Dealers face tough times ahead
Plummeting car sales, heavy discounting of new vehicles and lower levels of servicing work have combined to catastrophic effect on the automotive retail market in the UK, which has seen franchised dealership insolvencies double year on year.
That is the view of Ernst & Young, which in a new report reveals a total of 24 dealer insolvencies up to the end of August this year, compared to 12 for the same period in 2008.
‘UK Car Dealerships – Lessons from the Last Recession’ provides a perspective on the current and future trends in the UK automotive retail market and highlights the different effects on the sector between this economic slowdown and that of the 1990s.
Eric Wallbank, UK head of Ernst & Young’s automotive team, said the severity of the recession on the wider automotive sector was well documented but its effect on the dealer industry has been equally severe.
“Production shut downs, GM and Chrysler filing for Chapter 11 bankruptcy and a string of component suppliers going to the wall have dominated the headlines in recent months. But UK franchised dealerships, the last link in the global automotive chain, are suffering an equally severe effect,” he said.
“A cocktail of falling sales and diminishing profit margins has led to unprecedented levels of dealer closures. But the true extent of distress facing dealer groups is being masked by the closure of many loss making sites which would have not been reflected in the overall insolvency numbers.”
A significant contributing factor to lower dealer profit margins is that while new car sales typically represent 50 per cent of turnover, they only make up 25 per cent of gross profit.
Conversely, aftersales only make up around 15 per cent of dealer revenues but is the largest generator of profits with some dealers targeting and delivering over 50 per cent of gross profit from this source.
However, the overall slump in new car sales over the last 18 months will lead to weaker demand for servicing and parts from franchised dealers in the medium to long term, further adding to their profit woes.
“The strength of new car sales until mid 2008 should sustain dealer servicing volumes in the near term, but the impact of a drastic fall in sales from then on will be hard felt across franchised dealers over the next three year’s or so,” said Mr Wallbank.
“Add to this better build quality, longer service intervals and a consumer trend towards smaller vehicles and the future outlook for servicing volumes will be downwards for years to come.”
As a result, although the economic crisis appears to have stabilised, there are still real uncertainties for the dealership sector which will continue long after the UK emerges from the recession, says the report.
Vehicle manufacturer instability, the lack of available finance for consumers to fund new and used vehicles and falling demand for aftermarket services are all likely to adversely impact profitability for dealers.
Mr Wallbank says conditions will get worse for dealers before they get better and added: “We expect the number of dealer failures and site closures to accelerate into 2010 as the full effects of the current drop in car sales are felt.
“The franchised dealers best placed to weather the storm will be those able to retain a significant proportion of customers’ aftermarket spend and those representing growth brands. This is particularly true of dealers offering a strong line of smaller vehicles which are proving to be increasingly more attractive to changing consumer tastes.”
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