In these unprecedented times, the impact across the automotive value chain has been devastating. The SMMT reported a 44 percent decline in new car sales for March, and we expect an overall 30-50 percent decrease in vehicle spend during 2020.

The impact on dealerships has been particularly significant, as continuing lockdown measures mean that showrooms remain closed. Near-zero volumes of sales are expected while this continues.

Before the crisis, dealerships in the UK were already under pressure, with net margins declining ~0.6%pp since 2014. This has been driven by a combination of OEM network restructuring, the emergence of new digital players and the resulting increase in price transparency and competition.

In addition, dealers faced the difficult prospect of adapting to the future trends of electrification, automation and shared mobility, which threaten existing business models and margins unless significant investments are made.
The result has been historic consolidation, restructuring and bankruptcies, ultimately resulting in a smaller number of larger groups today.

COVID-19 may now represent the final blow for some. Although many dealerships have worked hard to establish or maintain an online presence, the reality is almost zero sales for as long as restrictions continue.

Despite the Government’s extensive support package for workers and businesses, dealerships face significant rental costs, depreciating value of stock vehicles and the prospect of continued revenue loss due to volume incentives, finance commissions and vehicle margins. Those with precarious finances – particularly mid-market/smaller dealers – may also struggle to access essential sources of finance in this period.

COVID-19 therefore represents an economic shock of unprecedented scale, and once restrictions are lifted, we do not expect to see a return to business as usual. At the same time, the shock will also help accelerate pre-existing trends – both the threats and opportunities that dealerships face:

• Consolidation will accelerate: Many dealers face administration and being acquired by larger competitors.
• The number of UK dealer sites will decline, as franchised networks restructure and some businesses do not reopen.
• Profitability challenges will continue, particularly in the face of an uncertain economic recovery.
• Used and aftermarket segments will become increasingly important to offset revenue losses in new cars.
• There will be increased pressure to invest in new retail formats, such as online sales and marketing, as consumer habits change.

For the majority of businesses that do survive, the sales environment in the recovery phase may be very different from early 2020. Extended periods of working from home, economic uncertainty and the prospect of continued intermittent lockdowns, as well as digital and product innovation from otherwise shuttered businesses, will lead to significant behaviour change, which will become more entrenched the longer the lockdown continues.

Post-crisis consumer behaviour therefore offers unique opportunities for businesses that can adapt to this quickly. We think the key persistent changes will be:

• Increased use of online auto research, already a major part of the sales process.
• Increased customer willingness to buy cars online, as isolation leads to a shift in mindset from the current preference to wait before buying and new capabilities (e.g. virtual showrooms) emerge.
• A longer-term increase in the influence of online retail platforms as gatekeepers to these consumers.
• The development of ‘disinfect and deliver’ services, combining convenience with perceived safety and further enabling online sales.
• Increased interest in low-commitment offerings, such as shorter-term leasing (PCH) or subscription products, as well as lower cost options.
• Continued uncertainty that will depress car purchases for 2020, as a result of recession, intermittent secondary lockdowns, the reduced need to commute and reluctance to make big-ticket purchases.

The future of the automotive market, in common with the economic outlook, will depend in large part on the length of the lockdown, the public health response and future vaccine availability. At this stage, our base case scenario is a ‘U’ shaped recovery, with a sustained recession - deeper than the 2008 financial crisis, but potentially with a more rapid recovery within 2-3 years as isolation protocols are lifted.

The impact will vary depending on the segment of the retail market. In our attached infographic before we include more detail on what we expect to happen to each segment. In particular, we expect significant pressure on new cars and motor finance, while used and aftermarket segments fare better.

We also think that for well-capitalised players, liquidity will be a competitive advantage in the crisis and open up opportunities for strategic acquisitions and investments that position them well in the recovery.

The acceleration of market and consumer trends is therefore an opportunity for ambitious organisations to capture future market share and leapfrog competitors. Successful leaders will need to balance the immediate needs of survival with the rapid reorientation of their strategies.

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