Thinking positive about Brexit?

By Paul Smith, Director, Traka Automotive

The dearth of evidence proving or disproving Brexit’s lasting effects on UK prosperity has not curtailed speculation over how its financial impacts will play out. However because of strong, economically-critical links with the EU markets in our market, there has been no shortage of concerned voices out there over recent weeks.

Yet while the possible effects of Brexit on Britain’s car makers and drivers have been much mulled over, the implications for its car retailers have received less punditry. This is surprising given that dealers are often caught in the cross-currents when the winds of economic change hit us. Take for example Glass’s prediction that we will see new car sales falling markedly as early as Q4 2016. Others expect numbers to fall from early next year.

What is a ‘known known’ meanwhile, is that automotive sales today are shaped by more than just the number of sold vehicles driven out of showrooms. The value-added services wrapped around new car transactions and aftersales servicing throughput are arguably even more important for dealer principals with a beady eye on their balance sheets.

Some evidence suggests that dealers were more upbeat about Brexit than might be expected. More than half of UK dealership sales staff admitted to voting in favour of Brexit, according to a pre-referendum poll of more than 300 frontline sales executives, sales managers and senior directors conducted by Dealerweb. A healthy majority, 58 per cent, said that they would vote ‘Leave’, 25 per cent ‘Remain’, leaving 17 per cent of dealer staff undecided just prior to 23rd June.

Asked whether they thought UK vehicle sales would be affected by leaving the EU, replies were more balanced: 36 per cent opined that Brexit would have a ‘positive impact on new and used car sales’, while 29 per cent reckoned that leaving would have a negative effect, leaving 35 per cent ‘unsure’ of the impact.

It’s impossible to tell whether the sample responses solicited here were governed by the head, the heart, or the nationality of the polled dealerships’ OEM brands. However, it’s obvious that UK dealerships will be watching out for evidence of post-Brexit fallout over the next few months. They well know how far maintaining sales of new and used cars is shaped by the multiple extras that OEMs and dealers have sought to integrate into the sales process.

The vagaries of car insurance provide one intriguing example. While car sales have been doing well, policy premiums have been rising, the overall cost to drivers being added to by hikes in Insurance Premium Tax. The latest such hike, announced in last March’s budget, is due to come into effect in Q4 2016. The combination of 2015’s ITP increase and other premium rises, puts about £40 onto the average annual premium, with more for younger, higher-risk drivers.

Dealerships and their insurance partners like flexibility when it comes to packaging deals for buyer demographic profiles, but they have less flexibility here than before. A 2011 European Court of Justice ruling prohibits the use of gender considerations when underwriting insurance premiums, banning insurers from offering women drivers lower premiums based on the fact that statistically they are less likely to make a claim than male policyholders.

Following Brexit, however, this ruling could be one of many EU and ECJ rulings being revoked here in the UK, so cheaper deals could again be offered to women drivers (and possibly other lower-risk groups) here. Dealerships here would have plenty to gain from seeing the gender-balancing ban rolled back. Such a change would fit well with sales and marketing campaigns focused on women car buyers now claiming a higher proportion of new vehicle sales.

It might also be a good time for the automotive retail sector to give some consideration as to how Brexit might have a bearing on car financing packages such as Personal Contract Purchases (PCPs). Because PCPs and other lease financing models account for around 80 per cent of new car sales now – dealerships may be well advised to think ahead about how Brexit might impact financing deals. Are there any early signs that interest rates are increasing there and, if so, are your brands reacting quickly enough?

For instance, if scrapping free trade agreements results in even a small increase in the price of vehicles imported from EU countries, then will that be fed through to prices on the forecourt or simply absorbed in OEM-subsidised PCP offers?

Any disruption to the successful and now dominant financing model is a concern but it may also provide an opportunity for the UK car market and its dealers as they explore a wider mix of financing options including possibly a ‘Pay-As-You-Use’ charging system going forward. Like all moments of uncertainty, Brexit provides dealers with an opportunity to review how things are done right now.

Some will use the next two years prior to exit as an opportunity to tweak their sales processes to stay ahead. Others still will deploy technology solutions to unlock operational efficiencies. Larger firms will no doubt continue sizing up further acquisitions, especially if they see sales margins being squeezed further in all the uncertainty created by the UK’s upcoming EU exit.