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  • The car retail market

    I read this on PH and thought it worth sharing, its certainly been on my mind for some time:

    Copied from PH

    This was posted on a motor trade forum a few weeks ago by a user called Talisker (would like to give credit where it is due!). It was so accurate that it was used an article in the trade paper Automotive Management.

    It will hopefully serve to explain some of the points raised in the 'dealer closure' thread:

    'The retail motor trade is about to go through the toughest period of trading certainly in living memory, probably longer.

    The fundamental problem lies in the business model that retail networks have been operating under since cars were invented. Manufacturers and their importers have compounded the flaws in that model in the last 10-15 years with some of their ambitious network strategies.

    The problem starts with new car trading, which for most dealers is marginal at best, loss making at worst. Today new car trading is only profitable (just) by hitting bonus thresholds. So the first problem is hitting target, normally achieved by self registration. This places a huge working capital burden on the business.

    Dealers have been able to sustain this through easy access to cheap cash with the support of a buoyant nearly new market. New cars were converted into used cars that sold at a reasonable rate, thus enabling dealers to liquidate the stock before it became a problem. This was all underpinned by stable used car depreciation rates.

    Nearly new sales take up valuable used car display spaces and yield lower margins than a true used car either as a part exchange or bought at auction. Dealers finding that nearly new were an easier sell than a true used car then started filling their sites with them, eroding used car contribution levels.

    The steady decline in new and increasingly used car margin was offset by the service absorption philosophy and a substantially inflated new car market, driven by manufacturer over production and cheap and easily obtained credit.
    Manufacturers have helped keep this model going by reducing the size of their networks, thereby increasing the throughput to compensate for the margin. Manufacturers drive to own sites is another clear indicator of this central viability issue - they have had to make the investment as dealers have been unable to get the numbers to stack up.

    Unlike many other retail businesses, a £20m turnover, 1% margin business remains a 1% margin business even if its turnover increases to £40m. Even if the absolute bottom line profit goes from £200,000 to £400,000 there are no economies of scale.
    You can only paper over the cracks for so long. We have now reached a tipping point and the world is about to change forever.

    New car margins have been trending downwards for a number of years. As a consequence labour rates have been artificially driven up to compensate. At the same time, aftersales revenues have been declining as 1. cars have become more reliable, 2. service intervals are increasingly getting longer, and 3. customers are discovering they can get service and repair work done cheaper outside the franchise and keep their warranty intact.

    There is now a widespread cancer of - lower service throughput, leading to higher labour rates to compensate, leading to lower throughput, leading to higher labour rates. A vicious cycle.

    The new and used car markets have virtually stopped as a consequence of the ‘credit crunch’. There is now a general lack of liquidity across the board. Getting hold of cash for business or individuals is now much harder and when it can be found, it is no longer cheap.

    Dealers now have substantial, rapidly devaluing used car stocks that they cannot got out of easily or without taking a substantial and potentially unsustainable loss. This blockage in used car stock turn is impacting on new car trading by tying up working capital and as a result stopping dealers either giving viable trade in values or being able to take part exchanges.
    This is also reducing dealers’ ability to respond to manufacturer encouraged self registrations.

    So dealers either have to start drawing on reserves probably severely depleted by property investments or attempting to borrow more to keep their heads above water just at a time when banks want to limit their exposure. Manufacturer finance houses ability to help has also diminished as they struggle with liquidity problems of their own.

    The solution? Some starters for 10;

    Manufacturers need to produce less cars and have to stop producing cars willy-nilly, dumping the problem on the dealer forecourt.

    A new business model needs to be created that enables a dealer to make a sustainable profit from new car trading (bonus has to be the icing on the cake not essential for making a profit).

    Premises investments need to be brought back down to earth ie mega brand centres for the big players, multi-million investments for 3% market share brands have to stop.

    The cost of repair and servicing needs to be reduced for customers ie labour rates over £100/hour have to be seen as a sign of failure, just as most now see 2 and 3 week service lead times as such.

    Workshops need to be on lower cost industrial locations and not on high cost retail sites.

    Manufacturers will need to stop being greedy with parts pricing. Why should a customer buy a headlight in a branded box for twice the price of exactly the same unit in a Hella or Bosch box?

    Will all that happen? Manufacturers will probably say - never, dealers will say, manufacturers will not do that in a million years.
    Here's a forecast – the total market will not exceed 2m cars for over 10 years. 2009 will be closer to 1.5 and will only be above this as manufacturers get rid of current stock.

    So manufacturers will be forced to address these fundamental issues or they will not have viable networks. They'll have no choice.

    AM ran an interesting article not that long back about a Vauxhall dealer who kept the service franchise but also kept selling used cars - making a fortune - why - because they didn't have a drag of new sales and as a result could get their service pricing down to competitive levels.

    The solution is simple - scrap the current business model and get a new one – fast.'

  • #2
    long reading for me LOL
    MB E63s AMG
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    • #3
      Interesting read. It'll be interesting to see how things change in the car market over the coming years.

      AM ran an interesting article not that long back about a Vauxhall dealer who kept the service franchise but also kept selling used cars - making a fortune - why - because they didn't have a drag of new sales and as a result could get their service pricing down to competitive levels.
      So are you going to start selling used cars then John?

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      • #4
        Get a "new business model", That is easy to type , if it were as easy to do I think they would have done it a long time ago !! What is the new business model, well thats the multi-million $$$$ question !!!

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        • #5
          Tis a fair point, although the author clearly has experience in the market from his comments.

          We've put together what we think is a good model but it needs investment and thats not exactly falling off trees at the moment.

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          • #6
            Originally posted by Bainie View Post
            Get a "new business model", That is easy to type , if it were as easy to do I think they would have done it a long time ago !! What is the new business model, well thats the multi-million $$$$ question !!!
            You'd be surprised at just how much of business is common sense, sometimes those involved can't see the wood for the trees.
            Nova 1.6 16v TB's DTA 1/4mile 14.8s

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            • #7
              Originally posted by Phazer View Post
              You'd be surprised at just how much of business is common sense, sometimes those involved can't see the wood for the trees.
              correct some people see more ££££'s in a sale as opposed to a quick turnover at a reasonable price!

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              • #8
                Originally posted by MagicDust View Post
                correct some people see more ££££'s in a sale as opposed to a quick turnover at a reasonable price!
                As they say 5% of something is better than 95% of f*** all!

                The problems start with these incentive schemes. The well meaning manufacturer wants to give the dealer a reason to help them out, hence the bonus payments for new car sales. This keeps the factory churning out cars, keeps them solvent and people in employment.

                The dealer cottons on to this then slit's his throat to get bonus which wrecks the trade in market.....and round again.

                Everytime you introduce an incentive people will find the shortcut to exploit it and it will never work quite as intended.

                The NHS got the operation waiting lists down to government limits by not adding patients to the list until they had been seen by their consultant - which might have taken 2 years and then a four month wait on the 'offical' list. Net result? The patient still get's no better service but the hospitals appear to be performing better against government metrics

                All fun and games eh?
                Nova 1.6 16v TB's DTA 1/4mile 14.8s

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                • #9
                  Originally posted by Phazer View Post
                  As they say 5% of something is better than 95% of f*** all!

                  The problems start with these incentive schemes. The well meaning manufacturer wants to give the dealer a reason to help them out, hence the bonus payments for new car sales. This keeps the factory churning out cars, keeps them solvent and people in employment.

                  The dealer cottons on to this then slit's his throat to get bonus which wrecks the trade in market.....and round again.

                  Everytime you introduce an incentive people will find the shortcut to exploit it and it will never work quite as intended.

                  The NHS got the operation waiting lists down to government limits by not adding patients to the list until they had been seen by their consultant - which might have taken 2 years and then a four month wait on the 'offical' list. Net result? The patient still get's no better service but the hospitals appear to be performing better against government metrics

                  All fun and games eh?

                  it's just a numbers game!

                  The government are the worst offenders and are pulling us down even further, but what do we do, keep backing them or back the next party that done **** all for us in the 80/90's when times were hard??

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                  • #10
                    end of the day greed has got us in this mess

                    Rabbid Tuned - WG Motorworks
                    www.wgmotorworks.co.uk

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                    • #11
                      the car makers should just produce a working stock i.e. enough for showroom floors and then build to order, they should also ignore incentives to stay in a country and move the production to where it is the cheapest, why make cars in germany, uk, spain etc when they could get labour at half the cost by moving east to the likes of romania, estonia etc..... and labour is where alot of the cost comes from

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                      • #12
                        Originally posted by hutch924 View Post
                        the car makers should just produce a working stock i.e. enough for showroom floors and then build to order, they should also ignore incentives to stay in a country and move the production to where it is the cheapest, why make cars in germany, uk, spain etc when they could get labour at half the cost by moving east to the likes of romania, estonia etc..... and labour is where alot of the cost comes from

                        thats when major job losses occur here hutch and the reason why the government inject these companies with incentives.

                        you need to keep your country employed or the country doesnt make money as there is no revenue.

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                        • #13
                          A lot of this "jargon" is lost on me as i suspect it will be on many of us, it starts to make more sense to me after "starter for 10"

                          I dont think we should feel too sorry for the dealerships in this current climate since they have been living off the fat of the land for many many years.............not a personal dig at any particular dealership, its just the way it has always been................The British public get a pretty raw deal when they buy a new car..no matter who the dealer is.

                          I appreciate that the article is pointing out that there are seriously lean times ahead and that it will effect everyone in the business of buying or selling cars.........trade in values included.Its not the ordinary man in the street that has caused this situation but unfortunately its them that will suffer most through lost jobs, higher cost of living etc etc.

                          My personal solution...........ill hang on to my car a bit longer than i intended and wait for things to get better,incidentally the financial people ive been speaking to recently say things are going to deteriorate well into the new year
                          Son of the Clyde a roaming went
                          Sinned aplenty, much to repent
                          loved and lost, gave and took
                          Way too lazy to write a book.sigpic

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                          • #14
                            Originally posted by Red Rooster View Post
                            A lot of this "jargon" is lost on me as i suspect it will be on many of us, it starts to make more sense to me after "starter for 10"

                            I dont think we should feel too sorry for the dealerships in this current climate since they have been living off the fat of the land for many many years.............not a personal dig at any particular dealership, its just the way it has always been................The British public get a pretty raw deal when they buy a new car..no matter who the dealer is.

                            I appreciate that the article is pointing out that there are seriously lean times ahead and that it will effect everyone in the business of buying or selling cars.........trade in values included.Its not the ordinary man in the street that has caused this situation but unfortunately its them that will suffer most through lost jobs, higher cost of living etc etc.

                            My personal solution...........ill hang on to my car a bit longer than i intended and wait for things to get better,incidentally the financial people ive been speaking to recently say things are going to deteriorate well into the new year
                            Now, now jargon implies wording used to baffle those not in the 'set'. That is not true, there's nothing in the article or the replies that is intended to exclude anyone

                            'Tis true that the average joe will lose out. We always do, I suspect the finance bods you've spoken to will be right. I think we need a period of rock bottom to sort a few distorted things out and also start the fighting spirit to get back on track (if that urge/instinct still exists in this country?).
                            Nova 1.6 16v TB's DTA 1/4mile 14.8s

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