Motor retailer profits down – indicating further financial distress according to Baker Tilly/Company Watch research

• One in five dealers cannot pay off their short-term debts and other liabilities
• 23% of dealerships saw pre-tax profits fall by 50% or more in last year
• ‘Probability of Distress’ higher than the average for SMEs overall

According to latest Baker Tilly/Company Watch research on Motor Dealerships almost one in four dealers, with a turnover of between £5 million and £25 million, saw their pre-tax profits fall by 50% or more in the last 12 months, according to their latest filed accounts. Rising costs are hitting profits in the sector hard but the impact to ripple through to increased formal insolvency levels.

Nearly one in five saw a fall in sales of 10% or more. Despite continuing economic uncertainty, less than 7% saw a 30% fall in sales. This fares well compared with other industry sectors. Few dealerships have moved from solvent to insolvent balance sheets or have had County Court Judgments (CCJs) filed against them over the last 12 months. However, this has been helped by the scrappage scheme, and financial pressures look set to mount in the sector. 

Graham Bushby, Head of Motor at Baker Tilly Restructuring and Recovery LLP, comments:

“Rising costs to the industry are clearly a major challenge for the industry. The pursuit of sales is being hampered by global inflation and margins are being squeezed more so than ever.

“There is clear evidence that while the scrappage scheme helped the industry massively in achieving much needed new car sales, it slowed the sales decline rather than prevented it fully. What we expect to see now the scheme has closed is a more dramatic fall in sales. New car sales will be much more challenging this year in an environment of jobs uncertainty, depressed consumer confidence and large item purchases being put on hold.”

With one in five dealers unable to meet their current debt commitments, the sector is likely to see increasing distress throughout the next 12 months. In the worst case, one in every 30 dealerships is expected to go through a major financial restructuring or formal insolvency arrangement in the next year.

Graham Bushby continues:

“The pursuit of much needed cash reserves will be tougher as the top line begins to dip. As the economy improves, it’s this cash which is vital for a business to ramp up and remain competitive. Dealers should be reminded that history shows more insolvencies occur in the recovery phase an economic cycle rather than in the recession. Those who cannot currently manage their debt burdens will be particularly at risk.”

Denis Baker, CEO of Company Watch adds," The savage fall in profitability among motor retailers despite only relatively modest revenue falls shows just how seriously the business models in this sector are being tested.

“Credit managers at suppliers and other stakeholders to these embattled companies need to be extra vigilant to minimise potential bad debts."