8:34 am, July 11, 2020
Dealership closures are likely to accelerate in the fallout from coronavirus, new analysis reveals.
Zeus Capital latest research reports its pre-Covid-19 expectation of a 20 per cent capacity to come out of the market this year is now ‘conservative’ and the virus has catalysed showroom closures.
The stark prediction echoes one dealer boss who believes around 500 showrooms could close within 12 months.
Daksh Gupta exclusively told Car Dealer Magazine this week that the industry could see some 500 businesses closing their doors for good as restructuring and the coronavirus pandemic take their toll, and it’s likely there will be a ’20 to 25 per cent reduction by 2025′, said Gupta.
In the report, Zeus Capital’s Mike Allen said: ‘Capacity reductions are expected to continue, with not all dealerships re-opening.
‘We know Lookers and Pendragon have planned dealership closures in place, with many smaller private groups potentially not surviving in the long term.
‘Pre-Covid, our expectation was for circa 20 per cent dealership capacity to come of the market, and in the current environment this is likely to be a conservative estimate and such dealership closures are likely to accelerate.
‘Indeed we have seen up to 25 per cent being quoted by 2025 and circa 500 potential closures over the next 12 months.’
He added: ‘We believe this will make the gap between winners and losers greater, leaving the winners with a more geared recovery exacerbated by capacity reductions.’
Zeus’s analysis also predicted Vertu, Marshall and Cambria to expand during the coronavirus pandemic, ‘utilising strong balance sheets to ultimately grow their estates over time that generates shareholder value’, while more ‘distressed’ groups such as Lookers and Pendragon could ‘generate shareholder value by shrinking their estates becoming more focused businesses’.
Meanwhile, Allen also predicted high cash burn linked to bringing back furloughed staff.
‘While we expect most dealers to have had a profitable month in June coming out of lockdown, it would not surprise us to see some cash burn in future months and dealers make the decision on whether to keep or hold staff on furlough,’ he said.
‘However, the key issue at present is re-introducing staff back into the business into higher levels of activity and whether this will continue. We concur with the useful analysis from Grant Thornton on likely cash burn
cycle due to Covid (chart above).’
Zeus also noted that it expects employment trends to have a larger correlation with car sales over the coming years due to Covid-19.
Allen said: ‘ We note Capital Economics projections on unemployment peaking during June 2021 rather than July 2020 as previously anticipated due to the success of the furlough scheme.
‘They are also forecasting the unemployment rate to be circa seven per cent vs. 8.5 per cent previously anticipated.
‘That said, it will take many years before the unemployment rate is back to the pre-Covid levels of circa four per cent according to its analysis.’
- Rate your manufacturer and favourite suppliers in Car Dealer Power – it takes a few minutes to have your say here
- Join our breaking news WhatsApp group. Broadcast only, no chit chat, and headlines to your phone. Send us a message and ask to join here.
- Download the latest digital edition of Car Dealer Magazine Issue 148 for free here.
