Scrappage - Papering over the cracks - Part I

Eighteen months ago, many franchised dealers were left hanging over the financial precipice with only the thinnest of credit lines or reserves preventing their doom. Inevitably there were some casualties and most towns saw at least one familiar dealer face disappear.

The scrappage scheme is forecasted to end next month and unless there is another form of respite, some of the dealers who survived by their fingernails could again be left dangling on the edge.

So why are many in this unfortunate position?

The noughties (I cannot get my head round this expression but for lack of a better term) was the period of excess in all industries and the motor trade was no exception.

Record registration figures, easy credit and a spend culture meant manufacturers of all sizes went on the offensive for market share and it was down to the dealer network to deliver it.

Most franchised dealers are independently owned by groups of differing sizes or in some cases owner drivers. Manufacturers reluctantly get involved in motor retailing but central London locations are often manufacturer owned.

European competition legislation saw a change of margin structure for dealers in the noughties. Whereas in the past a dealer bought a car for a typical wholesale cost of some 15% less than retail, front end margins reduced to between 5-8% with an additional 7% or so subject to both target and dealer standards.

The term 'dealer standards' will cause dealer principles or company directors up and down the land to shudder. Essentially a large operating manual exists for most manufacturers, usually taking the form of an acronym. This 'bible' covers everything from colour of the showroom carpet to how an enquiry is managed.

Using the target and dealer standard payments as a form of carrot, manufacturers encouraged many motor businesses to invest in new premises or redevelop existing sites. Again, examples of this will be evident anywhere across the country.

It should be noted that average returns for dealers had dropped from somewhere like 10% in the 1990's to around an average of 2%. Porsche retail consistently led the market with returns of 4-5% so increasing volume was paramount to retain profitability.

So armed with large mortgages and loans from manufacturers, many dealers embarked on relatively large scale developments using market projections which to say were ambitious would be an understatement.

And then the wheels came off.

Scrappage has limited the impact of large scale volume reductions for many dealers but those searching questions are soon to be asked of the industry again.

The next part will concentrate on the weakness of the retail motor industry.