Cox Automotive UK survey claims margins will remain under scrutiny in 2020

Margin pressures set to continue, says Cox Automotive

Following a challenging period for the automotive retail sector, with latest ASE figures suggesting a second consecutive year of declining profitability, the most recent sentiment analysis from Cox Automotive UK highlights dealers are not yet out of the woods. Vehicle supply, consumer demand and efficiency issues were all cited as challenges to profitability, while the changing powertrain mix is also playing a role.

Most respondents to the survey, which represents the views of independents, franchises and industry commentators, stated margins would remain the same or compress further in 2020. Fewer than one in five (18%) expressed optimism that margins would improve in the coming 12 months. However, three fifths believe business confidence will improve, setting the scene for more positive conditions in the medium term.

Philip Nothard

Philip Nothard, Customer Insight & Strategy Director at Cox Automotive, comments: “With so many political and economic influences outside of the dealers’ control, it is no wonder 2019 proved to be a year of fluctuation in both the new and used markets. Supply constraints drove strong used prices and market conversion rates, but the increase in costs, reduction in efficiencies and challenge of falling consumer confidence saw margins come under increasing pressure.

“Over the coming year, we expect to see further merger and acquisition activity, as well as investment in technology and data insights to allow dealers to take greater control of their process efficiencies and potential for profitability. However, despite bounce backs following the recent election and political decision-making, the road ahead remains uncertain. It is no surprise that most of the dealers in our survey are wary about what 2020 has in store.”

FRANCHISED SECTOR

Nothard has singled out three key areas which he expects to impact upon franchised retailers in 2020: (1) the push to significantly increase EV volumes in light of CAFE regulations; (2) the outcome of the FCA consultation into DiC (difference in charges); and (3) the network strategy from OEMs, leading to further consolidation and shrinkage in the market.

EV volumes
“As manufacturers seek to minimise the impact of CAFE regulations, among other environmental legislation,” comments Nothard, “we can expect to see further pressure on retailers to deliver a step change in EV sales. SMMT data shows significant growth in this area (from a relatively low base point), but retailers and manufacturers will need to go up another level to meet the stringent incoming targets and reduce the potential for fines.”

Nothard continues: “In addition, relations between manufacturer and retailer will need to evolve, as investment is required in on-site workshops, training and charging facilities to suit the new powertrains. Who foots the bill for these developments, which are likely to be accompanied by a push for showroom refresh and corporate identity / brand update activity, may well become a matter of contention in some networks.”

 

FCA DiC
The FCA Consultation into Discretionary Commission closed 15 Jan 2020, with results expected in the Spring. However, argues Nothard, “whatever the specific outcome, it is clear some dealers will need to rethink their finance model. Transparency in commission disclosure, the reduction in types of acceptable commission and the banning of commission linked to interest rates will all have an impact.”

Nothard adds: “In reality, however, many dealerships will have already made changes. FCA intervention of this level has been on the horizon since 2016. For many, the impact will come in levelling out the playing field around finance, pushing dealers to shift their emphasis from pricing back to customer service when it comes to differentiating the purchase experience.”

Network strategy
The past 12-18 months have already seen significant changes to the networks of many OEMs, with consolidation, disposal and acquisition activity at high levels. Nothard comments: “Manufacturers are seeking to futureproof and position their retail operations for the changing customer demand cycle and updated vehicle mix.

“In many cases, this has led to a strategic reduction in network footprint to improve sales per outlet and profitability potential. In the short term, however, with investment required in Commission & Incentives, the in-store retail environment and network competitiveness, it is likely that individual outlets will see their operational costs increase.”

Robin Luscombe, Managing Director, Luscombe Suzuki & Mitsubishi Leeds, adds: “The CAFE regulations, consumer confusion over EV, new car supply, and increasing cost of new cars will suppress used car stock availability.”

INDEPENDENT SECTOR

For the independent sector, Nothard has identified three linked areas which are likely to have an impact in 2020: (1) competition for retail-ready used stock with the franchised sector; (2) inability to benefit from economies of scale; and (3) increased third party and aftermarket costs.

Franchised competition
Nothard comments: “Dealer part exchanges are not making it to the auction halls quite so often and we’re seeing more consumers selling, rather than part exchanging, their old car before buying new – or even used because the wait times are often long. Overall, this is likely to push dealers, particularly independents, into a position later in the year where good quality used stock at reasonable prices becomes harder to acquire.”

In addition, David Bilsborough, Proprietor at Cheshire Cars, suggests: “Margin stability is dependent on the supply and demand of the used car market. The increasing age and mileage due to retention has a direct impact of reconditioning costs and therefore profitability. In a market of ‘price indicators’, retail competitiveness is ever increasing.”

Economies of scale
While manufacturers and franchised dealers are reshaping their networks to boost sales per outlet and overall profitability, the opportunities for independents to make sweeping changes are not so prevalent. Nothard comments: “It isn’t a new phenomenon, but the lack of shared resource and multi-site cost sharing will likely present even more of a challenge for independents in the coming 12 months, as other external pressures start to bite.”

In this context, Stephen Brighton, Managing Director, Hepworth Motor Group, suggests: “Process will improve but margin pressures will pull it back to roughly the same as 2019.”

Third party costs
The increase in demand for third party services and aftermarket repairs is leading to a corresponding rise in costs for the independent sector. Nothard says: “With cars becoming increasingly complex and reliant on technology, the cost of servicing and individual components continues to increase. This is likely to disproportionately affect the independent sector, leading to higher pressure on margins, delays in securing ‘retail-ready’ stock and a reduction in ROI.”

OUTLOOK

Although sentiment is erring towards the negative end of the spectrum, Nothard argues there are signs of optimism in the market. He comments: “Many of the dealers in our survey feel that business confidence is on the rise, while there is plenty of investment in new models and technologies coming to market. Plus, the Government’s latest announcement about bringing forward the ban on petrol and diesel models, and the anticipated inclusion of hybrid within this scope, will certainly have an impact.

“While challenges around supply, demand, finance and competition are always present, most dealers will already have risk mitigation strategies in place. We expect dealers will experience a challenging 2020, with ongoing pressure on margins, but there are plenty of opportunities for investment and even growth.

“Indeed, the recent Consumer Confidence Index dropped to -9 in January from -11 in December and -14 in November. The last time we were below double-digit was September 2018. With the rise in consumer confidence, we hope to see positive outcomes reflected in the automotive sector.”

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