Article | Creating Resilience
Adapting to change: The future of UK car dealerships
March 12, 2025 11 Minute Read
The UK’s automotive market is the second largest in Europe behind Germany, with the UK car dealership sector valued around £206.4bn in revenue. There are approximately 9,152 New Car & Light Motor Vehicle Dealers and 15,600 Used Car & Light Motor Vehicle Dealers in the UK, with around 40 major car brands actively selling vehicles in the UK.
The automotive sector experienced an unprecedented period of growth in car registrations prior to 2018. However, the COVID-19 pandemic impacted car showrooms more than other roadside and automotive (R&A) sectors. This was because, unlike petrol stations, car dealerships were deemed a ‘non-essential retail’. Car showrooms closed and used vehicle sales were transacted online; but servicing at car dealerships remained active during the pandemic, and the demand for vehicles rose rapidly. However, supply chain disruptions slowed the production rate of new vehicles, which resulted in a dip in new car registrations. Meanwhile, these supply shortages led to a significant increase in demand for used cars, causing prices to rise by 17% since 2021, along with corresponding margins. The used car market has continued this upward trend, growing 5.5% year-on-year in the last quarter of 2024, its eighth successive quarter of growth.
Figure 1: UK Car Transactions
The growth of profit margins within the used car market led to the fast expansion of online, second-hand car sales businesses. Availability of suitable premises remain a concern for operators, as some require more parking facilities and require a lower ratio of square footage and anchorage. Automotive dealerships have been adapting to changing customer behaviour, with an increasing number of customers buying cars online. As the market evolves, and emerging manufacturers and dealers continue to grow, the automotive landscape will become very different over the next ten years. Online operators began to expand their physical footprint specifically for the sale of second-hand cars, reflecting their growth. Car dealerships must find ways to streamline the online buying process and adapt their physical space to align with changing customer preferences. Few customers are willing to purchase a car without a test drive, making traditional brick- and-mortar showrooms essential.
How manufacturers are reaching a new customer base
Manufacturers and dealer groups are looking at new ways to innovate and reach new customers. They are expanding their retail offering from solely car showrooms to include small boutique showrooms, influencers, online sales, or immersive in-store experiences. Some operators have been targeting prime retail locations such as shopping malls and high streets, often choosing to position themselves close to luxury fashion brands, rather than agglomerating with other car dealers. Small boutique showrooms in high-traffic areas allow dealers to reach and engage with customers who might not be intending to visit a traditional dealership. In particular, to showcase new low emission vehicles or luxury car brands, locating to central locations allows dealers to target core customers. Urban populations tend to be more affluent and environmentally conscious, often directly impacted by congestion charges or ULEZ, and are therefore more likely to buy compliant cars.
In line with wider consumer trends, the majority of customers conduct online research prior to visiting a physical dealership. In response, Original Equipment Manufacturers (OEMs) have been innovative in enhancing their web presence, offering features such as 360-degree vehicle views, virtual showrooms, and options for initiating the sales process online. They have also increased their social media presence as buyers ever more use platforms to interact with brands, conduct research, and make purchasing decisions. A part of this has been leveraging influencer marketing for the retailing of cars.
The motor trade industry remains distinct from other retail sectors, as the likelihood of completely digitising the car sales process is low. This is largely due to consumer preferences to physically experience a car prior to purchase. Instead of moving to online sales, OEMs are optimising their online presence at the same time as integrating new technology into physical dealerships, to create a seamless retail experience across channels. For example, dealerships are enhancing customer interactions using virtual reality (VR) and augmented reality (AR), creating immersive in-store experiences such as virtual test drives and interactive display screens for visualising different vehicle configurations.
Investor sentiment
There is a clear divide between the investor sentiment towards manufacture covenant strength and dealer covenant strength. Despite periods of peaks and troughs since the COVID-19 pandemic, some car showroom dealers report positive results during periods of economic instability, largely due to positive results from the used car business. Value, executive, and luxury brands have all seen significant growth and have been able to expand their dealer footprints accordingly. At the other end of the scale, the established mid-market sector has been the slowest to recover.
Yields have been compressing across car showroom sites with strong alternative-use value underpin. Furthermore, we have seen growing interest from industrial and logistic investors who are attracted to the asset due to the large plot sizes and strategic locations of many dealerships.
Attractive characteristics for investors:
- Covenant Strength: Properties are, in some instances, either let to or guaranteed by a manufacturer grade covenant.
- High Profile Locations: Dealership properties typically locate in highly prominent positions fronting main roads, and are often in established commercial locations, meaning that investment values may be frequently underpinned by alternative use values.
- Modern, High-Quality Premises: Car dealerships are built to a very high standard and quality of finish. Manufacturer mandated brand standards will require frequent investment in the property ensuring that the retail environment is kept up to date and in the best possible condition to meet the Corporate Identity Standards set by the manufactures.
- Length of Term Certain: Leases in the sector are typically 15-20 years, offering long-term income opportunities.
- Fixed Rental Growth: Leases typically offer guaranteed rental growth by way of indexed-linked reviews.
- Lot Size: Individual properties are likely to be obtainable by a range of purchasers, from high-net-worth individuals to institutional funds. Portfolios of properties within the sector will also offer some significant scale, which will attract the institutions primarily.
Alternative Fuel Vehicles
In the UK, hybrid vehicles (HEV or PHEV) currently dominate the alternative fuel vehicle (AFV) market, accounting for 22% of new registrations in 2024. However, the share of battery electric vehicle (BEV) registrations has been increasing year-on-year due to their zero emissions and accounted for 19.6% of registrations in 2024. Most OEMs now provide BEV models, driven by consumer demand and UK regulations that ban the sale of new combustion vehicles by 2035. The Zero Emission Vehicle (ZEV) mandate sets out the percentage of new car and van sales that must be electric each year between 2024 and 2035, with 2035 being 100%. This year, 22% of new car sales must be electric. Low emission car brands that exclusively sell EVs are well-positioned to meet targets. However, other OEMs are lagging and are being impacted by supply chain disruptions and fluctuations in consumer demand. The role of car dealerships is crucial in meeting sales targets. The expansion of electric powered vehicles on a large-scale basis will require major infrastructure investment and advances in technology. On-site charging facilities are a specified requirement for a number of EV-only brands.
Figure 2: 2024 car market share by fuel type
The UK’s charging infrastructure is a significant concern among consumers contemplating transitioning to an EV. This stems from a perceived lack of EV charging stations and the power capacity of current public charging stations. Although the number and power capacity of chargepoints are increasing annually, the UK will need to maintain substantial investment to meet the projected demand.
Adapting to online and digital
The used car market’s growth has been helped by the rise of digital car purchasing platforms that facilitate effortless online transactions for customers. Platforms such as WeBuyAnyCar provide online valuations for customers intending to sell their cars, followed by an on-site inspection and test drive to confirm the final value. The online platform then resells these used cars to dealerships and retailers, generating profit and ensuring a consistent supply of stock for the used car market.
Artificial intelligence (AI) is being utilised to create more personalised and efficient customer service by informing staff about customer preferences and requests, scheduling appointments, streamlining paperwork, and predicting maintenance requirements. An omnichannel business strategy, which integrates physical dealerships with digital platforms such as websites and social media channels, is proving to be an effective approach for dealers to remain competitive and align with evolving consumer expectations.
Resilience of car dealerships
Times are turbulent for the R&A sector, but car dealerships have been leading and adapting to changing times. By actively embracing the adoption of EVs, car dealerships can not only enhance the reputation of the R&A sector among investors but also have a significant positive impact on the environment. The adoption of AI, and the move to an e-commerce model mean operators must embrace change to reach and engage with customers.
While the traditional car dealership model continues to dominate in the industry, it is successfully embracing technological innovations that enhance its operations. This model, comprising showrooms, workshops, part departments, ancillary offices, and extensive external car display areas, remains well-suited to meet the evolving needs of the market. This seems set to continue, as most development requirements in the sector are catered towards this type of operation.
