UK Car Market Round Up – 12 months to June 2010

UK recessions last an average of 4 years, so the current one, which began in late 2007, should be in the recovery phase in 2010 and see positive growth in 2011. Will this happen given a Eurozone crisis, slowdown in China and the US and significant UK tax rises and reductions in government expenditure?

The evidence from the UK’s retail motor industry is that it will as all the major market segments start to rise as predicted – see chart above.

In the 12 months to the end of June 2010, UK New Car Registrations were up 371,602 (+20.6.2%), a striking turnaround from the same period last year, when they were down 574,917 units, -24.0% less than the rolling 12 months before. H1 2010 was up 185,414 units (+20.1%) over H1 2009, growing the same as the H2 2009 annual.

There is continuing evidence that buyers confidence is returning and they are more willing to spend in H1 2010 compared to H1 2009: the mainstream segment (+76,634) rose steadily until March and has maintained this level in Q2, following sustained decline until Q3 2009. However, the market share gain (+11.51%) was only half the rate of the overall growth in the market. Budget sector volumes peaked in April with the last of the Scrappage Scheme units, up 37,543, just 40% of the growth it saw in 2009 (93,235) but still up  at double the rate of the market growth (+48%) year on year, albeit it has dropped from its peak in Q2. For both the mainstream and the budget segments, the UK Scrappage Scheme played a large part in their growth, accounting for 273,885 units, 13% of the 2009 total. Without the scheme many observers are wondering how the retail market will fare in H2 2010. The second half of 2010 will have to contend with a range of economic headwinds: reduced government spending, higher VAT (from 1/1/2010) and continued economic uncertainty.

Fortunes for the premium and luxury segments have strengthened. The premium market (+34,258) has piled on double the volume growth it saw in H2 2009 The luxury sector has stabilised, suggesting we are unlikely to see further volume falls.

Winners and Losers:

Budget: Apart from Daihatsu and the Malaysian producers, Proton and Perodua, the rest of the sector continued to do well, but success was uneven. The same factors constrain each brand as existed at the close of 2009. Daihatsu (-1,275), a Toyota subsidiary, continues to be hurt by the strong Yen/£ exchange rate while the Malaysian producers continue to be of too small a scale to compete, even with a weakening Malaysian currency. Kia/Hyundai, 2009’s outright winners, continue to break away from the pack, adding weight to the suggestion that those brands may emerge dominant global ‘budget’ brands. They alone accounted for 90% of the growth in segment volumes (34,148). Although, Skoda (+7,755) added units, Suzuki -2,397) and Chevrolet (-842) ran out of steam. The Scrappage Scheme played a large part in stimulating volumes in this segment. As reported earlier, Hyundai/Kia may dominate this segment across the EU and US, if they maintain this momentum. Since 2003, Hyundai have trebled volumes and Kia have doubled theirs. The sustained weakness of the Korean Won between March 2009 and May 2010 – down 25% – coupled with their manufacturing strength provided a distinctive price advantage. However, since mid-May 2010, the Won has strengthened 12%, albeit still down 17% on its Q1 2009 rate.

Mainstream: Over the long term – 2003 to 2010 – almost every mainstream brand, except Mazda, has lost market share as the mainstream has become squeezed between the lower price offerings from the premium segment and the quality/warranty offers from the budget segment. H1 2010 has seen no change in this strategic development. Comparing 2010 with 2009,  the strongest performer was Renault(+28,734), followed by VW (+20,633), then PSA (+17,255). They accounted for +87% of the segment’s growth between them. Second ‘tier’ winners were Vauxhall (+11,448) – which failed to offset their volume drop of -32,881 in H2 2009, Nissan (+14,336) and Fiat (+7,532). Ford faltered (-740), presumably paying for their +20% price increases during 2009. Chrysler (-262) continued to lose ground, but at a slower rate and Honda (-3,525)  also fell back due to its ageing model range: the rest of the brands in this sector made gains. Mini, Mazda and Seat all added 3,500+ registrations. As reported in earlier posts, the market is highly dependent on exchange rates. For example, although Nissan is a japanese-based car maker, it has benefited from the tie-up with Renault and its UK base, which has allowed it to escape from many of the difficulties of the strong Yen. Similarly, Ford has benefited from the weak US dollar and its UK manufacturing base.

Premium: Saab (-2,587) continues to be hammered by the market, with market share in June only 40% of its January level (0.55%). Unless there is a substantial positive consumer response to the new and much praised Saab 9-5, dealer volumes may make the existing network unviable. But Lexus (-1,569) also weakened in every month of the last 12, except August ’09 and January ’10, on a combination of press scares and the strong japanese Yen. Similarly, the ‘bull run’ enjoyed by both BMW (-574) and Jaguar (-1,645) seems to have stalled. Audi continues to out-perform (+1,122), but at a slower rate. Three brands are in the fast lane: Land-Rover (+7,760), Mercedes Benz (+6,746) and Volvo (+7,982). Alfa Romeo (+4,788) takes the laurels for the most successful newcomer to this segment.

Market Outlook:
If the fortunes of major retail groups – except for Pendragon-  are an indicator, the UK market is strengthening. As background, keep in mind the SMMT’s 2010 UK Market Forecast was 1.77MN and LGA’s was 1.8MN.
Inchcape revised upwards its 2010 UK registrations forecast from 1.8 to 1.9 MN units in May 2010, adding that revenues in the first 5 months of 2010 were up 10.6% in constant currency and reporting that FY 2009 saw £175MN profit on £5.5BN of revenue. Vertu expanded its presence in the ‘budget’ segment to grew revenue by 7.6%. Sadly, their ‘like for like’ revenue (£818MN) grew only 1% (UK registrations grew 19.6%) as their 2009 franchise portfolio was disadvantaged by the scrappage scheme. Still, Vertu generated PBT of £4.6MN which contrasts starkly with Pendragon’s £3.191BN revenue and dissapointing PBT of £1.3MN. Just comparing these two reveals Vertu as 13.8 times as profitable as Pendragon. Lookers revenues of 1.749BN and PBT of £11.5MN makes them 16 times more profitable than Pendragon. Lookers Trading Update (July 2010) confirmed that H1 2010 was better than plan and hinted that, now their balance sheet was strong, they could become acquisitive again.
Marshall Group posted automotive retail turnover of £453MN – above 2007 – and an operating profit before tax of £6.6MN. 2008 saw a loss of -£7.45MN. Sytner Group, the UK subsidiary of Penske Automotive, was disadvantaged by its focus on the premium and luxury segments. While accounting for 37% of revenue, the group generated $3.4BN(£2.27BN) in 2009. The UK group has reported a decline of 26% since 2007. However, their Q4 Trading Update cited growth of 30% in the UK’s like for like sales and almost 40% in overall revenue.
For those who like a flutter, motor retail shares might now be worth a second look.