Steve Bragg

PUBLICLY listed car dealer groups are big and getting bigger. That’s the take out message from a comparative analysis conducted by KPMG’s director of motor industry services Steven Bragg into the performance of Australia’s four listed dealer groups.

“The big are getting bigger,” Mr Bragg said. “There are now four listed retail entities in the automotive business, 10 years ago there was only one. In three years from now there will likely be more than six.”

The listed dealer groups in Australia are Automotive Holding Group (AHG), AP Eagers (APE), Auto Sports Group (ASG) and Motorcycle Holdings Limited (MTO).

Revenue growth was strong across all four groups totalling $10.9 billion in 2016.

According to Mr Bragg, for every listed entity there are five mid-sized ones which are all vying to get larger and need more capital and support.

“As these groups get larger they are tapping into their cost structures and leveraging their economies of scale, this is making them more profitable and their peers less so, meaning the smaller operators will continue to find it harder to compete,” he said.

Mr Bragg said that since the Global Financial Crisis, dealer profitability has been strong and almost guaranteed as low interest rates and availability of debt has fuelled vehicle purchases.

The ownership cycle has shortened, he said, to the point where the age of the national fleet is now only seven years while 10 years ago that figure was was 13 years.

However, it is already evident that in the remainder of 2017, dealers will be faced with a few legislative and market driven changes that potentially will have a downward impact on their profitability.

New vehicle sales have fallen in the early months of 2017, with the biggest decreases coming in Western Australia and Queensland. Overall, 2017 sales to the end of May total 465,381 which is 0.9 per cent off the first five months of last year.

Then there is the Australian Securities and Investment Commission (ASIC) review of finance and insurance and, Mr Bragg points out, this is the first year in which the financial impact of the changes will be felt.

“Although for most dealerships the changes on paper shouldn’t have a major impact, the jury is still out exactly on the financial impact which is adding uncertainty to dealership profitability,” he said.

“Normally this wouldn’t be an issue, but as finance and insurance income represents 100 per cent of their current net profits, any change will have an impact.

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“The other impact is the capping of commissions on insurance policies to 20 per cent and the inability now to finance these policies has limited their immediate affordability to customers.”

There are only two independent financiers in the car business today, St George Bank and the Macquarie Group, with the ranks thinning as others have been acquired over the last five years.

Mr Bragg suggests that 2017 will more than likely see some new entrants to the market, but in the interim, base rates are moving upwards when cost of funds aren’t moving at the same pace and getting certain deals done is becoming more difficult.

Of course, any increase in floor plan rates will have a negative impact on profitability.

Loan value ratios have slowly fallen over the last six months, meaning that if the customer has negative equity they will need to increase their cash deposit into the vehicle purchase.

The impact on volumes is uncertain but is an indicator of reduced ability to finance via traditional dealership methods.

All this combines to form a scenario that, according to Mr Bragg, will see:

• profit under pressure and harder to get
• big dealer groups continuing to get bigger
• debt and capital harder to raise and more expensive, and
• more dealerships closing to become a block of flats.

By Daniel Cotterill