2020 and 2021 have clearly been one of the strangest periods of trading for all businesses due to the pandemic and this has certainly been the case in the motor retail sector.
On the whole results for 2020 have been good, with turnover levels typically 10% to 20% lower than 2019, but profits holding up well on the back of strong demand for vehicles outside of the lockdown periods, a shortage of new vehicle supply, the furlough scheme, no business rates charges and various other government intervention in the form of grants helping the position.
Strong trading performances encourage dealers to look at growth prospects
2021 saw the vehicle supply shortages increase and, coupled with strong demand especially for used cars, this has resulted in much improved margins being generated with 2021 now looking to be a record year for many businesses.
At the same time, cash generation has been strong due to the reduction in working capital from lower turnover and stock levels.
This has led to a general increase in buying appetite for motor retail businesses, with surplus cash and strong trading encouraging dealers to look at growth prospects. The pandemic and resulting lower levels of businesses changing hands through 2020, has also resulted in some pent up sell side demand particularly for owners who are planning retirement sales.
Buying appetite has increased but are deals completing?
Whilst the prospects are good in theory, the actual market remains somewhat unproven with only very limited numbers of deals actually in play albeit the pipeline is good. Whether buyers will be able to meet sellers price expectations (which will no doubt be linked to the exceptional performances in 2020 and 2021) remains to be seen.
As well as short term challenges, there remains significant investor caution over the future role of car dealerships. The pandemic has generally accelerated the pace of change towards online sales and there are a number of disruptors (most notably Cazoo and Cinch) who are looking to establish themselves in that space with significant investment backing. For a number of years now, manufacturers have been typically looking to rationalise their network size including moving to a “hub and spoke” concept. The termination of the entire franchise network by Stellantis is a good example of the changes that are taking place. The significant investment in electric vehicles required by all manufacturers is lending them to investigate the distribution model with a view to streamlining and eliminating excess cost.
At the same time, the move towards electric vehicles by 2030 creates further uncertainty around the back end of the dealership model. As the electric vehicle parc grows, so will the opportunity for aftersales inevitably diminish. At the same time, the changing technology will require significant investment in facilities, training etc. Smaller and more marginal locations will be unlikely to make this investment certainly in the short to medium term.
All of this creates uncertainty from investors in such businesses and there are very few new entrants noted into the sector.
The next steps
For more information, please contact David Kendrick or your usual UHY adviser.
