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What does UK recession mean for car dealers and how can they prepare to battle through it

Time 9 months ago

The UK has entered recession with the biggest second quarter contraction of all the major economies – but what does this mean to car dealers?

The coronavirus lockdown has caused major issues across industries, but the motor trade is beginning to feel its way out of the darkness.

Used car sales are buoyant and new car sales are beginning to pick up, but what caused the recession and what will it mean to business going forward?

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What does this recession mean?

The recession is the steepest on record as the economy plummeted 20.4 per cent between April and June, due to the lockdown.

The large drop follows a 2.2 per cent contraction in the previous quarter which means the UK technically entered a recession – defined by two successive quarters of falling output.

Why has the UK economy been the hardest hit?

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The UK’s performance was worse than Spain’s 18.5 per cent drop and more than double the 9.5 per cent recorded in the United States.

This is believed to have been down to a number of things – including the timing of the lockdown in March and the way restrictions have been lifted. 

The fact the UK economy relies heavily on the services industry hasn’t helped either – it makes up three quarters of output.

This includes retail and hospitality to banks and real estate – all have been knocked badly by the lockdown. Some restrictions are easing slowly, but others are still in place.

June saw a rebound – what does this mean?

GDP grew by a better-than-expected 8.7 per cent in June following a growth of 2.4 per cent in May – mostly down to lockdown restrictions easing.

We’ve also seen pubs, hotels and restaurants reopen their doors and this has seen the services sector achieve growth of 7.7 per cent in June. This is expected to continue to rise during the summer. 

The third quarter could see steep growth recorded and hopefully a swift exit from recession. July new car sales have already risen by 11 per cent.

So are we out of the woods?

Not really. Despite the positive past two months the economy is still 22.1 per cent adrift of what it was at the end of last year.

There are also fears of a second wave and potentially further lockdowns – couple those with a jobs crisis as furlough comes to an end and it’s not going to be all plain sailing. 

How can car dealers set themselves up for the battle?

David Kendrick, partner at accountancy UHY Hacker Young, told us car dealers should focus on their cost base – which could mean cutting jobs.

He said: ‘Those dealers who haven’t adjusted their cost base should be cautious as with any recession, cost control is going to be key.

‘From conversations we have had with a large number of groups, it appears an average payroll reduction of 10-15 per cent is common, with many still having team members on furlough.’

Kendrick added that it would be ‘prudent’ for dealers to set themselves up for a tough couple of years as we are ‘far from out of the woods yet’.

What can car dealers do if they’ve had enough?

Well, they can always call it a day. UHY Hacker Young’s Kendrick said they’re already seeing an increase in car dealers looking to sell up and many big dealer groups are still very acquisitive.

He added: ‘We are already seeing an upturn in transactional activity and have had a number of calls in recent weeks from businesses who are looking for an exit as they would prefer to cash in their investment as opposed to ride out the coming months ahead.’ 

Should car dealers plan for a V, U or W shaped recovery?

That depends who you talk to, but many think the V is now unlikely – a V represents a sharp drop and then a sharp recovery.

David Bailey, Professor of Business Economics at the Birmingham Business School, told Car Dealer: ‘I’m sceptical of a V-shaped recovery as forecast by the Bank of England.

‘It will be more of a U or even W shape depending on second spikes in Covid.’

He believes recovery from the recession will be a ‘long haul’ for the economy and car dealers as unemployment rises when the furlough scheme ends.

‘That in turn will hit consumer spending,’ he said.

‘Brexit uncertainty and a possible hard Brexit also loom so dealers will have to offer not only great deals, but a much more seamless buyer experience from online to showroom.’

Will the government step in to help the UK car industry?

They haven’t so far – and it doesn’t look likely they will any time soon. 

Professor Bailey added: ‘The British government is out of kilter with other car producing nations like France and Germany which have offered big support packages for the sector and incentives for car buyers, especially focused on EV sales.

‘The UK government will have to do something similar to avoid real damage to UK auto.’

Anything else car dealers can do?

Don’t talk things down and remain positive, says Sentience Automotive Solutions boss Ali May-Khalil.

‘Be careful with your mindset as it is all too easy to talk yourself, and your business, into a downturn,’ he told Car Dealer. 

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‘The economic conditions will, regrettably, worsen, but that is no cause for panic. If you hold firm, keep a close eye on cashflow and ensure that your processes are water tight, it will place your business in the best possible shape.’

He added that managing enquiries and closing leads into sales should be at the forefront of dealers’ minds and warned that providing a decent service is critical.

‘A poor customer experience will have a far more damaging effect on your business that anything the economic conditions could do,’ he added.

James Baggott

James is the founder and editor-in-chief of Car Dealer Magazine, and CEO of parent company Baize Group. James has been a motoring journalist for more than 20 years writing about cars and the car industry.

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