Opinion

Three actions to improve automotive business viability

Owen Edwards Owen Edwards

120x120-owen-edwards.pngTo continue trading, downstream automotive businesses need to take charge of cash control and budget planning in the short-term. Future planning should also be reviewed with the changing business and consumer environment in mind.

The downstream automotive industry remains under pressure. With lockdown now in its tenth week, most companies should have already applied for government assistance, including the Coronavirus Business Interruption Loan scheme (CBILS) for both small and large companies through to the furloughing of staff.

These measures have helped to reduce business costs to some extent and such business have entered a temporarily dormant state until the government provides more concrete information on exiting lockdown and its three-stage process. Social distancing appears likely to continue for some time, at least until either sufficient people become immune to the virus or a vaccine is created.

Changing consumer behaviours

Consumer behaviour has already changed from pre-COVID-19 conduct, entering a new normal. There are movement restrictions, social distancing, the requirement to wear PPE and so on, and vehicles are being sold and serviced in a different way.

Consumers are learning different ways to communicate and interact through online calls and video conferencing. Working from home is also changing consumer trends and habits, with those micro-moments during the day when consumers search the internet for purchases.

The motor trade needs to be prepared for how these changes may affect their business now in and in the long term, with online research and online interaction becoming even more important in the sales process.

Three steps to improve business viability

As lockdown is slowly lifted through the government’s three phases, it is crucial that companies continue to trade, even though costs incurred are likely to exceed revenues coming into the business in the short term, as sales and aftersales activities progress back to more normal levels.

However, it will be necessary to make your business viable in the new normal.  We believe that that the following processes are key in ensuring the best chance of longer-term viability:

1 Ensure cash flow remains strong and in control

Cash planning is critical to determine whether the business remains viable in the short term. Strong cash flow or support from third parties will be crucial for survival. The government and banks are providing financial support for now, but cash burn is expected to increase as lockdown is released and costs rise at a faster pace than revenues. Therefore cash conservation remains paramount.

2 Create a business plan for viability

Specifically, we advise generating a three-month rolling financial budget plan. You will need a business plan for the here and now, and also for the next three months. This focuses management on immediate and short-term issues. The focus of the budget plan should be control and vision. Management should have a focus on control in the early months, using 90% of their time on this area of the business and only 10% vision. But over time the ratio of control to vision should return to more normal 50/50 levels.

3 Reshape for the future

Growing revenues and profits will become the focus again, as businesses start to open. Opening aftersales is key, as this is a strong source of cash flow. Opening requirements will lie with sales advisers, technicians, the use of PPE and social distancing. Be proactive: follow up pre-lockdown leads and those vehicles with time/mileage warranty services, and reassure customers of the steps taken to meet social distancing. Make it clear what you are doing in order to meet the social distancing rules and minimise the risks to the customer and staff. How these processes will depend on the individual dealership and demand for their services. 

As for sales, both new and used car sales will be a focus, particularly used vehicles for their higher gross margins. Used car values may be volatile in the short term as the market re opens and adjusts to changes in the demand for and supply of used vehicles. For new vehicles, it is not yet clear whether the government will support a scrappage scheme, as they did in the last financial recession of 2007. In light of changing consumer behaviour, however, it is crucial that dealers transfer their sales processes online, using social media platforms to sell more vehicles, and offering new purchasing capabilities, such as click and collect. For both new and used vehicles, delivery and handover need to be planned carefully and social distancing is likely to prove challenging for some time.

Whatever sales changes you adopt, the business ultimately needs to be viable. Therefore, throughout this whole phase, we would recommend the continuation of cash control and three-month budget planning in order to ensure that a tight control is maintained on finances.

What does the future hold?

Once businesses have returned to profitability and the ratio of control to vision changes from 90/10 to 50/50, we believe that there will be further consolidation. Businesses that have enough cash will make acquisitions and consolidate the market further. 

Unfortunately, we also believe that some businesses will not be able to remain viable amid the unprecedented challenges the industry is facing and that strategic change will be needed. We envision that this will result in further dealer network restructuring and, ultimately, fewer dealers operating in the future.  

For further information on automotive business viability, please contact Owen Edwards in our automotive advisory team.