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More consolidation, fewer sales...the market outlook for 2006

This has been a tough year for the UK retail motor industry, and many dealers would regard that as an upbeat assessment.

The problem now for the sector is this: all agree that 2006 will be just that little bit worse, at least for the first six months.

And following Trevor Finn’s bid to create a £5bn-plus turnover Pendragon, the prospect of more dealer group acquisitions is an unsettling factor as the year draws to a close.

Judgements on the state of the market continue to be based on the buoyancy or otherwise of new car registrations, though this can be misleading. Even when things are rosy, margins aren’t what they used to be – dealers start in single figures and, in such a competitive market, give much away in discounts to secure the sale – while few dealers are realising the potential of aftersales.

Anything in the current range of 2.25 to 2.5 million registrations a year is superficially healthy but profitability is another matter. And when, as now, the sales market is in decline, life for motor retailers becomes more of a struggle.

Manufacturers under pressure to maintain or increase their shares in the large UK market are pressing dealers to move units for small returns, while investing heavily in premises.

Carmakers, aware of rising production over-capacity, are, as the Society of Motor Manufacturers and Traders’ chief executive Christopher Macgowan says, “fighting for every sale”.

At the end of November, new car registrations were running almost 6% down year-on-year. The SMMT’s forecast for next year offers little comfort – it expects registrations to dip 2.5% year-on-year (marginally better than half 2005’s decline compared with 2004).

In this climate, and with continuing stresses such as the difficulty in finding staff with the right skills, many managing directors of medium and small dealer groups must hope a predatory ‘big beast’ will knock on their door.

#AM_ART_SPLIT# 2006 – the year of the takeover

Everything points to a round of retail takeovers in 2006. Pendragon fired the starting gun with its bid for Reg Vardy, and Lookers signalled its growth ambitions by expressing an interest before the contract is clinched.

Paul Williams, managing director of Kia Motors UK, expects more dealer groups to acquire others in 2006, and the potential disappearance of small to medium retailers is highly relevant to his own business as it seeks to expand.

“The bid for Vardy was a surprise, but it won’t be the end of it,” he says. “I expect the trend of dealer group consolidation to continue. Big groups are buying new cars in bulk because the retail market is weak. Manufacturers have to maintain production, and the cars find their way to consumers somehow.

“Dealers are under pressure,” he continues. “If you have seen the value of your business property rise another £150,000 this year, while your running costs have increased again, you must be asking yourself: ‘Do I need this?’”

Kia’s image has been strengthened by Pendragon, Reg Vardy and Arnold Clark taking the franchise but Williams is wary. “I welcome them selling our cars but I don’t want Pendragon to have 40 Kia dealerships – a big group needs to be no more than part of our portfolio.”

He urges dealers not to rely on sales of new cars alone. “Dealer profitability will be one of the big issues of 2006. They need to look at used sales, the aftermarket, cost reduction and just being smarter.”

Williams supports the views of Nick Lancaster, HR Owen’s chief executive, who has warned that profitable volume motor retailing in London is becoming impossible because of rising costs. “That is starting to apply to other metropolitan areas, and big groups are better equipped to cope with it,” he says.

Second half sales should improve

The market will become “harder and harder” over the next six months as retail car buyers have to absorb higher council tax bills and other increased costs. “The second half should be better, because the economy is stable and interest rates will remain low,” says Williams.

Nick Lancaster has this year become the motor trade’s cheerleader for change, telling AM that franchised retailing is unsustainable in major cities.

He is convinced that Pendragon’s bid to acquire Reg Vardy, followed by Lookers expressing interest, is the beginning of a period of hectic consolidation. “In 2006, changes will start in the relationship between carmakers and dealers, and there will be huge consolidation among dealer groups” Lancaster says.

“I expect to see some surprises, with some businesses failing or running into difficulties. The process is becoming very clear: many manufacturers will decide they want only 10 to 12 dealer partners, and the big guys will get much bigger.

“Over the next 12 months, I think we will also see the start of action on the Block Exemption location clause, with big groups moving into new areas to challenge smaller retailers.”

#AM_ART_SPLIT# Manufacturers fail to respond

So far, manufacturers have failed to respond to calls from Lancaster and others, like Clive Sutton who this year withdrew from franchised car retailing to focus on selling prestige cars, that big city dealerships cannot be run profitably when margins are the same as in rural areas.

But Lancaster does believe there is cause for some optimism about prospects for later next year: “The market will continue to weaken in the first half because manufacturers are trying to sell too many cars. But things could start to improve during the second-half,” he says.

This prospect of better times ahead is also shared by Jim O’Donnell, BMW UK managing director, but comes with a warning: “Growth prospects for premium sector manufacturers are much stronger than for those in the volume sector.”

O’Donnell sees aggressive competitor action to sustain sales volumes as next year’s biggest issue, with a possible affect on profits. “Current market conditions have already resulted in higher sales costs as many manufacturers and dealers have had to introduce additional sales incentives to attract customers,” he says.

He believes the level of dealer group acquisition will be lower than this year. Little change is likely in the sector, apart from a further increase in costs for carmakers and dealers through new “and often conflicting” legislation.

Ken Keir, Honda UK managing director, has similar concerns: “The climate will be tougher, fiscal measures are being introduced by the Government and there will be a greater need for pension provisions. All this will make meeting our targets that much tougher.”

Keir believes the greatest threats to the industry are complacency and economic uncertainty, with the state of the economy the key driver. “We will do all we can to offer the right product at the right price but customers must have that feel good factor,” he says.

Paul Burrows, of Grant Thornton Motor Retail, agrees: “UK new car sales are heavily reliant on consumer confidence, particularly in the housing market.

“The motor retail sector will continue to be difficult next year, but prospects are good for a well-run dealer group with the right franchise focus, managing its scarce resources to optimise returns.

“Globally, manufacturers are struggling with their own performance and putting the squeeze on component suppliers. While these pressures exist, little will change in terms of retail profitability.”

Burrows sees MG Rover’s collapse as a small example of what the future might hold: fewer manufacturer points and a supply/distribution chain that cuts costs and offers a better chance of profits.

“Motor retail consolidation will increase as suffering retailers run out of cash and/or willpower, and exit,” he says. “This may result in fewer franchise sales points. That may be no bad thing in the long run.”

#AM_ART_SPLIT# ‘Dealers are pivotal to the UK economy’ – Alun Michael MP

“The retail automotive industry is a pivotal part of the UK economy. It offers a sophisticated retail and service/maintenance sector which last year generated £20bn value to the UK economy, and comprises 65,000 businesses and 546,000 people.

Automotive retail firms are often leaders in global best practice in many areas of distribution, able to provide a key source of improvement for the UK retail sector as a whole,” says Rt Hon Alun Michael, Minister for Industry and the Regions.

“After several years of strong UK car sales, a slowing of growth is to be expected. The SMMT’s view of the market for 2006 is entirely plausible, but by no means bad news as the UK continues to be a vibrant and competitive market for new and used vehicles, with a wide variety of models available to the consumer.

“Under the auspices of the Retail Motor Strategy Group (RMSG), DTI’s Automotive Unit helps ensure that the industry benefits from early discussion and joint consideration of the wide-ranging policy, regulatory, and better regulatory agenda affecting the sector.Current priority themes for RMSG are Codes of Practice, Block Exemption from competition law, and Skills and Training.

“Through RMSG and related groups, the DTI is supporting the industry’s commitment to achieve OFT approval for a new consumer Code of Practice for servicing and repair. 

“We are encouraging and facilitating a joint approach between the SMMT and others in the industry to developing the new code and promoting thought on how the skills agenda for the sector can be married to the technical and ethical demands of effective self-regulatory codes. 

“The RMSG is also considering the feasibility of eventually bringing together the various consumer facing codes in the sector under one banner to aid consumer recognition once approval has been secured from the OFT.

“OFT Approval in this sector is designed to provide consumers with a pointer towards businesses committed to delivering a fair deal through the introduction and assured delivery of a set of agreed standards for garages.”

  • The RMSG was set up to look at issues which impact on the retail sector and is attended by DTI officials, retailers and other stakeholders, including carmakers.
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