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Record sales mask problems, say PwC

Car industry euphoria over the record 2002 car sales registrations shouldn't be allowed to mask serious profitability problems which could see the number of franchised dealerships fall by a third in the next decade, warns PricewaterhouseCoopers.

Commenting on today's SMMT release of 2002's final new car registrations, the company says that dealers must adapt to a “rapidly changing business landscape”. And without increased margins on new car sales,and action to fight off competition for aftersales business post-Block Exemption, many dealers will fall by the wayside.

“These are worrying times for many franchised dealers who face challenges from all directions,” says PwC's Business Recovery Services Automotive Group head Rob Hunt. “Margins are notoriously tight and new car sales have fallen away since the peak in early autumn of last year.”

Failure to act will see the number of franchised outlets go down from 6000 to 4000 over the next decade, the company warns. PwC cities three key negative pressures underlying the positive sales returns:

  • New car sales volumes and margins are under pressure. Volumes fell in the final quarter of last year and the SMMT anticipates a percentage fall in volumes in 2003. Intense competition, manufacturer power, and pressure for EU price harmonisation have put pressure on dealers' margins. A dealer will make typically only 1 to 3 per cent on new car sales.
  • Amendments to the block exemption legislation will lead to an opening up of the market. Competition from larger groups and new entrants could squeeze smaller dealers' margins to unsustainable levels.
  • The more lucrative servicing and repair work which typically accounts for 60 per cent of dealer profits could come under increased competition from new entrants and from reduced demand as the reliability of vehicles increases.
But dealers with attractive franchises and good geographical locations are in a stronger position, Mr Hunt feels.

“The successful dealers will be those that quickly face up to the challenges, adapt their business models and pursue strategies that give them a genuine competitive advantage.

“Any dealers ignoring the threat need only look at the fate of the traditional corner shop in the face of the rise of the supermarket chains. Those small shopkeepers who have not adapted to the competition have disappeared.”

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