Steve Bragg

AUSTRALIAN dealers should be looking at ways of diversifying their business, including fleet and leasing operations, to generate additional revenue streams and profit opportunities in the wake of the sagging local new-car market, according the KPMG Motor Industry Services.

KPMG national lead for Motor Industry Services (MIS), Steven Bragg, told GoAutoNews Premium that there are not many Australian dealer groups with fleet and leasing arms, mainly because some historical changes to consumer laws made it difficult to manage these businesses.

“But a lot of the bigger and progressive groups are now looking at getting back into leasing because they see the opportunity to diversify and maintain profitability,” he said.

Mr Bragg was commenting on reports that UK dealers were quitting their fleet and leasing businesses and whether this would be a trend that might be taken up in Australia.

But he said that the situation in the UK was different.

“In the UK they are de-risking partly because of Brexit and also other issues with the economy and political upheaval and some outside risk factors that are out of their control,” he said.

“Australia has had 19 months – almost two years – of falling car sales volumes, which is a finance-led decline caused by people no longer having access to liquidity via home loan drawdowns after the royal commission into finance.

“So dealers must now find different revenue channels to offset the sales fall. The volume declines have been coupled with margin compression as the overcrowded market fights over the shrinking pie.”

Mr Bragg said now could be a perfect time to look at the opportunities in Australia or even in the UK.

Last month, distribution, wholesale and retail automotive group Inchcape plc sold its fleet and leasing businesses to Toyota UK.

In the same month in the UK, the Sandicliffe Motor Group closed its leasing division. Two years ago, another major – the Marshall Motor Group – sold its leasing business to the Bank of Ireland.

But Mr Bragg said the situation with Australian dealers was the reverse as dealers seek new business streams.

“I have never seen our dealers involve themselves so much in diversification of their businesses as they have in the past two years,” he said.

“It’s because they have to. Obviously volumes are down roughly 20 per cent over the past two years when it was at a record levels.

“Along with that has been significant margin compression for dealers as well as their F&I income overall being cut in half due to the ASIC changes.

“So dealers seeing their margins leave the business need to find new ways to get revenue through the door. Otherwise they have to cut their expenses, so it’s a very difficult situation as business owners.

“This current environment is pretty much unprecedented as far as the level of which dealers are looking at diversifying their business to make it work.”

Mr Bragg said this diversification process has seen dealers look at subscription services, brokerages, joint ventures with finance companies to offer their own finance, and even ownership of body shop (paint and panel repair) is coming back in vogue.

“If you had asked me five or 10 years ago, ‘Should I buy a paint or panel shop?’ the response would likely be ‘No’,” he said.

“It is a difficult business to run but it can be profitable. A lot of dealers are now looking at this as a revenue stream and another way to get gross back into the business.”

Mr Bragg said Australian dealers were looking for opportunities in areas previously not considered.

“In the more immediate term, it could be that the dealer would look at involvement in the subscription service because those guys are looking for partners,” he said.

“There also could be leasing or hire-car businesses looking to sell and that could make sense for a dealer group to invest. For example, if you had a Holden dealer with a good fleet plan you could put some vehicles through to offset any volume falls in new-car sales.

“It makes a lot of sense because sales can go through the rental company and then come back to the dealership as fully serviced vehicles for the used-car division,” he said.

“It’s a logical pathway. If some dealer groups have some capital for investment, then having a rental business or a subscription service or lease fleet makes a lot of sense.

“But it has to be remembered that hiring cars is a whole new business and needs to be carefully managed otherwise it is possible to lose a lot of money, especially when the vehicles aren’t properly managed.

“Some dealers have Hertz, Avis and Europcar franchises and almost every city has a dealer group with exposure to a hire-car company.”

Mr Bragg said targeting hire-car sites located outside of airports is attractive.

“They tend to be the more profitable ones, not operated from the airport where the cost structures and fees are quite high,” he said.

“It’s hard to make money in hire cars at major airports, but obviously that is where the volume is.

“Hiring cars outside the airport is more profitable because of the lower cost structure.”

He said there were other, perhaps more obvious ways to improve the dealership bottom line and that dealers had a lot of opportunities in their business that they may not be recognising.

“Used cars and servicing are low hanging fruit for dealers. In servicing, they should concentrate on older cars,” he said.

“That’s where the profit is. Typically, the new-car franchise will concentrate on one- to three-year-old vehicles that are still under warranty.

“When I ran a dealership, I’d be looking at a workshop geared to repair and maintain vehicles aged five years and older – that’s where the profit is.

“We are basically letting independent workshops and mobile services – Ultra Tunes and so on – to steal that work away when that is where the better margins are.

“There’s the time you can bill in the workshop and the parts burn is higher because older cars need more parts. It’s all there to be had. Some dealerships recognise this and that you need to fill up the workshop every day. They tend to remain profitable even when volumes drop for 19 consecutive months.”

By Neil Dowling