Value of car dealers’ unsold stock up another 16% in just a year

Publications that covered this story include City AM, AM-Online, and Motor Trader on 2 October, the Daily Mail on 17 October, and City AM and the Guardian on 23 October.
  • Carmakers continue to push vehicles on to dealers’ books
  • Dealers having to invest in additional offsite facilities to store the sheer volume of vehicles they now hold.
  • Dealers risk addiction to manufacturers’ ‘VAT drug’

Car dealers are sitting on 16% more unsold stock than they were just a year ago, as manufacturers continue to push new vehicles on to their books, our latest research shows.

The value of inventory held by UK car dealerships has now reached a record £27.3 billion, up from £23.6 billion last year. That unsold stock now equals 17.7% of the turnover of the sector, up from 16.9% last year (see graph below).

Car manufacturers are continuing to find creative ways to push more stock on to the balance sheets of car dealerships, as well as dealers continuing to struggle to hit manufacturers’ challenging sales targets. This risks tying up capital, and can prevent dealerships making the investments they require in their own businesses.

This practice could be storing up risk for the future. If new car sales continue to dip and dealerships are unable to shed excess inventory, they may have to explore costly alternatives to keep the stock moving such as additional discounts, or self registration exercises.

Paul Daly, partner in our Manchester office, comments: “Car makers continue to push more and more vehicles on to dealers’ books, but that can’t go on indefinitely. It’s unsustainable for unsold stock to keep rising so quickly.”

“Manufacturers have traditionally used the UK market to absorb excess production from other European markets, as we tend to replace our cars more frequently than consumers in other countries do. We may soon start to bump up against the limits of that tactic.”

“Pressures on dealers are higher than ever before, with manufacturers demanding bigger and better premises, and many now need to resort to significant off site storage facilities to hold the excess stocks.”

Another issue for some dealerships is that they may have become over-reliant on the temporary cashflow boost given to them when they take new cars on to their own balance sheets. A number of manufacturers provide their dealerships with an invoice to claim back the VAT on these purchases immediately, even though they don’t pay the manufacturers until the car is sold to a customer.

That means these dealerships receive a 20% cash boost of the value of the cars they buy through their quarterly VAT return and this is only repaid when the vehicle is sold, which could take up to six months. This artificially flatters the cash position of the business and the risk of this excess cash is absorbed into other activities or investment.  But of course, when stock levels fall, the reverse applies and the VAT cash flows out of the business again.

Paul Daly adds: “Dealers are risking a cashflow crunch if they don’t plan adequately for the  cyclical nature of getting cash boosts through reclaiming VAT on unsold cars. It’s a short-term relief that can cause huge problems when levels of unsold stock begin to fall again, particularly as historically these falls in stock levels tend to occur at a point in the economic cycle when dealer financial performance is under pressure generally.”

Car dealers’ unsold stock keeps rising as manufacturers force excess stock into the UK and dealers struggle to hit sales targets