Questor: can 174-year-old Inchcape survive in a market disrupted by Tesla and Carvana?

·4-min read

When we covered Lookers, the car dealership, in June we wrote that the shares looked undervalued “even if the company is dead in a decade”. The fact that we could even speculate that it might not survive longer than 10 years, thanks to potential disruption from the arrival of electric cars and digital competitors, must weigh on our minds when we look at Inchcape, the global car distributor whose history goes back to 1847.

The fear is that this long pedigree will provide scant protection in a world where a company such as Tesla can, in just a few years, establish so strong a connection with its customers that it regards dealers as unnecessary – or in a world where Carvana, tipped here in December last year, can develop, again in just a few years, an entirely new way to sell second-hand cars via digital channels.

But to write Inchcape off on these grounds would be a mistake. The company’s intelligent business model is perfectly suited to survive in a disrupted market for new cars. This is because of where it operates and how it operates.

It avoids, broadly speaking, the big markets where it is worthwhile for carmakers to set up their own marketing and distribution operations. In such markets dealerships have a limited role and competition from other brands, and lack of bargaining power with the carmakers, tends to make them low-margin businesses.

Inchcape is to be found more in “second-tier” territories where even some of the largest carmakers would prefer not to tie up capital and management effort. Instead, they outsource everything to Inchcape, which handles importing and marketing the cars, distributing them around the country, selling parts to independent garages and so on.

Carmakers would not put vital operations in the hands of a third party in this way without a high degree of trust. Equally, once these relationships are established it takes a lot to break them; as a result, some have lasted more than half a century. And it would not make sense for carmakers to depend on Inchcape to such an extent and yet drive a hard bargain on financial terms, so the British firm can make better margins than it could as a straightforward car dealer.

In a sign that the carmakers continue to value the service it offers, it announced in July a new partnership with Geely of China to distribute its cars in Chile. The hope is that once the relationship is established, it will be broadened to include other countries.

Inchcape also seeks to expand by buying independent dealerships, often when the founder retires or feels unable to keep up with changes in the marketplace. Another route to sweating its assets is to maintain its relationships with car buyers for longer by, for example, continuing to service vehicles after the warranty has expired. Investment in its new digital division should help it stay in touch with these customers.

Its decision to focus on countries that carmakers deem of secondary importance has other benefits. These nations may be smaller or less wealthy, but they are growing faster than the West and their burgeoning middle classes will want to own cars. These countries are also likely to be the last to be affected by the kind of disruption we feared might cripple traditional dealerships in the developed world. Carvana and Tesla are unlikely to put the same effort into cracking Peru as they do into Europe and America.

“There are always things to worry about – electric vehicles, digital disruption, the current supply chain problems – but I think there is a lot to be excited about too,” says Iain McCombie, who holds Inchcape in his Baillie Gifford UK Growth Trust. “We try not to overreact to these fears. We think the company has long-term growth potential.

“We set a lot of store by the quality of a firm’s management. Inchcape generates a lot of cash and we need to trust its bosses to make the right decisions about where to invest it. We are reassured by their ability to maintain long-term relationships with the carmakers and by the way they have just steered what is a complicated business through a tricky period – it remained profitable, at least before exceptional items, last year despite the virus. I don’t think Inchcape’s potential is reflected in the share price.”

Questor says: buy

Ticker: INCH

Share price at close: 808p

Read the latest Questor column on every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

Read Questor’s rules of investment before you follow our tips.