15 July 2022

The recent economic challenges and the industry headwinds have seen a dramatic change in sentiment among retailers for the coming six months. Outlook on the economy is now overwhelmingly negative, with 72% believing it will be down in H2 – a marked swing from a level outlook in December.

Further, the view on the new car market and the numbers of registrations is again overwhelmingly negative, with 73% of retailers believing H2 new car registrations will be down. Six months ago, the view was only just balanced to the negative, at 38% versus 28% who thought it would be flat and 31% who believed the market would be up.

These are some of the key findings of the latest Auto Retail Network Barometer survey, conducted in partnership with BDO. And all of this has translated into concerns about the profitability of the business, with almost half (45%) believing profitability will be down and the same number seeing it at best as level. Just 10% of retailers saw potential for increased profitability through the second half of the year.

We’ve already seen this reflected in the trading updates from the big PLCs, with Lookers for example reporting that its profitability for the year will be heavily H1 weighted.

Contrast that overall sentiment with the last 12 months where consumer demand was strong: retailers reported making full margin on new vehicles because of the shortages of supply, and used car values were heading up on a daily basis. Now, with consumer demand falling away due to cost-of-living increases and fears over a recession, the market is a whole different ball game.

Bartletts Seat director Richard Bartlett commented: “That fall in demand has come through June. Before that, we were moving along okay. Order take was comparable with the trends of the ‘normal’ years of 2019 and earlier. Based on those trends, we would expect June order take for Seats to be between 12 and 14 cars per week. But this June we’ve seen our numbers hovering around 8-10, and in the worst week it was four.”

The problem is not so acute in the luxury end of the market. Mark Nicholas, head of business at Duckworth Motor Group, which has dealerships for Jaguar Land Rover, said: “The people who come in to buy our vehicles have pretty good disposable income, so the fact that they’re fuel bills have gone up doesn’t stop them buying their new Range Rover at £150,000. We’ve got those customers at that end of the market who are probably not affected.”

Used market decline

Where Nicholas does have concerns is in the used sector where prices are starting to fall. “That’s our biggest worry. We’ve got good new car order banks, but some of the stock that we have that’s maybe three months old has dropped in price considerably. That’s something we’re having to wrestle with – to get out of any over age units.

“At the same time, though, I’m trying to preach a bit of a more positive message, because we’ve still got ambitious budgets to hit. Rather than cutting our used car stock, I’m pushing for us to get more in, because if I’ve got to sell 32 used Land Rovers in a month, I need a stock of 48-50 cars. We haven’t got that stock at the moment because we’ve been focusing on getting out of over-age stock without putting anything in at the top of the funnel. We’ve got to be more positive because we can talk ourselves into a slump if we’re not careful.”

Bartlett is also conscious of the challenges in used, but sees opportunities, particularly in the sub-£12k end of the market. “That’s pretty stable, a fairly safe territory, and we’re even starting to see it make some small gains.”

What he has done, though, is abandon following the guides and rely instead on his own judgement. “If you look at what we’re bidding compared with the book prices, you’d say we’re being very cheeky, but we’re buying with what we think we should be selling at in mind. And we’re buying a surprising amount, and pricing it where we think it should be, which means we can be on the money and have margin left on it.”

It is interesting, too, that the finance companies are reporting that finance penetration in the used car sector is increasing, which will play a key role in supporting the market.

Aftersales performance

When it comes to workshop hours, there was a swing in the survey to a negative outlook, with most saying it will be level in H2 (59%), while 33% believe it will be down. This compares with six months ago where 37% of respondents expected aftersales work to be up.

Views on aftersales performance, however, are somewhat split at different ends of the market. For Nicholas, it seems that while JLR customers are comfortable spending big to buy a new car, they are extending service intervals as much as they are able in order to save money.

In contrast, Bartlett reports increases in retail work of some 30% at both the group’s franchised and independent workshops. “We are getting people who are maintaining and repairing rather than replacing,” he explained. “So we’re doing more three-year-plus services where people are extending their contracts. That’s helping towards absorption to make up for the lack of new car sales.”

Tags: aftersales, Auto Retail Network, Barometer, Bartletts Seat, Duckworth Motor Group, Mark Nicholas, new, outlook, profitability, Richard Bartlett, sentiment, survey, Used