. The biggest change of the last 10 years has been the emergence of the fleet and leasing industry.

And if you look today at the car market, the retail new car market is about 800,000+ out of say two million new car market. That's probably saying that the new car market for retailers is less than half, but the dealer footprint hasn’t halved in the last 10 years. So throughput per location is a big issue this time around.

AM: So is there a point where the current business model, with reducing margins in retail, will simply fail to work?

TF: How long did we say, in the next five years?

Things need to change, but that's not my decision is it? I'm not in control of the new car market, or the way that new cars are sold so you know from our perspective we can only adjust and adapt to fit in with the market. You know there's no question about it, the structural change in the market is the thing that affects the dealers, and that can only be described as structural change.

AM: Can manufacturers change the business model?

TF: It's their business.

AM: Will they only do so if they reach the point where you see dealers’ health becoming critical?

TF: In a micro level, yes they’ll change if a dealer is going out of business. At macro level, what's the incentive for them to change their business model if it works for them and if it continues to work? Why would it change? If somebody’s making money it’s fine.

The thing that obviously I have to address is what's happening to our business, but the new car market is run by the car manufacturers and we'll do what we can in that market. We'd expect, in any market where we represent the manufacturer, to do a good job for the manufacturer, but no matter what we do in that market we can't change the UK market.

AM: So the areas of the business that you can control and have a bigger impact on are your used car and aftersales?

TF: Those are the areas that we can influence more. We can influence our local market performance without question, but it is a holistic business: new, used and aftersales feed each other.

AM: What's to stop a manufacturer, in five years' time say, deciding it doesn’t need a franchise network anymore for new cars and will sell them online because they're backed by warranty, the product quality is pretty much assured, and it can deliver and collect at the customers convenience?

TF: What is to stop them doing it? Nothing. But if you look at the economics today I bet they say it wouldn’t work.

AM: Why?

TF: Because it wouldn’t be viable. I can show you the maths that would disprove that model instantly today.

AM: It could then potentially leave dealers with the aftersales business…

TF: Yes used cars, aftersales.

AM: …which is more lucrative.

TF: Yes, aftersales, used cars, could be a model, but it wouldn’t work for a car manufacturer, not on the numbers we've ever looked at. It wouldn’t work for us if we were a buyer of cars that then sold them on, so it wouldn’t work for them.

AM: Okay. It's just a view that has been kind of bandied around, whether it will come at some point, almost like the Daewoo business and whether that is worth trying again at some point?

TF: Daewoo was ahead of its time. But you're right and because it didn’t work last time, doesn’t mean it won't work this time, because factors will have changed. So, we buy into the idea that it could work, but not on today's economics or structure.

AM: Do you think the franchise networks in the UK are too big?

TF: Yes.

AM: Or too over facilitised? How do you see that being addressed? Renault has announced it’s going to reduce its network this year. Do you think other brands will follow?

TF: Of course everybody's in a different space so they're all moving in different directions at different speeds. It's a little bit like the European financial crisis isn’t it? All those economies moving at different speeds, but they're all bound by a consistent model. Fortunately not everybody is bound by the same model in our industry.

I think the Renault move is the right move for them, but if you were to take another brand that was coming into the market for the first time, clearly they'd have totally different set of dynamics to work with. I think every individual manufacturer is in different places, but I think overall the Renault decision is based on logic and therefore it's likely to be successful.

AM: Well they've had several years of market share well below what the network was established on so I guess they have to reach a point where, they've made a loss for the last five years and had to change.

TF: You'd like not to make a loss?

AM: Yes.

TF: I think as a dealer we know that feeling as well. For me what Renault is doing is logical and makes sense.

AM: Do you see some contraction in the network continuing with acquisitions as well?

TF: You mean in the sense of us acquiring businesses?

AM: You particularly, and other dealer groups consolidating.

TF: I don’t know. It's an interesting one, if you look at the consolidation the sum total of a lot of consolidation over the last 10 years has been us, the emergence of Pendragon, and that's it, and you've had groups come and go in between. Look back 10 years and list all the companies that aren’t here today: that would be the sum total of it all.

Your own data tells you the sector is consolidating, but actually has it been commercially a successful journey? I don’t know.

It's difficult to look at it in that way. There's a lot of investment in this sector which cannot be sustained forever. Without the smoke screen of property appreciation, how profitable are car dealers?

They have to be profitable in their own right, and I think that's the challenge for everybody. So consolidation is one way of achieving elements of that as long as you do get some economies and efficiencies and some benefits, and for us the single biggest benefit that we've had in the last 10 years of scale has been brought about through technology, just applying technology to become more efficient and effective.

Not through the scale of the footprint as such, it's more about the scale of transactions and activities.

AM: But expansion must put a strain on your management structures. How have you adapted your management structures as you've grown?

TF: Over a 20 year period we doubled in size every three years. We were typically buying the number two in the market when we were number one.

So in scale terms you have big structural resources, but when you have a period where you've not grown in any material sense and you can just concentrate on the business you've got, we've probably got a much better business footprint today than we've ever had - stronger, more robust, better people, more depth, than we've had in 20 years.

So that sort of distillation of all that activity and energy into running the business means we've got some fantastic businesses. If you look at, for example, BMW, we’ve the best CSI in the country.

Of the dealers who got 10-star accreditation on CSI in the country, two were ours. That doesn’t come by chance.

And if you look across the business there are lots of other areas where we could point and say, you know the number one dealer for that manufacturer in the country is one of ours. It isn’t just lucky and it isn’t just the fact that you've got lots of them.

AM: It's quite a journey to get there though.

TF: It is and if you look, once you get what we've got, you've been around 10, 15 or 20 years or whatever it may be, you've seen a lot of change in that period, but all of it counts for nothing when you're going forward doesn’t it?

So we've got a lot of people who are used to adapting and adjusting and know a lot. In the same way that many people would say in a particular town there's The Green Man, the pub on the corner, do you recognise it, our property people would do it with dealerships. As you drive past the Ford dealer on the left who is so and so, turn right at the Toyota dealer who is so and so. There's a degree of knowledge based on our presence over the years in most markets around the country.

AM: You just bought the Jardine business? (Scotthall BMW Leeds in December 2011)

TF: Yes, nice article.

AM: It’s a good business for you. Does it ‘fit’ with your existing business?

TF: Yes, we've got businesses around in that part of the world, and you know from BMW's point of view and from Jardine's it worked so, while, generally we haven’t been acquisitive lately it doesn’t mean that we're not acquisitive in the right situation. For the right opportunity we're definitely a buyer.

AM: Right opportunity, right location, I understand, but we're not going to see you making major acquisitions again?

TF: No, because we don’t need to. We can double, maybe triple, our profitability with what we've got. So once we've doubled or tripled the profitability, then the world will be a different place, we'll be in a different space. The key to it is to make more of what we've got and reap the rewards of what we've been doing, not necessarily create a load more noise.

AM: It’s slightly less exciting…

TF: You're right, but there are other things that are interesting beyond the swashbuckling side of it. We are doing new things; it just doesn’t happen to be in that field. You mentioned the internet, some of the technology stuff we're doing, and some of the clever stuff that we've got is as interesting for us.

If you went to one of the Mini stores, as you pull in, the staff could key in your reg number, it lifts your details on a device, so as you arrive they know who you are what, what you're about, the service history, and it'll tell them if there's any outstanding work. Things like that, having our dealer management information on a handheld device or a mobile so that we can sit and talk to you and say, well so far this month, we've done x, y and z, is incredible.

Fifteen years ago you didn’t have that information until the end of the month. Now you've got it any time of the day, anywhere you want it. For us that's a competitive edge.

AM: Those things are very interesting because it's shown how the dealers themselves are evolving and are developing. Like you say you are using core technology to make even more of what you've got.

TF: We've got some stuff in here that people are amazed by. It could be something basic like on the internet we've got a competition to win a car. So we'll just post it on a website, people answer a simple question, ring this number and if you win you get a brand new car. It’s a data capture exercise and we can market and solicit to customers. It costs us £8,000. We'd spend that putting an advert in newspapers, but what it does it capture? There's loads of things like that that we do that are interesting.

AM: It's giving personality to the business as well; even a business of this size is able to have a personality to its customers.

TF: We've got 9,300 staff, but ultimately communication only ever comes down to one person talking to another from a customer point of view, at the end of the day. The fact that I sit here in this office, 99.99% of our customers couldn’t care less. What they do care about is when they're talking to one of our people or one of our people is doing something for them.

We don’t trade as Pendragon anywhere, never have done, and you know from a business point of view I don’t expect people in our individual businesses' to look to me as the person who's got all the answers, because ultimately they're the person with the answers when a customer is asking them a question. We want to generate a local business feel with a team on the ground who are enthused and committed to that team that they're part of.

Let's look at the service department team at Doncaster Land Rover. There's a hierarchy. If they're in the service team, but they're also part of the team in the dealership; they're also then part of the Land Rover team within Stratstone; part of Stratstone, and they're also part of Pendragon. How alien is that as a concept? It isn’t, because I have exactly the same regard personally. I am from Hull, I'm quite proud to be from Hull, I'm also a Yorkshireman, I'm also English, I'm also British and I'm also European, so I can be all those things, and in a group you can have exactly the same.

People in the business will choose what equivalent ‘citizenship’ is appropriate for them, and on that basis everybody then is serving customers.

AM: Ultimately it comes down to the one-to-one relationships that the customer has with whoever they're dealing with.

TF: It's the individual they're dealing with that's important and the backup that that individual gets to deliver the commitments they make. Big is not beautiful, but equally small isn’t beautiful either.

AM: At group level how do you ensure the support and the processes at a group level are impacting at dealership level?

TF: It goes the other way.

I don’t care if somebody is greeted differently in a different dealership in a location.

The personalities locally are different, the dialects different, the common wording's different, and it's ridiculous for me to try and get somebody in Hull to say "Good morning, my name's Terence and I'm very happy to meet you today".

People will think you’re strange. So what it has to be is localised and this applies to everything. So the activity has to be localised to what suits locally first and foremost. But there are things that we need, we want a framework, so we'll have a framework for people to work within and the framework will be set out with various parameters and as long as they work within that framework their interpretation should be localised and personalised - and it works.

You can have a difference between some of our businesses, but the difference will have been thought through and applied in a way that's consistent with what suits our customers. Do we then say everybody comes into work in flip flops and jeans because they like that idea? No, what we say is if you think flip flops and jeans are a great idea, propose it and we'll look at it. If it's a great idea it'll probably apply elsewhere. Actually in Newquay it might, but it certainly wouldn’t in the West End.

We can have that divergence, but it's not a free-for-all either. We're organised locally first, in the sense of a region with a brand, nationally with that brand, if we've got the scale, and that's our structure. So it's brand orientated not geographic. So if we had several dealerships with the same brand and they were geographically dispersed then the same person in the structure is responsible for all of those brands.

AM: So you have brand directors?

TF: Correct. Somebody is running, or responsible for that group of dealerships focused around the brand.

AM: They are the face of Pendragon for that manufacturer as well?

TF: Yes it is in an operational sense. So those guys are making the calls suitable to that brand, and then obviously beyond that there's sort of a head office type function.

AM: So going back to the sort of regional accent greeting analogy, you have a process that ensures the greeting takes place?

TF: Yes. We have a process, but invariably with 90% of it there's some back up, so it's not spontaneous. The process will be there, but it will be personalised and tailored so the individual has got room to move inside that framework.

AM: Do you believe that the way that you do business has changed motor retailing in the UK?

TF: No.

AM: Is that because new car retailing is so much manufacturer driven?

TF: I think you can be better than the next guy at doing what you're doing, but if you're playing football, you're playing to rules. There's only so much you can change about the game. Any game has rules, so you have to play within the rules, and therefore your ability and scope to change the game is limited.

AM: It goes back to what we've already discussed about the business model changing, but is there any opportunity then to change the rules?

TF: Well it's not just the manufacturers’ rules. There are rules in business – legislation - affecting how things are done. The biggest change in the last 10 years has been the internet, but that's nothing to do with me.

AM: If Pendragon started again would you stick to the premium sector?

TF: Profitability in isolation isn’t a measure of success. How much profit did you make and over how long? And how much did you invest? Because actually if you made £10m have you been successful?

Well, you still have to ask the same two questions: how much did you invest and how long did you have it invested? Because if I invested £155m and made £10m over a lifetime I might not have won, but actually if somebody else has invested £50,000 for six months and came out with £10m they'd probably beat me.

You need more triangulation to get to what good looks like. If you look at the premium business and the volume business, there are some volume businesses which make much better returns on investment than some premium businesses, and ultimately the return on investment is probably the measure.

TF: But nobody ever talks about return on investment. They talk about return on sales which is a little bit like counting corners and not goals in a football match.

You kicked the ball from the corner flag more times than us. So what? That’s return on sales and doesn't mean anything, because it's missing out some of the ingredients. You can have as good a return on investment in some volume businesses as you can in premium.

AM: So you wouldn’t change a thing?

TF: Yes I'd change a list as long as your arm. Believe me I would change so many things it's not true.

AM: The benefit of hindsight…

TF: I have question that's asked a lot and I'll load it into your gun for you. ‘Was buying Reg Vardy the right decision?’ The world was a different place then and of course what you can't do is unravel any decision you ever made. So, and the more time you spend on something that's done, the more time you're wasting getting on and doing something else that will make it right. I had an investment manager said it was a mistake doing it at the back end of 2007 when it was at the top of the market.

AM: How were you to know it was the top of the market?

TF: That's part of the answer isn’t it? Looking back it was, at the top of the market and you couldn’t get it any further wrong in terms of timing. With the benefit of hindsight he told me I wouldn’t have done it, I’d have kept the cash and then bought it cheaper later on. But I asked him when the market was at its height did you sell all your stocks and shares, and sat with cash in the bank? He was probably on the same day buying shares which of course all went down the toilet.

You can't just do nothing. You've either got to have a plan; you've got to be working on something.

So the hindsight point is an interesting one. If I I write a book, how many chapters will I have on things we shouldn’t have done? It would be the bulk of the book. But ultimately your wins probably make up for it don’t they. We’ve been at the top of the AM100 for probably 14/15 years. We were at the top of the first one too.

We are the only one still there who would have been in that top 10 when it started out. Now that's probably not down to luck.

AM: Looking at the broad spread of brands that you have, do you see that consolidating or are you happy with the portfolio you've got?

TF: We're pretty much where we want to be. You know over a period of time you're always adjusting, there's one brand that's leaving the portfolio, and that's Saab, so there's stuff going on all the time. But broadly speaking it's a little bit like 'I'm happy with my weight', I've got comfortable with this. I'm not looking to go slimmer and I'm not looking to put weight on, so broadly speaking we're happy with where we are.

AM: Would you like some Volkswagen Group brands in your portfolio?

TF: Yes.

AM: Are you likely to have some in the near future?

TF: You'll have to speak to those guys who run the brands. We represent all other brand segments where VAG operates, There's no logic that would say the two businesses wouldn’t and shouldn’t work together.

What I do with all the manufacturers is communicate with them, tell them what we're doing, this is what we're thinking, these are our results. Twice a year we put the numbers out to everybody with the communications packs, purely on the basis of trying to keep those guys abreast with the shape we are in and what we're doing, because otherwise no disrespect but all they'll do is read what the media say, and it might not be 100% accurate, at least I'm 100% accurate.

AM: Are you saying AM isn’t?

TF: No. They have my spin on something rather than yours. I always look better when I spin it; no matter how hard you try you're never going to make me look better than I would have made myself look.

One of the big benefits as a group we've got is continuity. We've invested in car dealerships for 30 years. We’ve gone through cycles with car manufacturers and in 30 years have been from zero to hero we’ve stayed loyal to them, and it's fair to say they've stayed loyal to us.

AM: What's your view on Saab. You've a couple of Saab sites.

TF: It's gone for us. We've got only got two dealerships; one is empty, the other we'll probably use. As a group we've got about £20m of empty property. The permutations we have will allow us to offer a bit of flexibility on brands. It goes back to the manufacturer sometimes as they've a problem we can fix, and it fixes a problem for us, so that can work a lot. I suppose in outlet terms we've got 300 odd physical facilities, probably nearer 350 physical facilities, that on a mix and match can work.

AM: Have you put Quick's (Pendragon’s used car brand) in anymore sites?

T: It's a laboratory from our point of view in the sense that we can try things and test things and certainly on the technology front there's stuff we do at the seven sites that allows us to play.