With new car sales down and used cars filling up forecourts, Leon Woodwarns that Irish dealers are now paying for the vanity of chasing volume sales
THE CURRENT plight of the Irish car market is evident from the fall-off in car sales for the year to date.
New car sales are down nearly 19 per cent to the end of June, there is little expectation that the July tax changes will recoup the sales dip up to now and already there are signals of heavy discounting in the used car market.
That car dealers are facing the prospect of clearing their forecourts of unwanted used cars is hardly surprising.
The fall-off in sales and the reduction in profits will undoubtedly force dealers in Ireland to rethink their business strategies, and may finally force many of them to focus their time on their customers rather than chasing new car sales volumes.
They should have taken note of the old saying: "Volume is vanity, profit is sanity."
While this makes things uncomfortable at the moment, it will - in the long term - be in the interest of customers who will benefit from higher levels of service and better deals. In the short term however, it may result in some dealers closing their doors as they fail to generate the levels of profit required to sustain their business.
With over 35 years industry experience working with many of the leading manufactures and dealers in the UK, Europe and further afield, I have witnessed changes brought about by similar economic circumstance to those now facing Ireland.
The new car business is a useful barometer of any country's economic situation. A new car is an emotional purchase and rarely a necessity, and therefore in tough times people tend to lower their sights when it comes time to change their car.
Some customers will take a totally pragmatic view and decide there is no logical reason to change their three-year-old, fully serviced car, and will decide to hold on to it for another couple of years.
Others may not be prepared to forego their cyclical change pattern and may opt for a lower spec car or a nearly new second-hand car that is of higher quality, but lower in price.
The generally accepted view for the majority of new cars purchased is that for even the low mileage, well-maintained and serviced cars, depreciation over a standard 36-month period is at least 50 per cent of the original value; and more if there has been a model change in that period.
Similarly, if the car has not been maintained well or the mileage is high, things will be much worse. Therefore customers will be seriously out of pocket if they think about trading the car in within 12 to 24 months of purchase.
This is the real crux of the Irish problem. There are too many dealers with their forecourts full of over-priced part exchanges and too few customers.
This is now affecting anyone looking to change their car, as dealers are very reluctant or even unable to offer an attractive part exchange value. The dealers have been obsessed with chasing new car volumes and not being realistic enough in their write down policy on the part exchanges they have taken in.
They are trying to justify a profit from the new car sale, and in doing so they are overvaluing their used car stocks and this is the root cause of the dealers problems.
There has been an oversupply of new cars in Europe - in excess of four million - and yet Irish dealers still believed there was a reasonable profit to be had.
The only time a realistic profit can be made with any product is when demand exceeds supply, and this has certainly not been the case in Ireland for some time.
Of course there is always likely to be a shortage of supply for the unusual or specialist models, but the "bread and butter" mainstream cars have been in relatively free supply for some time. That in turn has led to the introduction of tempting offers of interest free credit or high price reductions.
I recently spoke with a senior manager of a major car firm in the UK who told me that only after enforcing some massive price reductions were their dealers able to clear their 2006-built cars before they could move on to their 2007 built cars.
While a customer may be purchasing what they think is a new car, it may have come off the production line two years ago and been sitting around somewhere in Europe. It's not the customers' fault that dealers find themselves in the situation they are in, but they are the ones who are likely to suffer until there is some stability in the market and dealers readjust their business strategies, lower their profit expectations from car sales, and concentrate on looking after loyal customers.
In the future there will be a reduction in the number of franchised dealers operating in Ireland with many smaller owner-operated dealerships in rural areas disappearing, but I also predict the loss of some well-known larger dealerships.
Ireland has already seen one major BMW franchise dealer deciding not to renew its dealer contract for 2009 - and another is due to follow later this week. This is largely down to the increased level of site investment required, which can seem unrealistic given the predicted market changes. Other dealers from other brands will follow suit.
In Britain BMW is to reduce the number of vehicles it sells in 2009 by lowering the dealers' sales volume. The new managing director of BMW UK, Klaus Kibsgaard, has acted quickly following his discussions with dealers and in response to their concerns for the future of the brand.
As a result they have introduced a strategy designed to protect their position as one of the leading premium brands and protect future values.
In announcing these changes BMW has said that as it has asked its dealers to make considerable investment, it is not in the interest of anyone - least of all their customers - if they are forced into discounting in order to move volume.
This will signal the start of attempts made by manufacturers to try to protect their brands by trying to maintain realistic residual values and thereby holding on to their customer base. While the BMW UK move may seem in the interest of the dealers, it is of equal importance to any BMW owner.
Whatever the manufacturers do in the future, large dealer groups will continue to invest in expanding their businesses in Dublin and the surrounding area, due to the percentage of new car registrations this regional market represents. You can expect similar investment increases in smaller dealer groups in regional locations like Cork, Limerick, Kilkenny and Galway.
This growth and development is where the customer benefits come from, as dealers will be able to offer realistic deals with higher levels of customer service throughout their business and a far greater customer satisfaction.
You can already see these changes taking place when you look at the marketing spend of these businesses with a greater emphasis being placed on customer retention, which is all good news for Irish customers.
Car dealers in Ireland have built many vast "glass palaces", often in areas where there simply aren't enough customers. We have seen just recently in the UK that large retail groups like Pendragon have announced 500 job losses.
Others are quickly following suit. These loses are directly linked to a fall in retail activity and also with the decreasing value of used stock. A similar situation in Ireland is inevitable, unless dealers take prompt and considered action.
Clearly there are some major matters that need to be addressed, but facing up to reality will not be easy for many, so perhaps it might be wise to address the simple issues first and learn from the experience of others.
Irish car dealers should do all they can to get a competitive edge over their rivals, react quicker to the market changes and make sure they have the right people who are well trained to move the business forward. In terms of used stock, there is an expression that must be grasped: "The early loss is best loss".
Better to bite the bullet early and revalue your stock than have it lose even more money on you as the time passes.
This, along with a large dose of realism, especially on the values of their used stock or potential trade-ins, might just give them a solid future.
• Leon Wood is managing director of Total Sales Solutions and has worked in Ireland with the SIMI, MDL Group, Citroën, Toyota and Bank of Ireland among others. He was responsible in the UK for the original development of used car programmes for BMW, Mercedes-Benz, Volvo and Peugeot