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Face to Face: CEM Day reaps the dividend of diversification

So what’s next for CEM Day? Finance director Stuart Smith said it won’t rule out adding more franchises in the future should the right opportunities arise, particularly those stealing share from the major brands, but the group is cautious not to push too far.

However, it has invested £120,000 in a VOSA test lane for trucks, coaches and buses at its Swansea Iveco outlet and added an MoT testing station at its Fiat dealership that is capable of serving motorhomes and light commercials as well as cars.

Yet, strategically, its preference is to expand its daily rental and contract hire brands, given the greater returns offered and the preference of many local authorities to rent rather than purchase, said Smith.

The company now has 11 Day’s Rental locations in Wales from Newport to Haverfordwest, and in 2011 it opened its first in England, at Shrewsbury. Bristol, Birmingham and south west England are in its sights.

The dealerships are still a vital part of the group. Graham Day describes Day’s Motor Group as “the glue that sticks it together” and the “passion” of the family. Having dealerships doesn’t help the company buy its rental vehicles more cheaply, but it allows it to repair them and dispose of them effectively. Unlike many franchised dealers lately, CEM Day doesn’t struggle to find quality stock, in fact it is expanding its used car sales.

It recently began trialling premium-brand used car sales, with stock sourced from its contract hire operation that previously would have been traded out or auctioned, and has trialled cars from £2,995 at its Llanelli site and used commercial vehicles in Cardiff. In addition, it has long operated its Day’s Motor Park used car supermarket, whose launch coincided with the film Jurassic Park – hence the dinosaurs dotted around the site.

“It’s fair to say that without hitting your targets, the dealership model doesn’t stack up profitability-wise, and that’s the way the manufacturers want it because you know you’ve got to get your target,” says Graham Day.

“You’ve got to treat the core business in its entirety and make sure you’re still making money on that, and we do. We ensure we get the best out of our dealerships, each one, branch by branch, department by department. So there are definitely possibilities of expansion of the core business because it stacks up quite well against some of the competition.”

The scale and funding behind CEM Day also leaves it in the fortunate position of often being able to snap up the pack deals on offer from its manufacturer partners.

But Stuart Smith has a caveat: “Our business is traditionally highly geared and all we need is for interest rates to go up substantially and five years from now we could be looking at the core business as doing really well and the contract hire and rental business as suffering.”

CEM Day factfile

Turnover £186m (2012)
Profit £6.3m
Franchises Ford (6) Peugeot (2), Fiat (1), Iveco (1), Nissan (1 aftersales only)
New car and commercial vehicle sales 8,800 units (incl 4,000 Ford cars)
Used car sales 7,300 units

AMi comment

CEM Day is a classic example of the successful 'local hero'.

If you want a new Ford (and now Peugeot or Fiat), there must be few people in South Wales who wouldn’t at least have Days on the list if not first choice.

If you want a good used car, the same would be true: geographic focus, brand focus, an identifiable name in a community, particularly, a family company with an identifiable brand that still links to the individuals behind the name.

Not all brand and geographically focused groups make good returns, and it took time for the synergies to develop at Days.

Ten years ago RoS (return on sales) was below the magic 2%.

However, for most of the next 10 years, it has exceeded this benchmark and for the last two years has bettered 3%.

One of the key success factors for the local hero model, is the capacity to meet most if not all of their customers’ mobility challenges from existing resources.

This seems to be part of the CEM Day story.

Whether you want a short term solution (rental); a longer term solution but don’t want to buy (contract hire); want the finance to buy, tailored to your requirements (a finance subsidiary); need help (Motability); CEM Day has grown to include that activity. “Why go anywhere else?”

There are of course additional benefits – if you can make them work. Having your own finance company and rental and contract hire operations allows for flexibility in meeting manufacturer targets. If you can’t retail it, then you can probably find a different type of customer who justifies the registration.

And the cars passing through the rental and contract hire fleets make excellent used cars, if you get the portfolio profile right and have strong remarketing processes for cars outside the profile.

The issue is gearing.

Retaining multiple integrated profit streams allows you to service more of each customer’s needs and allows some economies of scale and of management. However it requires considerably larger funding lines than the more traditional model.

Days have done well to expand their activities while keeping gearing stable. However, that stability is at a relatively high 70+%. Even in the current low interest rate environment this means an interest bill approaching £4 million.

Return on capital employed (RoCE) has also been fairly stable at around 7%, which is low for such a profitable group and would be higher but for the amount of capital required for the rental and contract hire fleets.

It is interesting that Arnold Clark operate on a similar principle, but on a much larger scale.

It makes a RoS, unusually for a large group, north of 2%, (but less than Days). It has a RoCE around 7%.

However, over time Arnold Clark has reduced gearing, while increasing their rental and contract hire activities, from over 60% to about 40%.

Perhaps Arnold Clark should take a leaf out of CEM Day’s book on how to make profits.

And CEM Day can learn from Arnold Clark how to control capital usage.
 

 



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