Michael Bills, managing director, Restructuring Advisory and Bob Tallentire, director, share their views on the current state of the UK Car Dealership sector.
The latest car registration data brings confirmation that the long run of a retail driven economy may be starting to falter. With the performance of the automotive sector so intrinsically dependent upon the nation’s levels of disposable income and access to credit, the recent performance of the sector in the 12 months to December 2017 indicates that car dealerships across the country may face a challenging start to 2018.
The recent public statements of the larger motor dealers communicate profit warnings and a softening of used car values. Further, the interest rate rise of 0.25% - the first rise since 2007 - will impact a number of consumer reliant sectors, no more so than an industry fueled on the availability of credit. Consumers have also had additional spending power as a result of PPI redress, but this will soon be coming to an end. 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?
Overall, in the 12 months to December 2017, the market was 6% down compared with 2016 and 14.4% down on December alone. However, it was somewhat polarized between those manufacturers and dealers who enjoyed a modest increase in sales during 2017 and those for whom the opposite was true. Certain marques saw reductions in sales demand of well in excess of 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, this will be new territory, a new set of trading parameters that they have not 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, it accounts for 12.0% 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 vehicles in the UK supported by 2,500 component providers and some of the world’s most skilled engineers.
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 labor as the main variable. The volume driven bonuses from Q3 2017 that could provide a cash buffer for the slower winter months were not earned by many and consequently were not paid at the end of October 2017. Where dealers have traded outside usual parameters in order to reach bonus volumes, they are potentially now set on what looks like over-priced used vehicles stock, that will be challenging to liquidate and turn into cash. Either way, 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. Those that extended seasonal facilities in August and September 2017 in the anticipation of a strong end to Q3 2017 and subsequent cash receipts may be wondering quite where they go from here especially after the announcement of the Q4 2017 car sales made by the Society of Motor Manufacturers & Traders (SMMT).
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 rescue principles will be necessary to manage this challenging economic period. Our UK advisory team is uniquely positioned to advise dealerships and their stakeholders in a variety of distressed and special situations. Our team has sector experts with real ‘workshop floor’ dealership experience and therefore understand the challenges being faced, so we would urge those dealerships facing tougher trading conditions to contact us to steer a route through the winter months.