Open for business again
Whilst I appreciate that many readers of this blog will be facing quite different conditions, ‘non-essential retail’ reopens in England today, April 12th. (Other parts of the UK have slightly different timetables). This includes car dealers, who have been operating ‘click and collect’ for sales and socially distanced aftersales for over three months now. You might think that dealers and their manufacturer partners are now expecting a ‘cork out of the bottle’ type explosion in car sales, but expectations are actually quite muted. This is not because there are material concerns about a collapse in demand for new or used cars. It reflects the fact that despite closed showrooms, UK dealers have been doing OK over the last few months – in fact, not just “OK” but actually “extremely well” in many cases.
This is not because the UK Government has been shovelling money towards them in order to prop up their businesses. There was some of that in early stages of the pandemic last year, and it was much needed and much appreciated at the time, but some dealers have actually repaid some or all of their support funding early. Their success is based on a combination of a relatively advanced stage of implementation of online channels before the pandemic hit, and a very rapid application of lessons learned during the first lockdown last March to maintain something which in terms of financial results has been close to business as usual over the most recent lockdown. I believe that the strength of their management teams and the presence of group-wide operating models and IT have made a material difference to how quickly and effectively they have been able to respond.
New car UK registration data for the first quarter of 2021 shows a decline of 12% relative to 2020 which was in turn down 31% relative to 2019. However, this largely reflects the huge push that manufacturers used to make in what is normally the largest sales month by far in the UK market. Restricted availability for some models due to semi-conductor shortages and other pandemic-related restrictions resulted in less push and better margins for the whole sector. Amongst the publicly-listed UK dealer groups, Marshalls full year revenue and profit for 2020 were within 5% of those for 2019, with new and used car volumes down by only 5%, both 8%-9% better than the market as a whole. Vertu has not yet reported final numbers, but it seems that although its volume losses may be closer to market levels, profitability has improved significantly, with analysts predicting profits only 2% lower than 2019. Similarly, Lookers has reported single figure percentage declines in revenue, but improved profitability.
The key to this relatively successful outcome has been the adaptions made by retailers, with support from the OEMs in some areas, to the working restrictions. These have been well-received by customers, and given the dramatically lower car usage over the last year, the declines in sales and aftersales volumes could be attributed primarily to a perceived lower need for a car during the restrictions. What is the point in changing your car if you are not travelling to work, and being urged to stay at home where possible, when you have the option to defer that decision by a few months?
Hopefully, we are now over the worst of the pandemic, and will discover what the ‘new normal’ looks like, even if that still includes some degree of caution related to hygiene and social interactions. Some observers suggest that customers will not return to showrooms and that the pandemic has dealt a fatal blow to the traditional car dealer. Some investors certainly seem to think so if you look at the nonsense US$7 billion valuation put on Cazoo, an ‘online’ retailer with 17 physical outlets (at least another 8 planned) that has sold only 20,000 cars in 15 months since launch. To give some context, leading UK dealer group Arnold Clark, sold over a quarter of a million used cars alone during 2019.
The actual pandemic legacy in terms of car retailing is that there have been few casualties in terms of business failures, although a number of newly-found efficiencies have reduced headcounts. Dealers now have readily available options to give customers choice over how they proceed on their buying journey – either from in-house developments or the many new or expanded offers from third party technology providers. Manufacturers have found new ways to enhance their online presence for new cars with virtual showrooms and more effective online support. The showrooms will however still see customers return in numbers, and whilst they will use some of the new online capabilities, their journey will continue to be omni-channel, taking the opportunity to mix physical shopping with online in whatever mix they prefer. Lockdowns will have moved the needle towards digital, but that will be as much down to the new capabilities that are available, as to any customer desire to avoid showrooms.