BUSINESS STRATEGY 2021 AND BEYOND
Identifying the key trends driving business transformation
The impact of COVID-19, Block Exemption, and vehicle funding on the automotive supply chain
Responding to COVID-19
In the UK during the early summer lockdown, Cox Automotive asked dealers about their greatest concerns for their business. The top ranked response was the health of employees and customers, followed by cash flow, reduced sales volumes, fear of a recession, and risk of further lockdown measures. Many of those responding had taken advantage of the furlough scheme; all were physically closed; but some had investigated click and collect or online retail options where permitted. These responses indicated dealers were focused on both the health of their staff and the survival of their business. Indeed, a shift into survival mode was the anticipated immediate reaction across businesses in all markets.
A few months later, in September 2020, the same question was asked. This time round the top five responses were a slowing economy, reduced sales volumes, risk of further regional lockdown measures, the health of employees and customers, and cash flow. By September, cash flow in dealerships was strongly aided by continued government support, plus rental and mortgage holidays. This benefited both their own businesses, as well as generating pent-up demand and the desire to purchase both new and used vehicles. Dealers’ business strategies understandably changed from survival mode to bringing back as many staff as possible to meet the sales and aftersales demand.
As this report is launched to market, the industry is facing further challenges as the Government introduces new COVID-19 rules. In both previous surveys, issues around reduced sales volumes and cash flow loomed large and it is likely they would feature in the top five if the survey were repeated, as would uncertainty around what is to come next for both COVID-19 and Brexit.
Recent automotive roundtables hosted by Grant Thornton suggested many companies have benefited from government support e.g., furlough schemes and VAT payment postponements which meant that cash flow was looking healthy for the automotive retail sector. However, if the R rate for COVID-19 continues to increase, or the shortage of in-demand vehicles in the market continues, then the long-term viability of some dealers may be questionable.
Indeed, the risk is that, as the general economy slows due to COVID-19 and Brexit, consumer confidence and retail demand could wane. The sales of vehicles and aftersales hours and parts could slow. Costs may start to increase with the ending of rent and mortgage holidays, and with VAT payments starting up again, businesses may be left with weaker cashflow. Cash reserves built up over the third quarter of 2020 will decline. At this point the key strategy for businesses is to react swiftly, contacting their advisors and key stakeholders if there is the requirement to seek further financial support.
Understanding the possible outcomes
Within this report’s market forecasts, several possible outcomes have been outlined: high, medium and worst-case scenarios. Therefore, the team at Grant Thornton recommends that several short-term business plans are generated to account for each possible scenario. Such consideration enables businesses to review the robustness of their financials and the certainty of their cashflow position. Additional information regarding the possible scenarios can be found in the Market Forecasts and Projections section of this year’s report. Alongside planning for the end of 2020, automotive businesses should be reviewing their strategies for 2021.
NFDA summarises the dealer return to work experience
- In the used sector, 83.2% of dealers saw a larger volume of online enquiries and 55.45% saw an increase in online used car sales. By August, 84.9% of dealers had seen a further increase on online enquiries for used vehicles, with 74% seeing an increase in conversions from enquiries.
- In July, nearly three in four dealers said more customers were booking appointments prior to visiting. By early August, a third (37.8%) of respondents had seen an increase in footfall for used cars, up to 25% higher than pre-lockdown.
Review the full results of the NFDA Post-Lockdown Automotive Retail Survey [opens as PDF]
and NFDA Post-Lockdown Automotive Retail Survey – August [opens as web page].
Business strategy additional considerations: Block Exemption
While COVID-19 has topped the agenda for many, other factors such as Brexit, CAFE Regulations and Block Exemption are starting to raise questions. How will they impact automotive markets and how will this change companies’ strategies in the coming month and years?
What might the case between Peugeot Austria (PSA) and one of its dealers, Buechl, in the Cartel Court mean for competition in the EU – and the UK? While action is ongoing and the final decision is awaiting an appeal hearing, most commentators are clear that relationships between manufacturers and their dealer networks will likely come under the spotlight in coming months (NFDA, 2020).
Key areas for manufacturers and dealers to consider in regards to future competition:
- Obliging dealers to participate in manufacturer-determined price campaigns
- Linking payment of dealer bonuses to manufacturer-managed customer satisfaction surveys
- Passing on the cost of ‘mystery shop’ exercises to the dealer
- Applying excessively aggressive and complex sales targets at artificially high levels
- Setting workshop rates for guarantee and warranty work at unprofitable rates for the dealer
Review the NFDA and TLT LLP analysis of the PSA vs. Buechl case from June 2020 (opens in new web page).
Business Strategy additional considerations: Vehicle funding
While many dealers have taken advantage of financial support from government over recent months, there has also been assistance from financial providers and the captive finance companies. Several captive finance companies have extended vehicle stocking terms; for example, NextGear Capital has allowed dealers to retain units on its stocking plans longer than it ordinarily would. If the car or van couldn’t be sold, funders shared the burden by extending the stocking terms. Similar initiatives took place across the NextGear Capital network in the UK, US, and Canada.
Demand for cars has remained strong. Some consumers have found themselves with higher available disposable income, as they have not been on holiday or paid to commute. With the return to work, people have also looked to avoid public transport due to the risk of catching COVID-19 and have preferred to go to work in their own car. The demand for LCVs has remained relatively strong and this can be attributed to increased online sales as consumers under lockdown have switched their purchasing from 'bricks to clicks' to remote retail. However, with continuing uncertainty in the market and further restrictions, it is possible the winter months will see ongoing impact on dealers.
The Bank of England has reduced the interest rate to 0.1% and there have been comments from some quarters that interest rates could become negative. Low interest rates or negative interest rates would encourage even more borrowing in order to stimulate the UK economy. However, this could also make borrowing for a new vehicle cheaper for both consumers and dealers investing in the vehicle stocking process.
A View from Liam Quegan, Managing Director at Manheim Auction Services and NextGear Capital
“Throughout the pandemic, we have prided ourselves on supporting our dealer base by providing financial relief and enabling vehicles to stay on plans for longer. After the initial lockdown restrictions lifted, dealers were able to take advantage of a buoyant market with pent-up demand, ultimately trading out of over-aged stock.
“Utilising funding options available to maintain cash flow has never held so much importance. In times of uncertainty, building cash reserves is key, and funding providers can help take the burden of cash tied up in stock. Market uncertainty is inevitable right now, and peace of mind is a valuable commodity.
“My main advice to people is prudency. Make sure you are careful about your business model. We are here to help and will continue to do so. We hope the market can remain positive, however, we know it ebbs and flows and that government support will not always be there. Dealers need to make sensible choices and invest to grow – but carefully.”
"In the short term, a company’s strategy should include a rolling three-month business plan to highlight any immediate issues in funding and cashflow. Companies also need to have a strategy on keeping key stakeholders fully informed. Any issues with cashflow should be addressed with an advisor and the key stakeholders as early as possible. Key stakeholders could include banks, vehicle asset financing companies, national sales companies, and captive finance companies."
Owen Edwards, Associate Director, Grant Thornton
NFDA summarises the dealer return to work experience after the first national lockdown (NFDA, 2020) (NFDA, 2020)
- Many dealers (75.2%) reopened on 1 June 2020, bringing people back to work in response to the levels of customer demand. By early August, most dealers (86.5%) had reopened all dealerships.
- Almost all dealers (98%) who responded to the survey used the Government’s Coronavirus Job Retention Scheme. By early August, two fifths (43.2%) of dealers had brought back more than 75% of their workforce.
Review the full results of the NFDA Post-Lockdown Automotive Retail Survey June and July (opens as PDF) and NFDA Post-Lockdown Automotive Retail Survey – August (opens as web page).