Group 1 Automotive's president and CEO has said that Volkswagen encouraged its recent acquisition of dealerships from Inchcape despite its own plans for a period of consolidation in a “challenging” UK market.
In a presentation delivered by board members in Houston, Texas, on July 25, Earl J. Hesterberg said that he was pleased to report revenues up 2.9% to $52.8 million (£43.4m) in the three months to June 30, but revealed a bleak outlook for the UK market.
He said that the period yielded an all-time record quarterly adjusted earnings per share of $2.83 (£2.33) per diluted share, an increase of 16% over the prior year, but added: “This increase was delivered in an environment of slowing new vehicle sales in both our US market, where industry retail sales declined 2%, and the UK, where the overall industry was down 5%.
Hesterberg described market conditions in the UK as “very challenging”, stating that the primary cause was uncertainties surrounding Brexit.
Overall the group endured a 30% slump in profits from new vehicle sales and of 25% in used vehicle sales in the UK during Q2.
But encouragement from VW appears to have been behind the recent growth of its UK representation of the German manufacturer with the acquisition of five car and van franchises – in Chelmsford, Colchester, Romford and Southend.
In response to a question about the UK acquisitions following yesterday’s presentation, Hesterberg said: “The acquisition in the recent quarter was just circumstantial. In fact, we weren't even going to bid on it.
“We're trying to consolidate in the UK until the market improves, and we made some pretty big acquisitions in recent years.
“But the OEM very much wanted us to acquire those Volkswagen franchises as they're contiguous to our existing stores. So we did that in concert with the OEM.
“And the Volkswagen brand has been recovering nicely in the UK after the diesel issue of a few years ago.
“So we really didn't plan on that. That was circumstantial but it will work out well for us and the OEM long term.”
In response to news of its sale of five VW sites to Group 1 and two Audi businesses, in Maidstone and Tunbridge Wells, to Motorline, led to a denial from Inchcape chief executive James Brealey that there were plans to slim his franchised business by 20% across the UK.
He told AM that "was not the case", adding: "In the London area, with high land prices and lack of availability, the creation of PDI centres and additional used car footprint is much more of a challenge for us as a business and it was clear that there were business owners in those areas that were better placed to make those operations a success."
In his presentation detailing Group 1’s recent activity in the UK market, Group 1's Hesterberg outlined the difficulties currently facing the UK automotive retail sector, stating that, while the UK market was down 5% in new car registrations during the reported period, “The true customer demand is likely down even more than that, as some OEMs are aggressively pushing self-registrations to support higher new vehicle sales numbers.
“The combination of this new vehicle market pressure, plus above-average used vehicle values last year caused by WLTP-related new vehicle shortages, resulted in downward pressure on used vehicle values in the second quarter.”
Hesterberg said that Group 1 had seen its new vehicle gross profit decline by 30%, as margins were also hit by new vehicle market volume pressure and it elected to forego certain OEM volume bonuses by not self-registering as many new vehicles during the quarter.
He said: “Although this had a significant short-term negative impact, it is the right business decision and should benefit future profitability.”
Used vehicles’ total used vehicle gross profit declined 25% in Q2, 2019, meanwhile, and Hesterberg said that the focus for the remainder of the year would be on inventory management, growing Group 1’s aftersales business and cost control.