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Driving the UK's recovery

Car retail looks set to emerge from the Covid-19 pandemic in leaner shape and with a heightened focus on its digital offering
Driving the UK's recovery

Prime Minister Boris Johnson has given the green light to England's car retailers in his bid to get Britain back to work. On 1 June, automotive retailers including Vertu Motors (VTU) and Marshall Motor (MMH) will be allowed to open their doors, ahead of a wider retail sector return in the middle of the month. Car retail showrooms have been closed to the general public since the end of March, with retailers limited to conducting sales online and offering some service to key workers and vulnerable people.

The toll of keeping retailers closed has blown holes both in corporate and government finances. Pendragon (PNG) shuttered its retail sites on 23 March and said that coronavirus dragged down its first-quarter underlying pre-tax profits by around £10m, pushing it into a quarterly underlying loss of £2.3m. The Society of Motor Manufacturers and Traders (SMMT), meanwhile, estimates a daily cost of £61m to the Treasury, owing to lost tax income and furlough funding.

The timing of lockdown was especially unfortunate for car retailers. New number plates are introduced in March and September every year, and consumers intent on having the latest plate will time their purchases for these months. “If you were going to pick the worst time for the automotive industry to be affected by something like this, you would pick March or September,” said Marshall Motors chief executive Daksh Gupta. “If you were going to pick when in March, you would pick basically the last week,” he adds – which is exactly what happened.

Just over a quarter of Marshall’s annual sales volumes typically take place in March. Sales have continued and the option to click-and-collect has provided some respite. Marshall has sold over 2,000 vehicles over the last two months, although this is well below normal levels. Car sales have slumped across the sector and the SMMT expects registrations to fall 27 per cent from last year, dropping to just under 1.7m cars in 2020.

Used car demand has spiked as a proportion of overall car sales. At the outset of lockdown, 95 per cent of Vertu Motors' sales were used cars, according to chief executive Robert Forrester, although that proportion has since become more balanced with new cars. Mr Forrester pointed out that many personal contract purchase (PCP) contracts, where the customer is given the option of purchasing their car outright at the end of their contract are due to end soon, and this should create demand for new cars. 

Car manufacturers, many of which have resumed operations after months of severe disruption, will also have their part to play. “I think the manufacturer offers to stimulate the market will be superb over the next few weeks and months,” he said.

 

What can the government do?

The government has taken action to convince more workers to drive to work, pledging fresh investment in road infrastructure, including a £1bn programme to create the first new all dual-carriageway across the Pennines in half a century. The Financial Conduct Authority (FCA), meanwhile, introduced a series of measures designed to relieve motor finance customers who are struggling during the crisis. 

These included a three-month payment freeze, while the watchdog also called for companies to work with customers who wish to keep their vehicle at the end of their PCP contract, but who lack the funds to cover the lump payment required in order to acquire it. “The big question is how quickly collections recover,” says motor finance provider S&U’s (SUS) chairman Anthony Coombs.

“Collections have been very good so far. It hasn’t been helped by what I think was a totally unnecessary repayment holiday," he adds, observing that companies are already bound by the FCA's consumer credit rules on forbearance, which allow for payment flexibilities when a customer is in financial difficulty. “It’s a self-validating holiday," he said. "You don’t really have to prove to the finance company that you are Covid-affected.”

More support may be required. A scrappage scheme has been mooted, and history suggests that an incentive to exchange old cars for new will help to jumpstart sales. Germany adopted a similar scheme in response to the last financial crisis, and during 2007 and 2009, German new car sales rose 5 per cent, according to McKinsey. Over the same period, new car sales in the US dropped 42 per cent.

 

What does the future hold?

The share of journeys taken by car is slowly rising, according to Department for Transport data, although remains far from normal levels. Yet there has been a small increase in the proportion of those who are more likely to drive in the future, according to Transport Focus research. 

For now, car retailers will have to operate with social distancing protocols, and some consumers will remain unwilling to enter stores. The quality of a retailer’s digital offering has therefore never ranked higher when it comes to assessing its prospects. “I think we’ll see more and more people going to the internet with their research and maybe transactions,” predicts Vertu’s Robert Forrester.

Greater use of the internet could reduce the number of dealerships needed to serve customers, and industry consolidation looks likely. At the beginning of May, Pendragon revealed that it had explored a merger with Lookers (LOOK), although these discussions had ceased. Both parties have already set about reducing the number of their sites. However, with the economic toll of coronavirus likely to reduce the value of dealers’ assets, car retailers may become attractive targets for mergers and acquisitions.

As a global trend, the high valuation of car dealer real estate had been slowing M&A activity in the sector prior to the outbreak of coronavirus, according to Randall Miller, head of automotive at consultancy EY. “Now, with the Covid impact, if we see that starting to come down... that could create even more incentive for consolidation,” he said.