Franchised car retailers face will face “a new set of trading parameters that they have not experienced for quite some time” during 2018, according to corporate finance advisors at Duff & Phelps.
Industry analysts at the business said that manufacturers would need to relax franchised agreements and show their support for the retail sector after a final third of 2017 which saw franchisees fall short of their bonus targets.
Duff & Phelps also highlighted the risk of retailers being left liable “what looks like over-priced used vehicles stock” as consumer confidence falters.
Commenting on the uncertainties of the market following the publication of a set of SMMT’s new car registration results which showed 2017 down 5.7% on 2016 Michael Bills, managing director at Duff & Phelps, said: “The recent public statements of the larger motor dealers are of profit warnings and of a softening of used car values. The recent interest rate rise will have a significant impact on an industry where SMMT figures show from that around 85% of new cars were bought using some kind of cheap loan.
“In addition, the depreciation of sterling pushing up prices, the drying up of PPI payments which gave consumers additional spending power, and the blow to consumer and business confidence caused by Brexit has created immensely challenging market conditions.
“The question therefore is how well prepared are manufacturers and their dealership networks to manage what may be the start of a potentially significant downturn?”
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, said Duff & Phelps.
Commenting on the role of the automotive sector in the UK as a whole, it said that the industry accounts for 12% of total UK export of goods and invests £4 billion each year in automotive R&D, with some 169,000 people employed directly in manufacturing and in excess of 814,000 across the wider automotive industry.
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.
Robert Tallentire, of Duff & Phelps, said: “The question is what resources and abilities can the average dealer draw on to confront the challenge.
“Manufacturer franchising agreements are not that flexible, 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.
Despite AM being told that many manufacturers had shifted their dealers targets to offer support to franchise partners through 2017’s tougher months, Dufff & Phelps said 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 not paid at the end of October.
Where dealers have traded outside usual parameters in order to reach bonus volumes, they are potentially now sat on what look like over-priced used vehicles stock, that will be challenging to liquidate and turn into cash it said in a statement.
It added: “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.”
Duff & Phelps said that those that lenders to the sector which 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 SMMT.
Bills said: “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.
“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, recruited from the industry and with real ‘workshop floor’ dealership experience and we 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.”