Winning the jackpot – how to spend it?
Image: Daily Telegraph
Last week the UK winners of the recent £184 million (say €215 million, but who’s counting?) Euromillions lottery draw were revealed. Based on market capitalisation, they could go out and buy a decent dealer group like Vertu, but apparently, they are more focused at the moment on a larger house and a holiday to Hawaii. Apparently, you are more likely to be struck by lightning twice than to win the lottery, but many dealers around the world have won their own jackpot in the last year, with every chance that they will repeat that trick this year. The reason is not that they managed to pick the right numbers, but that they are the fortunate recipients (along worth the manufacturers) of an unusual switch to demand exceeding supply, resulting in bumper profits all round.
Having had the chance to speak to dealers from various parts of the world at the Quintegia Automotive Dealer Days in Verona last week, two questions emerged. The first is that some dealers may look at profits that are two or three times the level that they are used to, and conclude that they are real heroes, that they have a sound business that is delivering the results they deserve. However, whilst some dealers have been pushing to improve their business throughout the pandemic restrictions and the subsequent product shortages, others have been more complacent. As one US dealer pointed out to me, many of the normal business processes have been abandoned, and with the freedoms that they have in the US, are building up lists of customers in anticipation of the next delivery from the manufacturer, then when the new stock arrives, auctioning the cars and trucks off to the highest bidder. That is clearly not a sustainable business process, and probably not one that will drive long term customer satisfaction when those high bidders come to trade their vehicle in under more normal market conditions. The first lesson is therefore that high profits do not equal strong businesses, and investors and management need to look behind the results and ensure that they are still creating a strong business for the long term, not just for these crazy times.
The second point is that however robust the underlying business is, the profits are real. Dealers are building up strong cash reserves, and have options about how to deploy them. Some are buying bigger yachts, and in the US in particular better planes. I’m sure others are deciding like the UK lottery winners that bigger houses and fancier holidays are on the list for this year. That urge is understandable, and if the team that helped deliver the bumper results also have a chance to treat themselves, then why not?
However, the good times will not last forever, and the economic environment is worse than it has been for many years, so it may be wise to think about how the windfall can be reinvested in the business to ensure that it continues to perform well and has adapted for future needs rather than go back to a business as usual with an unchanged business and depleted reserves. I am not suggesting that this is a good time to invest in bigger, fancier showrooms. We know that the need for those will decrease in the coming years, but it could be a good time to invest heavily in omni-channel capabilities – better online functionality, staff training or new staff. Perhaps there are some other investors who are looking to exit, but have a business that will be complimentary to your existing offer. It could be time to reconfigure aftersales facilities so that they are more flexible to capture a larger share of the local business as the total market shrinks. Depending on your location, it might be worth adding daily rental to your services, and dipping a toe in the subscription market?
Arguably this is the most important question facing dealers today. Having a windfall profit is great, but are you going to invest it for the future, or blow it all like some lottery winners, with little to show for your good fortune in five or ten years’ time?