the piece of land that your business occupies may well be more
valuable than the business itself.
You might even think that, with the profit margin on each car
you sell getting thinner each year, it would perhaps be wise to
cash in on your site, throw in the towel and go fishing
instead.
Indeed, it is more likely to be decisions like the scenario above
rather than bankruptcies that will drive down the number of car
dealerships in the UK, says the latest Ernst & Young (E&Y)
report on the auto retailing business, released last month.
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With the road ahead looking bumpier as predictions for slower
economic growth become reality, E&Y has dubbed 2008 a year that
“promises to be one of the toughest of the last decade.”
“A year ago everyone was saying the market for new cars in 2007
was going to shrink but that didn’t happen. It actually increased
so does that mean that dealers had a good time in 2007? The answer
was no – it was actually very tough,” says Eric Wallbank, director
of Automotive at E&Y.
The formula for sustainable profit in car dealerships, according
to E&Y’s analysis, appears to be a combination of size,
location, hawking the right brands and having diverse sources of
revenue.
As the report points out, last year’s 2.5 per cent increase in
new car sales did not benefit every dealer. To a large extent,
dealers who reported higher sales were those that sold Minis,
Audis, Land Rovers, Vauxhalls and Hondas. Except for Vauxhall,
these brands gained market share after refreshing their product
line-up.
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By GlobalDataOn the other hand, brands such as Jaguar, Renault, Kia and
Hyundai suffered losses in market share owing to their dated
product range.
In assessing the large and ‘mega’ dealer groups, E&Y notes
that on the whole, this segment demonstrated consistent
profitability with a number of groups maintaining operating margins
of about 2 per cent.
In contrast, of the 680 small and medium dealers in the UK, only
half were profitable last year.
Generally, large dealer groups had the advantage of scale and
the funds to develop related businesses with higher margins than
those of dealerships.
Although the highly fragmented UK market would suggest
opportunities for greater mergers and acquisitions (M&A)
activity, the number of M&A deals last year actually fell.
E&Y pins the problem on the integration challenge,
post-acquisition as in the case of Pendragon’s buy-out of Reg
Vardy.
As a result, acquisitive groups may prefer to target independent
dealerships in strategic locations or franchises rather than large
dealers. Of course in any highly competitive industry, market
forces will weed out weaker players and it has been no different in
auto retailing, Wallbank says. But considerably, real estate values
have had a role to play in causing the numbers to dwindle.
“Part of the trend here is car retailing moving out of town
centres towards the edge of cities so if you’ve got a good site
that’s close to a city centre it might be attractive for retail or
housing. You can realise a lot of value from the sale of the
property and that may be more than running the business as a going
concern,” Wallbank says.
See Riding out the economic storm for more on the
dealer sector
Motor Finance Issue: 42 – April 08
Published for the web: April 23 08 12:37
Last Updated: April 24 08 15:13
