The introduction of stricter emissions testing is creating additional challenges for car dealers already grappling with broader economic uncertainty.
In the aftermath of ‘Dieselgate’ and with broader economic uncertainty weighing heavy on consumer confidence, it is perhaps unsurprising that the sale of new cars has been on a steady decline for the last few quarters. However, the introduction of the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) on 1 September 2018 has put the brake on new-car sales in the important September registration change sales period and will also impact the next few months.
Whilst the impact of WLTP on manufacturers has been well-documented in recent times, the potential wider knock-on effect on dealers has so far not been extensively explored.
What is the WLTP?
The WLTP is a new test that was recently implemented to replace the New European Driving Cycle (NEDC) test. The test is still conducted in a laboratory , but the ‘challenges’ the vehicles face are more representative of modern driving, with fewer opportunities to exploit loopholes in testing regulations. Many existing models already tested under the WLTP are demonstrating notably poorer fuel economy and higher emissions than recorded by the NEDC test, often by up to 15-20%. Several leading manufacturers are now reportedly making modifications to existing models, suspending production of top-selling lines whilst performance updates are made, or even stopping production or certain models and variants completely.
Crucially, the new test states that every engine and model variant must undergo scrutiny, as cars with higher trim levels can exhibit different real-world driving characteristics mainly due to increase weight of those additional spec items. This may result in less choice for consumers in the long-term, reducing variations of trim levels and optional extras. In the short-term, however, the overriding impact is a backlog of models already approved for sale, leaving dealerships allied to the worst-affected marques with significantly constrained supply.
The impact on dealers
With the margin on the sale of new vehicles typically very low, one prized source of income for dealers are the sales bonuses received from manufacturers for hitting set volume targets. For the marques worst affected by the WLTP, it’s widely anticipated they will reduce thresholds and ensure the bonus targets are still met. Manufacturers supporting their primary route to market is an act of commercial pragmatism as well as fair play.
Yet recompense from manufacturers for lost sales due to restricted availability because of WLTP will not cover a number of other lost revenue streams essential for dealer profitability. Most notably, dealers usually receive income for linking customers with their financing provider when selling a new vehicle. With 85-90% of new private cars being purchased using some form of finance, the impact of lost revenue will be significant.
Similarly, the margin made on part exchange, service plans, peace-of-mind warranties, gap insurance and accessories will be further lost revenue streams, usually with much higher margins than the new car sales themselves. This is likely to place a significant short-term cash and margin squeeze on car dealers. Those specialising in a relatively narrow range of marques are at even greater risk.
Just as concerning, however, may be the long-term loss of valued customers. New car buyers can often be quite brand-loyal, although there is a reasonable prospect that those less brand-sensitive buyers (or with greater urgency to change) may switch marques to one with available product lines. At this point, it may be very difficult for both the manufacturer and dealer to tempt those lost customers back, and lose those on-going income streams such as service and aftermarket.
Second hand car market
But it is not all bad news for dealers.
The lack of availability of new cars has bolstered the used car market, as customers swap older-for-newer rather than waiting months for new deliveries of their favoured model to resume. One auction house has reported that the average price of a two-year-old vehicle has risen by over £1,000 in the past year, due at least in part to the lack of WLTP-compliant new cars pushing up the value of used vehicles. Indeed, industry concerns around the residual values of cars purchased on earlier PCP finance agreements may be allayed by the unexpected bolstering of the used car market.
The challenge for dealers will be to ensure sufficient quality used cars are available for sale given the declining volumes of part-exchange as a vehicle source. Therefore, sourcing of quality used vehicles will be a key facet to any dealer in the coming months. Car auctions and online car marketplaces are also reporting significant growth from value-seeking sellers and buyers. Dealers that can adeptly switch focus between new and used vehicles will be best placed to weather the storm.
KPMG can support companies with longer term strategy and options, immediate cash flow challenges, identifying ways of improving liquidity and identifying performance improvement solutions. We work across the automotive sector to address key performance challenges and support implementation of practical, effective solutions.
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