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AM100: Get ahead but do not forget the past

Last issue’s AM100 has focused industry minds on where to go next.

We haven’t seen anywhere near the number of business failures that we thought might happen. 

But despite this good news story, retailers are still very cautious and wary about the future. 

Can it continue as it is now, with more flexible trading conditions and low cost bases? 

There are issues that need to be considered, acted upon and previous history never forgotten:

 

Overstocking 

The current new vehicle trading conditions are, in many cases, favourable for retailers.

Fire selling stock helps no-one in the long term, and everyone in the 'profit circle' – manufacturer, supplier, national sales company (NSC), retailer – needs to take their share of the reward.

There are concerns that the GM, Opel and Chrysler rescues will not take out enough capacity because of the fighting across borders between politicians.

This contracts the size of the profit cake. Retailers cannot influence this, but recognising the issues of overstocking should not be forgotten.

Profitability

The pace of retailer failure being so low will not reduce the 'size of the cake'. Any downwards adjustment to new vehicle profitability will mean lower profits per location.

If manufacturers and NSCs alike are forced to pare back their current offers as supply (and funds) dry up, then retailers will face lower profits unless they represent a bigger slice of the aforementioned cake
 

Funding

The cost of funding will inevitably move upwards and with covenant breaches being the norm rather than the exception, this is beginning to happen.

There are a number of retailers where there is ongoing stakeholder support because it just doesn’t make sense to let them fail in today's climate. 

This support takes the form of standstill agreements, payment holidays and interest-only funding. When this unwinds, which it must, then pressures on those retailers will increase.

Breakeven

A consequence of all the above is most retailers enjoying a cash generative environment for 2009, the polar opposite of 2008.

We have long been recommending retailers establish their cash breakeven point so that the business is aware that breaking even, or even making a modest return, is simply not enough.

When factors move against retailers from any of the above, then this breakeven point will move further away and the business case could become unsustainable and inviable again.

As the economy picks up, interest rates will rise so it makes sense to base a viability study on a higher base rate than the current 0.5%.

Speaking to the industry, it is clear everyone is currently trading off the back of excellent goodwill and a concerted effort to work together. 
 

The three key points

1. The big benefit of the recession has been to see retailers and NSCs acting together for a common goal.

This state of affairs has been further enhanced by the scrappage scheme which has benefited many of the lower share brands. This co-operation needs to continue – forever. It is the only way to develop a route to market that really works and doesn’t involve putting more cost and pain back in to the system.

2. Facilitate communication between NSCs, captive funders and bankers, as a starting point, with strong management information, based on a full reporting of profit, balance sheet and cashflow with budgets for each and a monthly commentary on variances. 

Retailers will learn more about their own businesses, and stakeholders will see a more professional approach leading to more confidence in management and possibly less surprises.

3. The profit cake may well be reducing and there is an argument for fewer retailers and less facilities to combat this through a bigger slice of the profit cake per player. 

Those retailers I have canvassed agree and indeed a few have already spoken about effecting change. If your business structure doesn't work, then it has to be changed before it is too late.

If your current trading or debt concessions move back against you, there will be no room to manoeuvre and matters will end up being taken out of your hands.

I see a strong future for well run, fit and sensibly funded businesses. 

Email paul.v.burrows@gtuk.com.

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