Nigel Ruddock, Grant Thornton: Opportunities for Success
Dealers in the UK will continue to face the challenge of maintaining cashflow and profitability, says Nigel Ruddock, national head of motor retail at Grant Thornton.
Ruddock suggests several options to boost profitability. These include diversification into parts distribution, as done by Lookers and Foray Motor Group, or into technology, such as Pendragon’s dealer management system business Pinewood.
“You need to maximize the profits from the network, so it makes sense to look at parts distribution as a support business. Dealers can do it, and they have the skills to do it best. The question is, whether to do it in partnership with the vehicle manufacturer, in parallel or in conflict,” he adds.
Ruddock says the UK’s major dealer groups will be looking to mainland Europe for expansion opportunities with chosen manufacturer partners in the near future. However, consolidation of the motor retail sector in the UK will continue, with strong regional specialists being steadily “picked off” by bigger retailers. “The groups that have cash have options, but I think the rest of them will be targets,” he says.
Ruddock sees the growth of regionally dominant motor retailers more likely than the birth of national “super-groups”, as the motor retail sector is still extremely fragmented. Even if Pendragon’s takeover bid for Reg Vardy is agreed, it will still have less than 7% of the UK’s new car market. “It has a long way to go to get itself to the level of Tesco,” says Ruddock.
Although the larger groups are more stable and able to absorb acquisitions without taking a hit, many of the smaller regional specialists are more profitable.
Manufacturers’ national sales companies will be forced to change, taking costs out of their business and becoming more efficient. Although their UK networks face high operating and development costs, Ruddock says the strong skills base puts the UK’s motor retailers among the best.
Julian Fox, Aon Consulting: Pensions protection
Motor retailers are advised to get up-to-date advice on changes in pension and tax legislation. Julian Fox, senior consultant at Aon Consulting, recommends dealers establish an action plan to ensure they are not caught out by the Pensions Act 2004, already in law, and the Finance Act 2004, which comes into effect on April 6, 2006.
The Pensions Act established the Pensions Protection Fund (PPF), which bails out pension schemes when companies become insolvent. The PPF is funded by a levy from businesses, which is calculated depending on the level of pension scheme funded, the risk on employer solvency and how much the PPF would need to pay out should that scheme collapse.
“If you don’t know what your risk-based levy might be I suggest you find out, and quickly,” says Fox.
The law also established The Pensions Regulator, which has far reaching powers. In the case of final salary schemes, many of which have large deficits, the regulator is able to stipulate the deficit a company must pay, and the period it has to do so.
In addition, says Fox, it will want to see that businesses are managing the ongoing risks to their final salary schemes, and that there is no conflict of interest if the directors of a business are also trustees of the pension scheme. “Document your decisions and do it properly,” adds Fox.
Next April, the Finance Act replaces all previous tax rules, and puts a £1.5m lifetime limit on tax free pension benefit. Other sections of the law will cater for flexible retirement, such as partial retirement, and set a 25% maximum limit on tax free cash lump sums.
#AM_ART_SPLIT# Jeremy Martin, Imica: Saving on non-core costs
Look at improving your dealership’s profitability by driving down non-core costs, is the advice to dealers from Jeremy Martin, of Imica Business Consultants.
Many managers concentrate on core purchasing as it is the area of largest cost, but overlook non-core areas such as office supplies, utilities and support services where savings are easily achieved. For car retailers, Martin estimates non-core procurement represents 3.5% to 4% of turnover – a spend of £1.6bn by the whole sector. He believes savings of at least 10% to 15% are possible, if dealers properly explore their options, such as negotiating new deals with existing suppliers, tendering or clubbing together in buying groups.
Martin cites as an example a south west motor retailer with a turnover of £9.5m, which Imica worked with last year. Its profit forecast for 2005 was £40,000 to £80,000. Imica identified savings on internal printing costs which alone would save between £8,000 and £13,000 per year.
He urges managers to consider “the three Ds” when looking at non-core procurement: Don’t buy it if you don’t really need it; Defer it until next year if possible; or Downgrade the cost. “The best cost saving is where you don’t buy the thing at all.”
Professor Peter Cooke: Block Exemption actions
Professor Peter Cooke of Nottingham Business School suspects that lobbying from the manufacturers has meant that the revised Block Exemption legislation has not had the impact that many predicted.
He describes the progress of the final Block Exemption Rules being published in July 2002, to their enactment in 2005 and eventual evaluation in 2008, as being of an “evolutionary rather than revolutionary timescale”.
Cooke advises eight actions for dealers to consider in order to prosper in the new landscape. “Extended product offering, fixed price packages, family support packages, customer loyalty programmes, two tier service pricing, further business car opportunities, local daily rental operations and making the change to considering themselves as ‘providers of local mobility’, are all actions to consider,” he says.
Bob Lewis, HMRC: Comply with tax rules
Most dealers are incorrectly calculating their tax obligations, according to Bob Lewis, manager of the motor trade unit of the newly formed HM Revenue & Customs (HMRC).
The HMRC has been set stringent efficiency targets and an unswerving brief to tackle those businesses who do not comply.
“About 70% of visits to motor dealers identify errors. And those errors can be significant”, says Lewis. This is often due to the compounding and multiplication of small errors that go unchecked.
Prior to a visit, HMRC gathers information from a variety of sources. These can be from its own internal records, records from Companies House and VAT return data. Less obvious sources include the dealer’s website – checking against stock lists, local and specialist press, and even copies of correspondence from customers which are in the HMRC’s possession.
Lewis explains that 36 Business Units now cover all HMRC functions. Dealers can expect to deal primarily with Customer Units (broken down into Large Business and Employers and SME and Employers), and Operations (which includes Large Business Service and Local Compliance Contact Centres.
Areas where dealers are at highest risk of committing offences are imports or EC acquisitions, sales not being declared, sales on finance terms, book-keeping errors – often as a result of the misapplication or misunderstanding of entering sales under manufacturer special promotions and finally qualifying cars.
Other areas to watch are private use charges to employees, partial exemption and capital goods scheme. “Land or building refurbishments costing over £250,000 should be kept on separate VAT records as subsequent adjustment may be required,” warns Lewis. If in doubt, dealers are advised to consult note the HMRC website.
#AM_ART_SPLIT# Stephanie Murdoch, Auto Network UK: FSA’s yellow flag
Dealers must embrace and understand the FSA’s four statutory objectives, says Stephanie Murdoch, managing director of Auto Network UK.
These are to maintain confidence in the UK financial system, promote understanding of the system, secure the appropriate degree of protection for consumers and reduce the scope for financial crime. “The goal is to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal,” says Murdoch.
Some 9,000 pages of rules drive the FSA, with up to 40 pages of updates published each day. Murdoch warns dealers not to be complacent when it comes to ensuring they are abreast of the latest rulings.
“There are over 4,000 motor retail businesses registered with the FSA, so you are well and truly on its radar. The UK motor industry has been issued a yellow card. Don’t be the first dealership to be given a red,” she says.
Bruce Hand, RTS Consultants: Staff retention issues
High employee turnover affects morale, productivity, customer loyalty and profitability says Bruce Hand. So what can be done to improve the retention of staff?
“Typically it costs £14,000 to replace a department manager,” says Hand. “It’s not just the cost of advertising the post, but also the lost productivity on the ‘wind-down’ prior to leaving as well as if the post is empty for any period of time.” Replacing a car sales executive costs around £18,000 and a vehicle technician £10,000.
Pay is a key reason why staff are dissatisfied. “Pay remains not only the primary motivator for the majority of employees, but also the main reason for lack of retention. Conversely, an organisation’s ability to recruit the right people is often determined by their pay scales,” says Hand. So what’s the answer? Pay plans should be used as a key part of the motivational package.
Examples include combining team and individual bonuses, focusing rewards on changed behaviours beneficial to customer and company, varying incentives over time and having the flexibility to allow for individual bonus preferences.
#AM_ART_SPLIT# Professor Jim Saker, Loughborough University: Leadership and clarity
In the rapidly changing landscape of motor retail, where does the future lie and what are the industry’s longer-term prospects? Ford professor of retail management Jim Saker considers the answers.
“The business is now undoubtedly more than just selling cars and aftersales and as such dealerships are facing a range of new challenges,” says Saker.
He believes there is still a tendency within some dealerships to think they are “just shifting metal”. But success is down to new ways of thinking and investing in staff and customers.
“Customer satisfaction is a very weak measure of re-purchase loyalty. We should be looking at ways to measure the depth of that relationship – a successful dealership adds value to the relationship it has with the customer,” says Saker.
The two main factors influencing the business are economic and socio-cultural. Economic factors include a slow down in the economy, higher interest rates, over capacity, the rise of China and increased pressure from carmakers. Increased customer sophistication and the problem of recruitment and retention represent the socio-cultural issues.
Saker points to the struggle to get the industry’s profile improved in the media, and the subsequent difficulty of attracting quality people. “The future winners will be those with the leadership and clarity of thinking to take that business forward.”
#AM_ART_SPLIT# Age discrimination, employment law and competition
Measures to outlaw age discrimination, likely to come into effect on October 1, 2006, are described as “the most significant piece of anti-discrimination law in decades” by Leigh Dewdney, employment solicitor at law firm Osborne Clarke.
The draft Employment Equality (Age) Regulations 2006 look certain to cover all aspects of employment. Many policies which employers have in place, such as those which link to service-related benefits, are likely to be indirectly or directly discriminatory once the regulations come into force.
Dealers will have to review their policies to make sure they comply. The regulations are also likely to establish a minimum retirement age of 65. Employers will have to justify retiring employees any earlier than this.
“If an employee wins a claim for age discrimination, compensation could be unlimited because there is no cap,” Dewdney says.
She also highlights changes to the Transfer of Undertakings (Protection of Employment) regulations (TUPE), due to be implemented on April 6, 2006. These concern business transfers, such as a restructuring, and the effects on the workforce.
The TUPE changes are likely to mandate a transferor to provide employee liability information to the transferee prior to the transfer. Failure can lead to a penalty of up to £75,000, payable to the transferee. TUPE is also set to make insolvent companies more attractive to buyers, by reducing certain employee liabilities on transfer and absorbing some of the cost of transferring employees via Government payments.
Osborne Clarke competition solicitor Miles Trower says the EU wants to help retailers trade freely: “Use competition law as a tool. Challenge restrictive behaviour to achieve benefits for your business.”
Trower warns dealers who sell cars online or via telesales that customers are entitled to a seven-day cooling off period, during which they can hand the car back and claim a full refund for any reason. Trower suggests dealers ensure at least one face-to-face element of the sale process, such as a test-drive, to negate this.