The value of car dealerships’ inventory has risen 46% over the past five years to £23.4 billion last year, up from £16.1bn in 2011, says national accountancy group UHY Hacker Young.
Following analysis of 10,400 dealerships, UHY Hacker Young found that car dealerships have increased their inventory by 13% in just a year, risking tying up capital and hitting profitability.
During the same period, the turnover of UK car dealerships increased by 32%, from £107.9bn to £142.6bn, with stock now accounting for 16.4% of total turnover up from 14.9% five years ago.
UHY Hacker Young said that car dealerships are encouraged to add increasing amounts of stock to their balance sheets to meet contracted targets from manufacturers looking to secure greater market share and to reduce their own stock levels after struggling during the recession.
It adds that this will obviously cause issues for dealerships if sales slow and they are stuck with this excess inventory – they may have to reduce prices or increase incentives to clear, especially as the economic outlook remains uncertain post-Brexit vote.
Paul Daly, partner at UHY Hacker Young, said: “Dealerships are under pressure to add increasing amounts of stock to their balance sheets in order to meet targets set by the manufacturers.
"This approach can put unnecessary strain on dealerships, with many facing the risk of termination of their lucrative contracts with manufacturers if they don’t take on stock.”
UHY Hacker Young added that across Europe the production of cars outstrips demand – 18.1m cars were manufactured during 2015 compared to 16.7m new registrations – and the strong performance of sterling against the euro in recent years makes the UK a popular destination for this excess stock.
Daly added: “Manufacturers continue to produce more stock than European demand calls for with much of the excess stock residing on the balance sheets of UK dealerships.
“The UK is a unique market in Europe that traditionally absorbs the oversupply from Europe. Other European markets suffered deeper economic crises than the UK and traditionally consumer habits in other countries often see less frequent vehicle purchases than would be the case in the UK, all of which makes the UK a prime destination for excess stock.
“Ideally, businesses would take a “just in time” approach to stock control, to ensure storage costs are kept to a minimum and valuable capital is unrestricted – both of which would boost company performance. However, this is often difficult to achieve with manufacturers controlling the production levels, and by implication, the sales targets of dealerships.
“The second-hand market is still feeling the effects of the recession, there are less used vehicles on the market as the level of registrations during the recession plummeted. As a result, there are fewer vehicles in the four to seven year old bracket which continues to cause issues for dealerships and consumers alike.”
However, weaker exchange rates could see this excess stock head to other European countries, suggest UHY Hacker Young. Research shows that there has been strong growth in demand across the EU as the number of registrations has increased 9.3% in a year.
Daly adds: “Consumers in the UK benefit from low interest rates which allow vehicles to be purchased on highly attractive monthly payment plans, however, this can create artificial demand.
“With the impact of Brexit yet to be fully realised, businesses may look to pursue more conservative business models.
"In the event of any downturn, if the UK has a lower proportion of Europe’s stock it would make for a softer landing than in 2008 when vehicle values crashed.
“The fall in the value of sterling since Brexit was announced could make it difficult for dealerships to shift excess stock if it is more expensive in the first place.
"This could also result in the level of margin of these dealerships squeezed further, putting many more under financial strain.”