12 January 2023

With the UK looking certain to go into recession in 2022, which the Bank of England forecasts will be prolonged, if shallow, sentiment among retailers over the country’s economic prospects has hit a new low. Some 82% of retailers anticipate that the economy will be down through the first half of 2023, and even those who are more optimistic think that, at best, it will be flat.

Sentiment on new car registrations for the first half of the year has picked up slightly, with 18% of retailers anticipating growth compared with just 7% six months ago, as the supply chain issues that have afflicted manufacturers begin to ease. But this comes at a time when the rising cost of living and the inevitable job security fears that a recession brings could combine to dampen demand, while other consumers are becoming increasingly disgruntled with long delivery lead times. As a result, 41% of retailers are concerned that forced registrations will rise.

These are some of the key findings of the latest Auto Retail Network Barometer survey, all of which have translated into concerns about the profitability of the business, with over half (57%) believing profitability will be down. Just 5% of retailers saw potential for increased profitability through the first half of the year.

Numerous retailers that we spoke to highlighted lack of new car supply as a continuing problem going forward, and while full order books will protect revenue in the short term, there are definite signs of new orders slowing. At the same time, a number of retailers reported that manufacturer targets were becoming increasingly demanding.

Retailers also pointed to problems from the push by the OEMs of EVs, with the manufacturers’ hands being forced by European regulations and individual government mandates. But far from every customer wants an EV, and indeed demand for electrified vehicles has been seen to be softening among retailers as the cost of electricity increases and with the UK government introducing road tax on zero emission vehicles from 2025.

The government’s view is that all drivers should pay a fair tax contribution, but it is a further measure that will give consumers pause for thought when making a decision on whether to go all in with EV now or stick with a more conventional powertrain for a little longer – especially at a time when the cost of public charging is almost on a par with petrol.

The new year also sees the transition to agency agreements for some brands, with retailers somewhat nervy about this uncharted ground – not just for the impact on their own business but also on how it will affect customers. One retailer also pointed to “a naïve brand approach to generating demand”.

As a further issue impacting new car sales, particularly for customers coming to the end of PCP contracts, retailers pointed to problems with the availability and increasing cost of finance making re-signing customers up to new agreements more difficult.

Used car market

The reduced numbers of new cars coming into the market over the last three years will begin to have an even more significant impact on nearly new stock in the used car sector through 2023, and vehicle sourcing is a key challenge for retailers. Numbers of quality trade-ins are falling, and reconditioning costs on older vehicles are increasing.

Retailers are seeing demand softening and the prices customers prepared to pay falling, just at a time when cost of stock is high. They fear being stuck with overpriced, overage stock that they’ve paid high prices for, and having to take a hit on price to turn the inventory.

A number of industry commentators have suggested that the used car market is relatively immune to recession, with consumers who might have been new car customers switching to used, and with existing used car customers trading down rather than deciding to stick. But retailers told us they are experiencing a decline in footfall and a softening of demand.

For those retailers for whom used is the bread and butter, there is also the fear that the dealer groups will increase their focus on the used sector to bolster profitability, or will provide more compelling new car offers that might tempt away customers who would traditionally have opted for used.

Aftersales performance

When it comes to workshop hours, there has been an uplift in optimism for the next six months, which is perhaps not surprising given the focus on aftersales over the last couple of years as a way of growing revenue and protecting profitability.

The number of retailers anticipating that their workshop hours would increase has grown from 8% in the summer to 20% now, while the number expecting this KPI to fall has reduced from 33% to 25%. The balance of 41% of retailers expect their sold workshop hours to be, at worst, flat.

Many retailers told us that their workshops were very busy, and that they were booking franchise work several weeks ahead. They are also benefiting from a focus on selling service plans, particularly as customers look to hold on to vehicles for longer.

However, it is not all good news, with many retailers seeing the impacts of the cost of living squeeze as customers look to put off work on their vehicles to find lower prices at independent garages. There remain, too, issues with the lack of technicians in the market, and the wage inflation that a shortage brings impacts on cost. This is exacerbated as the costs in other areas of the business that continue to rise, particularly energy.

Another issue impacting the aftersales department is a shortage of parts, with a number of retailers reporting waiting on back orders.

Vehicle finance

It is notable looking at the new vehicle deals over the last few months how much the interest rates offered have increased. When we entered 2022 with a Bank of England interest rate of 0.25%, typical new car finance offers had interest rates ranging between 4.9% and 5.9%, along with a scattering of low or 0% finance offers.

The year ended with the Bank of Interest rate at 3.5%, a rise of 3.25%. At the same time, car finance interest rates offered peaked at 11.9% for a Citroen C3, and interest rate percentages in the high 8s and 9s, and low 10s, are increasingly common; so the interest rates on the new vehicle finance offers appear to be increasing at a faster pace than the Bank of England base rate.

A number of retailers reported that this was impacting on the affordability of vehicles, adding pressure as customers came to end of PCP contracts and finding that the monthly price on a new version of the same vehicle had increased significantly. One retailer told us: “Going from previous offers of 0% to over 7% makes it real challenge to keep the customer focused on the payment and not the interest rate.”

Retailers argued, too, that these preset interest rates meant there was a lack of a competitive alternative to supermarket personal loans. Some also reported that customer finance was getting more selective.

With so many retailers pointing out that high interest rates are putting customers off, it is interesting to note that in the finance offers for the new quarter, a number of these deals have seen reduced interest rates. Finance offers with interest rate percentages in the high 8s and 9s and beyond are the exception for the new quarter rather than the norm.

Recruitment and retention

The labour market has long been a challenge for automotive retailers, with a shortage of technicians and problems in recruiting staff to other areas of the business. Automotive is not alone in this, and Bank of England agent for the West Midlands Graeme Chaplin highlighted a structural challenge in the labour market more broadly going forward.

The shortage of people has driven up wage inflation to the point where this now a very real cost pressure for retailers as they focus on retention, while making it very difficult to recruit and retain qualified technicians.

The pressures of staff retention, recruitment and the associated wage costs were common themes among respondents to the Barometer, particularly with inflation so high, although there was some hope that the contracting economy through 2023 as the UK enters recession might help to stabilise wages.

Even so, many retailers still say they are having to combat the lure of other industries on staff – particularly where those sectors tend to be higher payers. To combat staff churn and tackle downturns in morale, retailers are doubling down on internal training support to engage new entrants, while others say loyalty schemes will become key.

Transition to agency

As an extra question in this iteration of the Barometer, we sought to find what impact retailers are expecting on their business from the transition to agency agreements. The vast majority (78%) anticipated that a move to agency would reduce overall profitability, while just 8% believed profits would increase.

Further, looking at new cars specifically, some 76% of retailers believed profitability would suffer, with 11% thinking that, at best, profitability would be flat. While some commentators have suggested that retailers could focus more on the used sector to bolster profitability, only 8% of respondents to the Barometer saw the potential to increase their profits in the used sector, while 35% thought profitability here would actually decline.

When it came to aftersales, the overriding balance of opinion (68%) was that the transition to agency would have no impact. However, 27% of retailers thought aftersales profitability would suffer, while just 5% thought it would increase.

Tags: after sales, Auto Retail Nework, Barometer, economy, forced registrations, new, profitability, staff, survey, Used