Business Planning for Motor Dealers Facing Brexit
National Economy/Trends and Outlooks
Whilst the local economy in which a dealer operates and the franchise it has may perform very different to the national economy, national trends and outlooks are likely to be a good basic economic indicator.
The November independent forecast for 2017 complied by the Treasury reports the following economic indicators:-
- GDP (1) growth: 1.1% versus 2% for 2015
- CPI (2): 2.7 versus 1.3% for 2015
Both indicators report a deterioration in the economy. Are these indicators aligned with current sector opinion and your budget assumptions?
New Car Volumes
The SMMT’s recent new car registration forecast for 2017 reports a 5% decline in forecast versus outlook 2016 numbers. For most dealers though, I believe actual dealership registrations will decline further. Whilst the 2017 forecast is favourably impacted by the expected increase in registrations brought about by new B segment model entrants such as the Micra and Fiesta, there is a more significant downside in relation to the pre-registration volume and fleet registration activity that has muddied the 2016 registration numbers. With used vehicle volumes currently tracking at 8% growth year on year, is this indicative of the level of pre-registration in the market place pre the Q3 additional activity?
On a positive note, current consensus of opinion is that the Bank of England Base rate will remain at 0.25% for the whole of 2017 and beyond. This will safeguard continued PCP activity and maintain current pricing, which may come under scrutiny based on current speculation of long term wage stagnation. In addition, due to the weakening of the pound there may be a reduction in the amount of European volume surplus pushed to the UK and therefore registration levels may align to actual market demand levels.
Volume assumptions will need to be considered based on the franchise operated and the level of pre-registration volume carried over.
New Car GPU(3)
As we have recently seen with scrappage schemes and 0% finance deals being offered this quarter, it is likely that manufacturer stimulus and incentives will be required to sustain consumer appetite in 2017. This potentially may lead to less money in the manufacturers’ volume bonus pot and a lower per unit bonus amount being filtered down into dealerships – assuming a unit volume bonus carry-over is unlikely to be correct and may need to be flexed.
The used car market has held up well in 2016 with margins just beginning to slow and see the effects of the increased pre-registration activity. Budget GPUs will need to reflect the potential mix of stock being sold in 2017 and if provisions for yearend pre-registration stocks are not made in 2016 accounts. It will be interesting to see when the impact of the fleet registrations made in 2016 will impact the used car market – if the fleet deals in the last few months have been short-term/buyback deals then this could impact the 2017 used car market.
A potential area for growth in 2017 due to increased new car registrations leading to a growth in carparc numbers and the promotion of service plans. Budget growth rates should be considered against aftersales opportunity figures and retention rates by vehicle age and current workshop capacity; not just be a number that sounds right or balances the budget.
As noted in our recent Dealer Survey staff costs and recruitment are the main areas where dealers expect to see significant increases. In addition to the normal budget considerations of pay rises/holiday pay and minimum pay requirements, commission structures will need to be reviewed against forecast vehicle sale numbers. Larger groups (c. £60m turnover) with a wage bill of over £3m will need to include the apprenticeship levy of 0.5% and small dealerships may still need to adopt auto-enrolment.
Analysts and other stakeholders expect a decline in trading performance reflecting the expected tougher market conditions. This decline is expected to more of a softening of the market rather than a significant downturn, but cash and stocks will need to be managed to ensure the continued success of companies. In some part, the performance of a dealership may more than ever be based on the franchise it holds and how the manufacturers react to market conditions.
What next once you have your budget?
- Consider the cash impact of trading mix, capital expenditure and seasonality of trade – low cost finance is still available assuming risk ratios met.
- Re-run the numbers on different basis (volume, margins, and additional costs such as advertising) and have a plan for certain outcomes – do you have enough working capital headroom?
- Review potential Brexit outcomes and timing considerations in your budget.
- Foreign Exchange: Sterling is expected to now remain stable until the Brexit negotiations start. Will manufacturers look to pass on exchange losses to the customer if sterling falls?
- Trade negotiations: The expected outcome (ETA/FTA or WTO) and success of the negotiations will impact consumer confidence. There is a potential that demand may yo-yo depending on how trade negotiations go.
- GDP (Gross Domestic Product) is the yearly value of all final goods and services produced within a nation and a summary indicator of an economies growth
- CPI (Consumer Prices Index) is an index of the cost of all goods and services (excluding mortgage payments) to a typical consumer and is used as a measure of inflation.
- GPU (Gross profit per unit)
For further information, please contact your usual MHA MacIntyre hudson contact.