MT INTERVIEW: Pendragon CEO Bill Berman

The venue is the refurbished and decidedly upmarket Land Rover store on fashionable Berkeley Street in Mayfair, London. Cool, minimalist, sophisticated lighting, chilled sparkling water and, in a room downstairs, on a call the day before Pendragon’s AGM, CEO Bill Berman.

It’s been a turbulent few years. Dealer veteran Berman joined Pendragon in April 2019 as a non-executive director. He spent over two decades with the £20bn-turnover US dealer giant AutoNation in the US, president and chief operating officer of the company and responsible for 26,000 staff and the operational performance of the company’s 300 new vehicle franchises, including new and used vehicle sales.

He left AutoNation in 2017 and worked with AutoCanada before he was tapped by a shareholder in New York to see if he was interested in joining Pendragon. Berman joined following the departure in rapid succession of two Pendragon CEOs, Trevor Finn who had been with company for three decades and Mark Herbert who served three months. Pendragon was going through a difficult period. For Berman, the situation was clear: “The company was in limbo.”

“We had a terrible first half in 2019 with the long term CEO leaving and the new person coming in, a convolution of several different things, multiple bad decisions. The company lost £32m in the first half – that was completely unheard of – and we almost got it back to breakeven by the end of the year,” he said.

Life in lockdown

He was made CEO in February 2020. Time to get to work. And then, before he got his feet under the table, Britain went into lockdown.

“That was a unique time, it was a little fraught. I leased an apartment; I was the last person out of the hotel before they shut it down completely and I moved and spent the next six weeks sequestered in a tiny flat in Marylebone” he said.

But lockdown gave Berman more time to run the rule over the company and see what it was doing right and where it was going wrong.

“During that time, we re-engineered the entire company. Lockdown gave us the time to really look at everything. Instead of trying to change the tyre on a moving vehicle, we looked at the way the business was structured. We looked at staff. We looked at the store count and profitability. We had some stores that we had for a long period of time and had not made any money and there was no path for them to make money. Some stores were contiguous to one another and were robbing Peter to pay Paul.”

CarStore remade

Berman also took the scalpel to the used car proposition CarStore, creating a hybrid digital-led approach with large supermarkets, underpinned by a lot of work on the marketing side. The message that Pendragon wants to get across is that the dealership hybrid model was based on research. That’s what customers wanted. It had already cut loss-making Car Stores and it wanted to develop eight locations at a cost of £7.5m per supermarket. According to Berman, customers want to buy a car in the manner that suits them. The hybrid CarStore model allows them to do just that.

“What we have done, and the marketing team have really gone into this, we have our CarStore brand, our go to market used car strategy. Under CarStore you can see all of our used car inventory, over 12,000 vehicles. There is only one group that has more cars online than we do, Arnold Clark. If you take Cinch and Cazoo, the two juggernauts when it comes to digital direct only, we have double the number of cars out there. Our proposition now allows the customer to transact where they want. 80% of our customers are going hybrid,” he said.

I ask Berman for his views on online platforms Carvana in the US and Cazoo in the UK. What did they get right and wrong? He goes for the wrong bit first.

“They assumed that they were going to get enough market share and enough people to buy a large ticket item purely online. That is a herculean challenge.” That said he believes they will continue to expand, just less than they thought. “I think there is a market there, I think they will continue to grow.”

And what did Carvana and Cazoo get right? “Some of the go to market strategies were good, not all. Sponsoring every football club and putting your name on every taxi doesn’t necessarily make sense. They are good transaction sites. The tech was solid.”

Agency beginnings

Agency is the big issue of the day for many dealers with lots of upsides and downsides for groups; I wondered what the thinking is at Pendragon, representing a broad swathe of franchises at its Stratstone premium arm and Evans Halshaw volume business.

“There is no real definition of agency, it is a kind of catch-all phrase. The OEMs are looking at different ways try to go to market and engaging with customers. No two are going about this in the exact same manner. They are trying to engage with the customer in a more direct way, in a fixed price manner.”

But the devil is in the execution. Making it work is complicated with finance, trade-ins, upsells and keeping sales volumes on target.

“It sounds great, but the raw functionality gets a little hard. Customers have expectations. It gives dealers and OEMs fewer levers to pull to facilitate a transaction. Before, when a customer came in, maybe we could not supply the exact car they wanted, or it was going to take two months to order, maybe we had something close in stock or we could reduce the price. We could find a way to facilitate that deal. Now we do not have the ability to do that,” he said.

According to Berman, before dealers had greater flexibility on finance options and terms, less so in some cases now. “There are some limitations. How do you value a part exchange? Is that done by the dealer or the OEM? There are these growing pains that you have to get through.”

Mercedes-Benz route

So, how is Mercedes-Benz is doing in the UK with agency. The brand is further down the road on agency than most.

“It is way too soon to [judge] one way or another. If you look at the market place their volumes are down right now. We are six months in, it is way too early.

“The people who bought a car [on agency] like it but what you don’t know is the people who did not buy a car. Where did they end up going? But listen, they are one of the best brands in the world. If anyone is going to figure out the best way it is going to be Mercedes-Benz,” he said.

Overall, Berman thinks the agency model will morph over time as carmakers and dealers find the right level.

“I don’t know if it will look the exact same way in a year’s time, I don’t think anyone is going to get it right coming out the blocks, it is going to have to evolve. You are just going to have to see how the market plays out.” Focus on Pinewood

Pendragon continues to invest heavily in its Pinewood software business, which saw revenues rise by 4.1% to £25.4m in 2022. Pinewood is run separately from the parent company and has been instrumental in building the hybrid model used in CarStore. Is Pinewood up for sale? It seems to have always been potentially on sale although one never materialised. Is its performance restricted by Pendragon ownership?

“Look, if someone would pay enough for me, I am sure the company would sell me as well. There is currently not an active market sale process out there. We announced the strategic review last year when Anders [Anders Hedin] made a bid for the company because he had expressed interest in selling Pinewood. Pinewood is a core, key asset to the business. All of those things we described about CarStore and the way we developed the business over the past three to four years, Pinewood has been the driver behind that,” he said.

Are dealers afraid to switch to Pinewood because of the Pendragon ownership? The software group is already expanding fast in foreign markets. Berman acknowledges that at some unspecified time Pinewood will go its own way. “There needs to be a time and a place where Pinewood can stand on its own,” he said.

That said the link to the dealer group has proved valuable for Pinewood. “Right now, Pinewood benefits by testing new system and processes. So, we are developing different things out of Pinewood, out current stores test things with it. If they did not have that close working relationship, they would not have been necessarily able to do that,” said Berman.

Hedin comeback?

Berman’s day job is to run one of the biggest dealer groups in the UK but last year had to contend with two bids for the company. Talk about busy. First US listed group Lithia tabled an offer which, it was widely reported was not entertained by major shareholder Hedin Mobility. The second £400m bid came from Hedin itself but it subsequently walked away citing market conditions.

So, will Hedin come back?  “I would be surprised if he didn’t. He invested in the business originally because he liked Pinewood and as he got deeper into it saw the value of the business.” He alludes to Hedin’s investment in Mercedes-Benz dealerships in the UK. “He is a force to be reckoned with in the UK. I would be surprised if he is just in there as a passive investor.”

In a footnote in the annual accounts Pendragon refers to a $315m lawsuit against Pinewood made by Pinewood Asia Pacific. Pendragon has since made a counter claim against the company. Did Hedin pull back because of this case and fear of a financial hit?

“You will have to ask Anders about that. What they said to the market was business and financial conditions. I can tell you this about the lawsuit, it is completely egregious,” said Berman.

“At the time what they pushed out to the marketplace was that the business environment had changed. At the time Liz Truss was coming in and the economy took a lurch, you had some constraints on the banking side, and I think it was a combination of things. Nothing transacted at that time because of those outside financial forces.”

Looking at Lookers

So, Pendragon has been of interest to foreign investors. But what are the possibilities of Pendragon making acquisitions itself? Berman’s last gambit was an informal approach to Lookers’ chairman in 2020 with a view to a merger, which went nowhere.

“We had multiple conversations. So, the chairman when I first came into the country reached out to me a couple of times. I said look at our companies there are great synergies to be had here and I believe, and you are seeing it happen right now, this market is ripe for more consolidation especially with agency coming.”

According to Berman the fit between the two companies was good with few conflicts.

“There was very little overlap in the two footprints at that time so there wasn’t a tonne of stores that were on top of each other that you would have to sell. We were heavier in the Midlands and North they were heavier in the South. They were heavy on Volkswagen and Audi; we had zero representation there. We had Porsche and Ferrari, they didn’t. There were great synergies in brands and locales at that point in time.”

But what now? Is Pendragon open to acquisitions or are market conditions not suitable?

“I would love to but right now with the position with [interest] rates and everything like that I am not sure it is the most prudent. It might not be the most opportune time, that said we are always, constantly looking at opportunities to grow. You have to. If you are not growing your new car franchise, with things like agency and network changes from the OEMs you slowly but surely lose a store here, a store there. You don’t want to go down that way. We definitely could handle something much larger than we are right now.”

The big push

During the pandemic and chip supply shortages, car supplies were limited. Dealers and carmakers made more money, margins were higher. Marketing teams were not pushing volume through to keep factories operating at maximum capacity. But is Berman now seeing a return to “normality” with more push marketing.

“First, it is hard to define what normal is. If you go back to the financial crisis, all the OEMs and retailers said ‘We learnt out lessons, we are going to produce one less car than the market demands we are going to keep it to pull. We are not going to go back to a push model. Then three years later they were shoving cars down dealers’ throats.

“What you are seeking varies drastically by brand and model. There are still tremendous amounts of supply constraints out there and a lot of that depends on what you are selling. We are starting to see some quarterly targets start to come in here, money to drive maybe a certain model line. Put to get back to your question. It is not an ‘if’ but ‘when’ and it is starting to trickle in,” he said.

Chinese charge

A key move by Pendragon is to be selected as one of the big dealer groups to sell the Chinese brand BYD. A few stores up from the Land Rover store in Piccadilly, a new Stratstone BYD operations is being fitted out. BYD is huge, an EV giant, a battery behemoth. In the UK it is relatively unknown to the British public but the launch in 2023 will be significant. For Berman it is a big opportunity.

“They approached us, but they approached a lot of people. They went with large scale dealers that they could go to market with. They have different strategies for different parts of the world. In Germany, the largest car market in Europe, they went with a distributor. They already had a footprint in the UK with electric buses.

“Here they decided to go with what they call Dealer Plus, which is not a true, traditional franchisee. Over time the dealers will actually have a little more control. It is a unique opportunity. They are the largest electric car company that nobody has ever heard of. Their technology is state-of-the-art. They produce a tremendous number of batteries and platforms for OEMs around the world. Nobody knows that the electric buses here are all BYD. They have just started to trickle into the country and the full brand launch will hopefully be coming some time this year. We are fully committed and fully invested. It is going to be exciting,” he said.”

UK dealer groups like Pendragon must look very attractive to US investors compared to their US counterparts.

“We trade at half the multiple they trade at in the US. It is like Lithia buying Jardine to get 50 premium stores in the UK. It is a no brainer. You already have two large well established north American groups here Group 1 and Penske. If you were to buy the exact same footprint in the US, it would cost four or five times as much.”

It is clear that Berman would have liked the Lithia deal to go ahead but it was not to be as it was understood to be blocked by Hedin.

“The only thing begrudgingly that I have is that they [Lithia] were not able to consummate our deal.”

Do you think there will be any publicly listed companies in the UK by close of 2024.

“I would not be surprised. There are benefits to being a public company, access to capital, access to cash to enable you to grow your business. I don’t think either side of the pond that you necessarily get valued fairly. If you look at Lithia and AutoNation, what they produced last year and what their market caps are, compared to other retailers, automotive retailers do not resonate, even less so here. Would these companies be better in private hands or in bigger hands or staying on the public market. I don’t want to say I had foresight to see all of it, but I was here six months, and I could see that and that was why I reached out to Lookers backin 2020. It was a no brainer.”

Undervalued stock

Berman believes that dealer stock is undervalued in the UK, even with strong performances. The company saw underlying pre-tax profits of £57.6m in 2022, and a record £83m the prior year when dealers capitalised on higher margins in the new and used car markets.

“We have two record years, and our stock still languishes. We have zero debt and our stock still languishes. We have a great balance sheet. Our market cap now is less than our real estate value is. It makes zero sense,” he said.

Shortly after this interview took place, there was a flurry of activity at Pendragon with some significant people moves.The group’s chief operating office Martin Casha, a long time director with the group, announced that he was leaving to join Marshall as CEO. Chairman Ian Filby stepped down after two years. The issue of directors’  pay reared its head again at the AGM. That said, Pendragon subsquently announced that it expects a 9% hike in H1 underlying profit before tax of £36.5m, like-for-like new vehicles sales up 18.3% and used up 7.2%. “Pendragon has continued to perform well, demonstrating the continued success of our strategy,” said Berman.