Wednesday, October 10, 2007
Times are tough for second-hand car dealers.
Motor manufacturers are flooding the market with new cars at knockdown prices, making it harder to offload used cars at decent prices.
The company with the most to lose is Pendragon, the largest car dealership in the UK, with brands such as the luxury car dealer Stratstone and Evans Halshaw, which sells volume brands.
Pendragon has been expanding quickly, buying up both used and new car dealerships.
Last year, it bought the Reg Vardy dealership chain for £500m. The strategy is simple - to buy car dealerships using debt and then pay down the borrowings out of the dealership's profits.
This has left Pendragon with debts of £350m and interest payments that swallow up about half of the company's operating profits.
The company has paid down much of the debt it incurred as a result of acquiring Reg Vardy, but its share price has been battered.
Pendragon's chief executive Trevor Finn says an oversupply of new cars is taking its toll on the second hand car market.
"The manufacturers are giving incentives to dealerships to sell these new cars, which is great for the consumer. But that has put pricing pressure on the nearly-new cars that we hold in stock," he said.
Trevor Finn expects this process to unwind, with lower prices but healthy sales.
However, some analysts are more concerned about the company's recent performance.
Sanjay Vidyarthi, a retail analyst at Dresdner Kleinwort, said: "Is this a company-specific factor or is Pendragon suffering from the whole market slowing down?"We haven't seen rivals having the same problems and Pendragon's sales started slowing before everybody else."
Figures available for the UK car market do show that after two difficult years, new car sales have increased by about 2%. Used car sales slipped slightly.
Pendragon says it will continue its expansion by buying up dealerships that are sold at bargain-basement prices when they hit trouble."Pendragon's strength is that it sells a large percentage of some manufacturers' cars and it can use that to form strong relationships and possibly gain cheaper prices," said Tim Rose, the deputy editor of industry car magazine AM.
Economy
Perhaps the most important question for car retailers is how economic conditions are going to affect sales over the next 12 months.
The credit crunch means that banks are slashing credit limits, interest rates have risen and most pundits think the economy is set to slow.
The car industry is unusual because many car loans are funded by the finance arms of the car manufacturers. This means the likes of Ford and Vauxhall have an incentive to continue offering credit, so that consumers continue to buy their cars.
Trevor Finn believes that the weakening of the economy could actually help his business.
"Am I more confident than a month ago? The answer is yes," he said."There has been a lack of clarity on interest rates and that has fuelled uncertainty. Events have now eased that uncertainty and my customers will be more positive."
So what are the actual buyers saying? We bumped into a few on a dealership forecourt.
James Harrison, 29, said: "The thing that's really striking is just how keen they are to sell you a new car. We were offered a £2,000 discount on a Ford Focus, so why would you want to buy a used car?"
Source: http://news.bbc.co.uk/1/hi/business/7016634.stm
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