Pressure on margins, the impact of Chinese cars on the UK market, the ZEV Mandate, motor finance redress and the challenge facing dealers recruiting enough technicians to do the job. These were some of the issues facing Vertu Motors CEO Robert Forrester as he presented half year results this week.
In fact the group turned in a strong first-half performance, with pre-tax profits up 24.1% to £24.2m and turnover up 3.5% to £2.6bn. The group is reshaping its business, having already taken on 20 Chinese dealerships, with plans to add another 11, bringing its tally to 31.
This performance is notable given that dealers have been under pressure for some time from rising costs and squeezed returns. The most recent National Franchised Dealers Association (NFDA) Dealer Attitude Survey identified current and future profitability and return on capital as key concerns for dealers.
So, how is Vertu combating these pressures? Scale is a big plus. Running a tight ship is a prerequisite. And having the right balance of franchises is critically important.
“Your performance depends on a variety of factors such as scale. We are definitely seeing that scale can lead to material benefits with the use of technology to gain productivity,” said Vertu CEO Robert Forrester.
“If you have a large group like we have, you have a portfolio. Some franchises are operating really well, some are operating really poorly. Some operators might have a bad set of franchises and, while that can change over time, it can lead to pressure.
“The other thing is the level of indebtedness within the sector. We have a very low level of net debt, £54m against £330m of freehold property, whereas you have other groups that have really high levels of net debt. If they see profit pressure, it creates pressure with the banks,” said Forrester.
Forrester notes some positives in the market that are helping his business.
“There is a rebalancing of new cars from fleet into retail, which will benefit retailers. The used car market has been quite good in terms of stability of residuals. Demand has been pretty good, supply has been improving and, with aftersales, the average car in the UK is nine years and 10 months old; 10 years ago, it was seven years and five months old, so aftersales demand should be good. And it does depend on how you run the business. I am hopeful that we run the business fairly well and clearly our profits have responded, as has our cash,” he said.
Forrester has been a long-time critic of the ZEV mandate, which he believes is forcing carmakers and dealers to sell a proportion of cars that people do not want. The mandate is currently being reviewed by the government, but Forrester is not impressed by what he has seen so far.
“Of all the options I have seen in the consultation, my answer would be none of the above. I think we will have some short-term relief from the targets, but if we are aiming for a 50% battery electric mix in cars – and maybe the target will be higher than that – or 40% in vans, when we are currently tracking at 11%, then none of these are realistic targets.
“Unless they massively change the flexibilities to allow the manufacturers to achieve the numbers, then the industry is in for a lot of pressure. The impact of the ZEV mandate is very simple: it makes selling BEVs uneconomic in the UK,” he told Motor Trader.
Forrester is pushing hard with Chinese brands and now has Jaecoo, Omoda, BYD, Leapmotor and Geely on board, aiming for a total of 31 Chinese dealerships. This is good news for the group in terms of additional revenue streams: in the most recent NFDA survey, Jaecoo and Omoda were ranked highest for current and future profitability. But is it harming the brands it has represented for a long time?
“The fact is that all of the growth in the UK is coming from Chinese brands, which means the rest of them are broadly level. The market is growing and the Chinese have been particularly adept with affordable PCPs, taking used car customers and putting them into the new car market.”
But it is not all about new Chinese entrants when it comes to increased new car sales. The UK is now firmly in a push market, which, bluntly, means incentives or inducements to shift product.
“There is a significant increase in general pre-registrations, which is something we have not talked about in a few years. We are seeing the market distorted now by pre-registrations.”
Some Chinese brands have greater requirements than others. Traditional brands, meanwhile, are showing a new flexibility to accommodate the new reality.
“We are seeing the Chinese demand quite large showrooms and traditional manufacturers are certainly responding with better product. Some of the product we are getting from the Europeans is excellent.”
The rise of Chinese brands has come as no surprise to Forrester, who wants to have 31 Chinese dealerships on board.
“It is playing out exactly as you would expect it to play out. The Chinese have arrived, they have done well. How will the Chinese do if we end up with tariffs? They will not disappear, but it will certainly slow them down and we will see the UK consumer probably paying more for battery electric vehicles. How that interfaces with horrific targets from the government under the ZEV mandate is a mystery to me. A lot of what the government does is a mystery to me.”
Asked whether he thought tariffs would be introduced, he said: “Yes.”
Forrester said the ongoing motor finance redress saga was having no impact on his business at dealership level.
“The only slight concern I have comes back to the government. If you tell an industry that every penny they have made in the last 20 years is going to be recouped in regulatory fines, you probably have to question whether you want to be in that industry.
“My only worry would be if the supply of used car finance came under pressure because people decided they did not want to be in it. That would be bad news for consumers, bad news for the FCA and bad news for retailers. MotoNovo and a few others have had a good look. Barclays pulled out a few years ago. You want a competitive market and actually, the FCA’s underlying objective is to make motor finance competitive.”
An ongoing issue for dealers is the shortage of technicians. Vertu is facing the same challenge but is aiming to improve the packages it offers technicians while increasing their numbers.
“The industry has got itself into a bit of a problem insofar as the age of technicians is increasing. There is quite a lot of retirement due in the next few years and, because of profit pressures, they have not been recruiting at the same level.
“So, there is pressure on technicians, and we will take steps in November to augment the remuneration of our technicians, which will mean we will be more attractive. We have not been losing a lot, but we want to increase the number of technicians.”
And finally, the upcoming Budget. Last year, Forrester lambasted the government for increasing business costs through rises in the minimum wage and employers’ National Insurance contributions. This time around, he thinks it is doing a better job.
“They have handled the pre-Budget period better. We have not been bombarded with negativity, speculation and uncertainty. That’s good. They have learnt the lesson there. In terms of what British business wants, we want the government to live within its means, to allow interest rates to be reduced and not risk an IMF bailout problem. We need less regulation and interference. The biggest challenge would be another hike in the minimum wage, which, when you have major youth unemployment, is clearly problematic,” he said.
