Irish Motor Management
April 2011
As everyone in the motor industry is aware, the Government Scrappage Scheme will come to an end on 30 June 2011.
It has been a resounding success. In 2010 close to 17,500 cars were sold under the Scheme, one fifth of all new car sales. The knock-on effect must also be considered, as customers attracted to showrooms by the Scheme have taken advantage of lower asking prices and deals on non-scrappage cars.
This positive effect has continued into 2011, with over two thousand cars sold under the scheme up to the end of February. Preliminary figures to the end of March show that new car sales have already surpassed 40,000, a 14% increase on this time last year.
The scheme has generated over €50m* in incremental revenues for the Government. It has saved hundreds of jobs and ensured the survival of dozens of motor dealerships. And finally, it has benefited the environment by putting new, more efficient cars on the road and thereby reducing emissions.
However, as the Scheme draws to a close, motor dealers are faced with two challenges: taking full advantage of the scheme over its remaining life; and coping with any after-effects – which are likely to be a reduction in sales in Q3 and Q4 2011.
What will happen in the months immediately before and after the end of the scheme?
It is probable that dealerships will experience an element of ‘pull-through’ in their sales, whereby customers who were planning to replace their cars in the latter half of the year will bring forward their purchase in order to take advantage of the Scheme. This could result in a significant spike in new car sales in June with a corresponding decrease in the later months.
The effect of this decrease on motor dealers may be lessened as the industry is used to a highly seasonal sales distribution – typically only 20% of new car sales occur in the six months to December. Added to this is the fact that the Scheme has been in place since December 2009 and it is possible that many of those customers who intend to take advantage of the scheme already have.
However, motor dealers should still be keenly aware of the potential for a significant decline in the volume of new car sales when the Scheme ends.
Another factor that motor dealers should be aware of is the potential for an ‘incentive trap’ to have developed amongst consumers who have become accustomed to the deals on offer over the period of the Scheme and who now expect similar low prices to continue to be available. As similar schemes in other countries have come to an end, manufacturers have stepped up their marketing initiatives and implemented sales subsidies to mitigate this effect. This may also happen in Ireland, and it is important that dealers continue to communicate with their manufacturers.
Several other countries including the UK, Germany and the US have implemented scrappage schemes in recent years and their experiences of the end of those schemes provide some contradictory lessons. For example, German estimates are that 29% of units sold under its scheme were ‘pull-throughs’ whereas in the UK that figure was estimated to be as low as 10%.
So how can dealers best approach the end of the Scheme?
Firstly, they need to maximise Scrappage revenues over the remaining months of the Scheme. They need to ensure that potential customers are aware that the Scheme is ending. A cost efficient way for individual dealers to communicate this message is through prominent forecourt displays. A note of caution: dealers should be wary of offering overly generous discounts that may secure sales and increase revenue but result in a complete erosion of the profit margin. Any staff commissions should be carefully structured so that there are no incentives for below-cost selling.
Secondly, dealers need to ensure that they are prepared for the range of possible outcomes which may arise from the Scheme ending. Key areas of focus should be stock mix, cost base and working capital.
The end of the Scheme is likely to result in a significant change in demand profiles, with a possible switch toward used cars and higher emissions models. Dealers who fail to anticipate this may find themselves with excess levels of new car stock after June 2011 or, alternatively, may fail to take advantage of potential sales through not having the right mix of stock.
If businesses do suffer a significant drop in revenues post June 2011, they need to ensure that their cost bases are flexible and not fixed and that they can react accordingly.
Managing working capital is critical in an environment where credit is scarce and cash is king. As discussed in previous articles, dealerships should be preparing and regularly updating cash flow forecasts. When preparing their forecasts for the period after the end of the Scheme, dealers should model a number of potential scenarios, and ensure that there is a contingency plan in place to cover a worst case scenario.
Taking a longer term view of life after the Scrappage Scheme, motor dealerships should be attempting to leverage off its success. The Scheme will have brought many new customers into dealerships over the last eighteen months. Those new customers are a valuable source of after sales income – dealers need to ensure they are capturing the servicing and maintenance business of all cars sold under the Scrappage Scheme. In addition, motor dealerships should have in place a customer relationship management system that maintains a record of all customers who have bought new cars under the Scheme – those customers may seek to replace those cars again in two to three years and a properly maintained database will enable dealers to engage in focused marketing to them.
The Scrappage Scheme has provided a huge boost to motor dealerships at a very challenging time for the industry. Now that it is coming to an end, dealers should spend the coming months maximising any remaining potential revenues under the Scheme as well as planning for its aftermath. The dealers who will be best placed to cope with any negative impact from the Scheme’s end will be those who have carefully considered and planned their stock mix, who have maintained a flexible cost base and who understand their working capital needs.
Michael Neary is a Partner in Grant Thornton's Corporate Finance department
Email mailto:michael.neary@ie.gt.com