Dotcoms bite into motor retailers' profits

Profit margins among new and used motor retailers have fallen to the lowest level on record with the sector now looking to be in danger of falling into an overall loss with the global economic slump resulting from the September 11 terrorist attacks merely exacerbating already tough conditions.

The stark picture of an industry heading into crisis has been highlighted in the latest edition of Experian's Corporation Health Check, which shows that UK corporate profitability was already in steep decline months ago.

The report states that profit margins among motor traders have 'almost disappeared' in the latest quarter of 2001, declining from 2.28% in the first quarter of 2000 to 1.65% in Q4 and 1.43% in Q1 2001.

“This is the lowest on record and the sector looks to be in danger of following the textiles sector into an overall loss. The year-on-year decline is over six times faster than the industrial average and reflects the increasing pressures on margins from newly-emerging suppliers of new and used car, such as internet companies, and increased competition in the aftermarket, where they traditionally made their profits,” the report says.

Experian also says that the recent strong sales – which has led the Society of Motor Manufacturers and Traders to predict record 2001 new car registrations – may provide 'some relief, but it depends on how much dealers have given away to generate sales'.

Return on capital employed among motor traders slumped to its lowest level on record in Q1 2001, falling from 14.89% in Q1 2000 to 10.73% in Q4 2000 and an 'abysmal' 9.23% in the latest quarter.

“This was the steepest quarterly fall of all the sectors, as was the annual decline of 38% - well over twice the annual rate of decline of the industrial average,” the report states.

Peter Brooker, author of the Experian report, said: “If there was any hope earlier in the year, this has probably now been dashed. Manufacturing output is falling at the fastest rate for almost a decade and has now declined for three consecutive quarters. Moreover consumer confidence, which had provided the mainstay of the domestic economy, dipped sharply post-September 11, with the rate of job losses accelerating, house prices faltering and consumers cutting back on spending.”

On the positive side, he said, the recent cut in interest rates meant consumer demand for credit is still robust while inflationary pressures weak.