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Retail failure

Date: 27 September 2006

It's not a good time to be a car maker or retailer - but fleet managers and contract hire firms can rejoice.

There is a significant divide opening up between the economic performance of UK plc as a whole and the new car market in particular.

Let's take a look at some figures.

New car sales in August were down by 6%, and even if the industry does manage to squeeze 400,000 registrations out in September, the annual market will still be down by some 4.3%, with the fleet sector down by 2.5%. Meanwhile, according to the British Retail Consortium, high street retail sales are growing at around 2.5% per annum.

Consumer Price Index (2006)
January1.9%
February2.0%
March1.8%
April2.0%
May2.2%
June 2.5%
July 2.4%
August2.5%
The Consumer Price Index (CPI), the Government's official measure of inflation, rose to 2.5% in August, up from 2.4% in July. But new car price inflation, which is a factor in the CPI, is running at 0.8% according to the Office of National Statistics.

What this means in real terms is that the UK new car retail business is in dire straights. Just when every other retail sector is experiencing growth and putting up prices, car manufacturers and retailers are having to pull back. While their underlying costs are going up, they are unable to persuade the end customer to buy more, or pay more for, their product.

It isn't going to get any easier for them. The Bank of England Monetary Policy Committee (MPC) is tasked with looking at inflation as a whole and is unlikely to spend much time discussing new car sales - however significant they may be to you and me. It has a target of bringing inflation down below 2%. Which explains why the MPC members voted unanimously to hold base rates at 4.75% in August and everybody expects the rate to rise to 5% in November, if not earlier. Indeed, last week the CBI tacitly accepted that a rate rise was necessary.

“”

The UK new car retail business is in dire straights - just when every other retail sector is experiencing growth and putting up prices, car manufacturers and retailers are having to pull back

Ian McCafferty, the organisation's chief economist, said: "The Bank of England faces a difficult challenge. The inflation outlook suggests a further increase in interest rates later this year. No business wants higher borrowing costs but we do think it would be necessary in order for the Bank to meet its mandate."

Basically, the CBI is suggesting we should all take some pain now in order to keep inflation under control next year. Its forecast suggests inflation will reach a peak of 2.8% in the first quarter of 2007 and then come back down closer to the target later in the year.

Leaving aside the wider implications of higher interest rates on your business as a whole, is any of this going to affect the way you manage your fleet?

Well, oversupply in the new car retail market is certainly good news if you are looking for replacement vehicles. All the signs are that carmakers will be desperate to move stock in the final quarter and, maybe, even into the first quarter of 2007.

At the same time, there is a strong used car disposal market at the moment with above average residual values. The BCA Used Car Price Index for Q2 this year stood at 107, compared to 101 this time last year - another good reason to look at refreshing your fleet, if you have the flexibility to do so.

On the other side of the industry, contract hire companies should be in clover. Okay, their borrowing costs may be going up, but most took a very cautious view on residual values three years ago and they are now in a position to buy cheap and dispose at a profit. As a result, rentals should be coming down.



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