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How prepared are dealers for a ‘significant downturn’?

Signs that the retail-driven new car market might have started to falter towards “a significant downturn” are starting to ask questions of dealers’ preparedness, says Duff & Phelps.

With the performance of the automotive sector so intrinsically dependent upon the nation’s levels of disposable income and access to credit, the performance of the sector in the 10 months to October 2017 indicates that car dealerships across the country may face an extremely challenging end to 2017 and start of 2018, the global valuation and corporate finance advisor has warned.

Michael Bills, managing director, Restructuring Advisory, at the business said that the recent public statements of larger motor dealers paint a picture of dented profits and a softening of used car values, adding that the 0.25% interest rate rise looks set to further impact on a number of consumer reliant sectors including automotive retail.

Bills warned that consumers were also facing the loss of additional spending power as a result of PPI redress, before asking: “The question therefore is how well prepared are manufacturers and their dealership networks to manage through what appears to be, the start of a potentially significant downturn?”

Duff & Phelps’ Robert Tallentire said: “Overall, in the 10 months to October 2017, the market is 4.6% down compared with 2016 and 12.2% down on October alone.

“However, it is somewhat polarised between those manufacturers and dealers enjoying a modest increase in sales this year and those for whom the opposite is true. Certain marques are seeing reductions in sales demand of around 20% year-on-year. And there will be regional differences too that need to be considered.”

What is certain is that for many in the industry, according to Duff & Phelps, is that the sector is heading into new territory, a new set of trading parameters that they have not been experienced for quite some time.

With some 169,000 people employed directly in manufacturing and in excess of 814,000 across the wider automotive industry, the automotive sector accounts for 12% of total UK export of goods and invests £4 billion each year in automotive R&D.

More than 30 manufacturers build in excess of 70 models of vehicle in the UK supported by 2,500 component providers and some of the world’s most skilled engineers.

Tallentire said: “The question is what resources and abilities can the average independent dealer draw on to confront the challenge.

“Manufacturer franchising agreements are not that flexible for the independent dealer with the infrastructure and staffing of the business dictated by franchise agreements. Will these rules be relaxed to maintain dealer networks as the UK goes through the seemingly unending and unsettling Brexit process?”

Dealerships are faced with a business structure predicated on a predominance of fixed costs with labour as the main variable, Duff & Phelps said in a statement, adding that for many the volume driven bonuses from Q3 that they use to provide a cash buffer for the slower winter months ahead were not earned and consequently were not paid at the end of October.

Where dealers have traded outside usual parameters in order to reach bonus volumes, it said, they are potentially now sat on what looks like over-priced used vehicles stock, that will be challenging to liquidate and turn into cash.

The business said that it “feels like there could be a prolonged period of working capital challenges before dealers have the opportunity of a good bonus month again”.

For lenders to the sector, the change in fortunes in new car sales and the softening of used car values may have crept up unnoticed.

According to Duff and Phelps, those that extended seasonal facilities in August and September in the anticipation of a strong end to Q3 and subsequent cash receipts may be wondering quite where they go from here especially after the announcement of the October car sales made by the Society of Motor Manufacturers & Traders (SMMT).

Bills concluded: “Manufacturers will not want to see long standing dealerships suffering and possibly even disappearing as a result of an economic slowdown. Accurate forecasting, planning ahead and embracing of the rescue principles, which Duff & Phelps promotes, will be necessary to manage a tricky economic period.”

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