The average profit margin at Australia’s car dealerships sank to just 0.5% of sales in the second half of 2008, and will come under more pressure this year as the automotive industry braces for a 25% fall in sales.
The dire message is contained in a report from accounting firm Deloitte, which is also predicting further consolidation and job losses among dealers.
Australian new vehicle sales enjoyed its second best result ever in 2008, with total sales of 1,012,164 vehicles. But Wayne Pearson, managing director of Deloitte Motor Industry Services division, says these figures were artificially inflated as car companies, distributors and dealers attempted to clear excessive inventories.
“As manufacturers dramatically cut back production and excessive inventories are relieved, the true underlying demand will not become evident in sales figures until at least after the March quarter 2009,” Pearson says.
The attempts to clear inventory led to sharp cost cutting, driving margins down from 1.45% in the first half of 2008 to just 0.5% in the second half. With vehicle sales set to fall up to 25% in 2009, margins are unlikely to improve and dealers will struggle.
Mergers and buyouts are expected to increase and dealers will need to trim costs by shedding staff.
“Better performing dealers have adjusted staff levels and improved the accountability of employees, which tends to be the biggest direct expense of the department,” Pearson says.
“Unfortunately, dealers who fail to adopt similar practices risk significant unrealised losses accruing in their dealerships if vehicle prices continue to fall and inventory levels rise.”
The one benefit from this carnage is that consumers will be able to get some great deals on new cars as dealers battle for business.
But if you do decide to buy a car, have a bit of sympathy when the car dealer tells you there is no way they can drop that price any lower – they are probably telling the truth.
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James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
