Is ‘poor trading’ to blame for business failures

Following a sustained period of stability for the motor trade and annual increases in new car registrations, not all dealer groups have thrived.

‘Poor trading’ can describe a multitude of sins and should come as no surprise when it leads to business failure. However, in our experience this never tells the whole story.

Does the recent insolvencies of City Motor Holdings Ltd and James Haugh (Castle Douglas) suggest a downturn in the market or a new direction of travel for the motor trade? What was the root cause of this ‘poor trading’?

The liquidators of James Haugh (Castle Douglas) blame the rise in internet sales as responsible for the failure of the business, with ‘poor trading’ and a glut of nearly new and used cars in the market the cause of City Motor Holdings demise.

Many dealers hail the internet as a tool for driving sales; a way to engage with their customer base and present a virtual forecourt both of which drive footfall. Advances in technology have always affected markets with both winners and losers emerging depending on how well they have embraced and exploited the opportunities those advances present.

Dealers need to continue to innovate in this space and watch the competition for good ideas and then do it better.

Traditional economic theories of supply and demand may drive down price where there is an over-supply, but savvy traders will reflect this in their used car purchasing decisions to help maintain margins with a lower price bringing more buyers into the market.

Of key concern is the level of nearly new stock which suggests an excess of pre-registrations to meet targets. If this is the case, then the positive results of previous years which seems to equate new car registrations with new car sales creates a false impression of success. The dealers in this position will have nearly new stocks in a flooded market where they have had little control over the purchase price of that stock. In addition, bonus monies earned may have been used to cover fixed costs and not be allocated to the stock unit.

Are these insolvencies simply the result of ‘poor trading’, a single adverse event or, more likely, an unfortunate combination of factors that management strategy or decisions did not adequately address.

Many such insolvencies can be avoided with the appropriate planning, forecasting and financial control, with realistic and achievable target setting avoiding the need for management to take decisions that may put future trading at risk.