On the back of one of the more challenging years in recent global history, the first quarter of 2021 has shown a period of strong performance for Australian dealers. For many businesses, transitioning off the Federal Government’s JobKeeper program, either last October, or January this year, meant the removal of a safety blanket that ensured continued employment of approximately 350,000 people who make up the wider automotive industry in Australia.
As bottom line profitability rose - particularly on analysis of the Return on Sales metric given for many dealers affected by ‘lockdowns’ indicating fewer cars were sold during the period - a different set of challenges presented themselves.
We’ve found three key themes emerging from our discussions with Australian dealers.
Focussing on return on investment (ROI) for used vehicles is critical
The difficulty in sourcing quality, used vehicles continues to trouble dealers, many seeing inventory turn cycles increase and/or gross margin decline from picking up the wrong stock and holding out for too long to achieve an unrealistic margin. High performing dealers are still seeing strong returns from used cars, with the most consistent message being ‘back to basics’ and focussing on effective methods such as the inventory matrix and, critically, close oversight of data to continually fine tune the buying process.
Maximise the equilibrium of supply and demand
A key theme of Q1 has been a return to the more traditional method of profitability - grossing from the metal. Whilst the mechanics of this varies by franchise, nearly all boil down to basic supply and demand - with demand surging mainly due to closed borders and restricted travel, as well as many shying away from public transport.
Supply chain disruption has given local OEM’s a moment of pause from what had, over time, become an aggressive push of stock into a highly competitive market. We would be kidding ourselves to think this rebalance is here to stay, with many dealers making the most of this opportunity to correct imbalances in inventory levels and reset to more sustainable levels. While interest rates remain at historically low levels, looking to the medium- to long-term, adding just 1% to the wholesale bailment rate of an inventory holding of, say, $10,000,000 would cost a dealer a further $100,000 annually in interest expense.
Opportunities to pay down debt and build up your investment fund
As cash balances swirl, there has never been a better opportunity to reduce debt and build up funds to capitalise on opportunities that will present themselves over the next 12 to 24 months. Speaking to GoAutoNews Premium recently, CEO of Peter Warren Automotive (PWA), Mark Weaver was quoted as saying PWA was “considering options for additional sources of capital for growth”, and that “we consider ourselves to be well positioned to play a role as an industry consolidator”.*
With some of the industry’s largest dealers looking to acquire and, in the process, achieve economies of scale that will translate to a competitive advantage, we may see ourselves on the cusp of a second buy/sell boom similar to that which commenced with record low interest rates in 2013/14.
Taking a different view on further industry consolidation, many dealers had been contemplating a partial or total sale of their business in the lead up to the COVID-19 pandemic. Government assistance and a rebounding market toward the end of 2020 had provided a ‘stay’ to many dealers who will now look to take advantage of this strong financial performance in the form of business goodwill over the near term.
Closing out the financial year
With most dealers expecting a strong final quarter to the 2021 financial year, attention should turn to year-end and effective planning prior to 30 June, ensuring maximum return from a challenging period and a strong position for dealers to move forward.
We’ve recently strengthened our national automotive team with the addition of new Partners, Grant Cameron and Sam Venn. If your organisation could benefit from our extensive experience in car dealership tax planning, advisory and business services, please get in touch with one of our automotive specialists today.
* Dowling, N, 2021. ‘Peter Warren valued at up to $1 billion’, GoAutoNews Premium, 26 March 2021, viewed: 15 April 2021, https://premium.goauto.com.au/peter-warren-valued-at-up-to-1-billion/