If the UK auto retail sector could be characterised in a single phrase, I think my choice until recently would always have been “Suffers from chronic oversupply”.
From pictures of vehicles stockpiled at the docks and airfields, to wading through pages and pages of consigned vehicles on a dealers floor plan statement to seeing row upon row of pre-registered vehicles, all the tell tale signs were there.
Through 2019 and into early 2020 there were signs of a pre-recessionary build up of stock throughout the entire UK distribution network and it seemed only a matter of time before the wheels came off and values started to slide. Covid-19 arrived and, aided by finance company support, most dealers held their nerve and sat on stock in the hope demand would return once the first lockdown was over. The bravest dealers actually went out and bought stock at very low prices during this period (fortune favours the brave) but for most it was an understandable case of battening down the hatches.
Fortunately, demand actually held up well once showrooms reopened. With many factory shutdowns, supply was constrained with UK registrations of just 1.6m compared to an average over the 10 years to 2019 of 2.3m, some 30% lower. In addition to the low levels of registrations, I have seen significant de-stocking on balance sheets through the audit work we carry out on clients in the sector; indicating supply was actually even more constrained than the registration figures suggest. Supply shortages remain in 2021, exacerbated by the well publicised shortage of semi conductors to the industry leading to the majority of manufacturers having production headaches.
Paradoxically this shortage of vehicles, alongside government Covid-19 support measures, has meant dealer profits are actually better than normal for the vast majority with improved margin retention outweighing the volume shortages.
SMMT latest forecast (July 2021) predicts 1.8m vehicles in 2021, rising to 2.1m in 2022, indicating that there will be a gradual return to normality and it will be 2023 before the longer term average of 2.3m vehicles is reached. Assuming demand remains healthy it seems the market will remain in the unusual situation of demand exceeding supply for some time to come.
The next steps
For more information, please contact Paul Daly or your usual UHY adviser.
