Motor Retail Market Performance September and October 2017
The analysis carried out below has included data from Mike Allen of Zeus Capital, SMMT, BBC, 2017 our own MHA Motor Survey, Cap HPI and Motorway.
The new car registrations from The SMMT (Society of Motor Manufacturers and Traders) for September 2017 of 426,710 highlights a decline of -9.3% compared to 2016 new car registrations, and the first time there has been a decline in new car registrations for September in six years. Private registrations were -8.8%, with fleet also showing a decline of 10.1% YOY representing 47.0% of registrations vs. 47.5% last year.
October 2017 figures of 158,192 registrations highlights a decline of -12.2% compared to 2016 new car registrations. Private registrations were -10.1%, with fleet also showing a decline at -13.0% YOY representing 53.1% of registrations vs. 53.5% last year.
The 21.7% and 29.9% decline in diesel registrations for September and October (and the trend throughout Q2) can be attributed to the uncertainty over government clean air policies, which appears to have discouraged consumers and businesses from buying new diesel vehicles. This is also supported by the growth of alternatively fuelled vehicles (AFV) growing by 41.0% in September and 36.9% in October.
Current year to date new car registrations are 4.6%, with Diesel registrations declining by 14.9% as both Petrol and AFV have grown by 2.9% and 34.8% respectively.
This is the first-time registrations have declined in September since 2011 (-0.8%). Mike Hawes, SMMT chief executive commented:
“September is always a barometer of the health of the UK new car market so this decline will cause considerable concern. Business and political uncertainty is reducing buyer confidence, with consumers and businesses more likely to delay big ticket purchases. The confusion surrounding air quality plans has not helped, but consumers should be reassured that all the new diesel and petrol models on the market will not face any bans or additional charges”.
Within the mix, private registrations were -8.8% in September with fleet -10.1% and business -5.2% and October private registrations -6.4%, fleet -3.0% and business -3.4%. The weakness in private registrations points to increased uncertainty from the consumer and a potential sustained deterioration in consumer demand along with supply issues emerging as a result of the weakened currency (pound sterling). The pattern of prestige brands outperforming volume brands continued in the period although registrations were down across almost all the major brands with key performances including premium brands such as Audi (-4.8%) and BMW (-3.5%) along with volume brands such as Ford (-19.1%) and Vauxhall (-25.5%) in September.
Used vehicles: Used diesel vehicles residual values have been affected by the governments imitative of improving air quality and reduction of pollution. Data from Motorway.co.uk illustrates the average value of diesel variants of the most popular car models has fallen by 5.7% between the first and third quarter of the year from £4,581 to £4,318.
Three of the top 10 selling models for the year to date being the Vauxhall Corsa, Vauxhall Astra and Audi A3 has seen their values erode. The Vauxhall Corsa saw a fall in value by over a quarter (26.3%) since the start of 2017, falling from £2,160 to £1,592. The Vauxhall Astra also fell by an average of 17.7% from £2,949 to £2,426 over the period, while diesel Audi A3 models fell by 11.3% from £5,373 to £4,766.
Conversely a number of used petrol vehicles have seen their respective value increase as a result, with examples being (and not limited to) the Ford Focus, Audi A3, Volkswagen Golf and Nissan Qashqai.
Cap HPI have expect used car value movements to remain relatively stable for the next five years, despite the above. Diesel values are forecast to erode more quickly than petrol values, particularly for smaller cars, until the balance of used cars supplied is switched to petrol.
Values are expected to vary because of the shift in the balance of supply and demand, influenced by Brexit and the clean air debate, but movements should be gradual and predictable according to Cap HPI’s Gold Book forecasts.
It is clear that Q3 trends in the new car market in the UK have deteriorated further following a difficult Q2. From a demand side perspective, consumer confidence appears to have softened in recent months against a backdrop of increasing political and economic uncertainty. Conversely in Europe new registrations have increased (August ACEA data was +5.6% YOY and is currently +4.5% YTD).
Forecasts and valuation
The current decline in profitability and earnings across the sector appear to be due to the current political and economic uncertainty in the UK. Balance sheet strength across the sector is generally robust, and there is likely to be further consolidation activity as smaller operators become more distressed in our view.
In light of the decline in new car registrations respected news outlets have commented on political events being the main driver for the reduction of acquisitions made in 2017.
Balance sheet strength across the sector is however generally robust and is stronger than balance sheets of 2007, and there is likely to be further consolidation activity as smaller operators become more distressed.
Domestic transactional activity has slowed down in both volume and value for 2017 compared to 2016, with Marshalls and Vertu especially demonstrating a less acquisitive appetite in 2017. A notable trend emerging is in the form of foreign investment from North America (Group 1 Automotive and Penske) and particularly South Africa, with SuperGroup and Imperial entering the UK marketplace, with their recent acquisitions of SMC and Pentagon respectively. Interestingly the combination of a commercial vehicle operation (Imperial) and a pure motor retail operator (Pentagon) could point toward acquisitions of a similar nature in the future.
Group 1 Automotive have continued expanding with the acquisition of Beadles Group, growing their brand portfolio to 12 in the UK, along with Penske acquiring Car Shops UK in 2017.
As political and economic uncertainty in the UK continues to impair consumer confidence, the growth in the UK motor sector in previous years through to Q1 this year has been replaced by declining revenues in Q2 and Q3 and a more pessimistic outlook for the sector. Larger dealer groups, including the foreign operators, are likely to continue to seek ways to expand through acquisition by consuming smaller and distressed operators. The operators impacted by declining revenues are also increasing their focus on reducing costs, to protect earnings. In these uncertain times, the support that manufacturers are providing to the motor retail groups becomes increasingly important, with the recent scrappage schemes being a good example of this.