At the start of 2017 many commentators on the motor industry expected a spike in new car purchases in the first quarter of 2017. The underlying assumption was that consumers would accelerate purchase plans to avoid the new (and higher) rates of Vehicle Excise Duty (VED) that came into force on 1 April 2017.
The recent release of car registration data for the first quarter of 2017 has, however, poured cold water on those expectations and new car registrations for the period January to March have in fact fallen below 2016 levels.
The consensus view is that many purchase decisions were deferred due to the perception of tougher economic conditions and the wider uncertainty remaining in the economy. Such uncertainty is expected to continue in the short term, and with the impact of the new VED rates yet to be fully understood, the volume of new vehicle sales is generally expected to disappoint throughout the remainder of 2017.
The challenge for car dealerships will be, to manage costs effectively in the period of reduced new car business, to manage the relationship with their respective franchisors, and to implement a business plan that is relevant to the current market.
It is also important for dealerships to continue to assess cash flow requirements and keep tight control over inventory levels in the coming months in order to continue trading successfully through the current uncertain economic conditions.
By managing costs and maintaining them at as low a level as possible, dealerships can ease the pressure that is being placed on margins due to the competitive nature of the market in which they operate. Conducting a thorough review of costs should enable dealerships to identify where to reduce their cost base allowing the application of a more dynamic business model that can react to changing business and economic environments in the future.
Dramatic costs cutting regimes should be implemented only after the impact of each cost has been considered carefully with the longevity of the business in mind. Recklessly cutting costs could severely impair the future performance if it is not conducted in a prudent manner.
The changing market outlook for 2017 will also need to be reflected in dealership business plans. With new car registrations falling below that of 2016, the effect of weaker sterling on imported car prices and additional downward pressure on prices of cars due to factors such as increasing insurance and road tax prices, prompt action should be taken to re-assess the business plan to reflect those economic factors. The effect of the current environment on used vehicles will undoubtedly form part of that re-assessment.
Getting the business plan right at this stage is important to maintain the viability of the business in the short term and to allow the business to react to improving market sentiment when it returns.
As the industry will continue to watch the data on new car registrations, new car dealerships would be wise to invest time in reviewing operations and to look at lowering cost bases, so that they remain dynamic businesses for the future.