15 July 2022

The UK inflation rate is currently 9.4% but the Office for National Statistics estimates this could increase to 11% by the end of 2022. This creates challenges for all businesses as they seek to set prices, negotiate contracts, manage cash and plan for the future. Business projections can be out of date in a matter of weeks.

The greater risk is underestimating the cost base and related cash requirement. This can lead to trading losses and in extreme cases the business can run out of cash leading to terminal insolvency situation. Projecting based on a single changing rate is challenging enough, but as we have seen each major category of spend has its own rate of inflation and, in the case of fuel and energy, this can be eye watering.

BDO is keen to understand how motor retailers are tackling this challenge and therefore our ‘bonus question’ as part of the recent Auto Retail Network Barometer was “What is the highest level of inflation you have planned for in your business this year?” in relation to staff, energy, transport and finance as well as an overall figure.

Staff costs: Irrespective of your preferred measure, by most definitions the UK is at full employment, putting power into the hands of employees. With cost-of-living increases and the motor retail sector having reported record profits, businesses should be primed for some challenging conversations with employees and the potential for some movement in the recruitment market.

Over two thirds of respondents are planning for wage increases below 7%. While this sounds generous it still represents a real cut in take home pay. Only 2% are projecting staff costs to increase by more than 10%.

Energy costs: Some 56% of respondents are forecasting energy costs to have increased by more than 10% in 2022. While this is not a surprise, the interesting point is the 44% are still planning on the basis of a less than 10% rise. As a rule of thumb, we would expect projections to start by doubling energy costs from last year and then seek ways to mitigate.

We recommend retailers develop an energy efficiency strategy across all premises and review the steps that can be taken to reduce consumption or move to more cost-effective generation methods. The article in June’s Bulletin by Mike Davies would be a good place to start that journey.

Overall: The majority of respondents are expecting overall costs to rise by more than 7%. This is encouraging but is still some way below the 11% inflation rate forecast by the ONS. On a £1m cost base this could see unbudgeted costs of £40,000 hitting P&Ls in 2022. Even at £2k PPU for used cars that’s another 20 cars to sell just to stand still.

In times of rising costs, we always recommend that businesses take a number of key actions now:

• Prepare a detailed budget and review the cost base and contracts regularly (this is no longer a once-a-year exercise for budgeting) and make changes promptly
• Eliminate waste and inefficiency wherever possible through questioning processes and exploring new ways of doing things. New technology can help enormously.
• Stop doing those activities that are not adding value to your customers or bottom line
• Get back to basics. Businesses with exceptional client service have always performed well. Where market share is important you are competing with the dealership next door, not just the comparable brand
• Maximise cash flow

Author Kevin Lamb is managing director – advisory at BDO. The Auto Retail Network Barometer was conducted in partnership with BDO

Tags: Auto Retail Network, Barometer, BDO, business costs, Kevin Lamb, survey