Positioning and reputation

McCarthy celebrates 100 years in business this year and is one of the most trusted brands in automotive retailing. We are positioned as “the value leader you can trust”. All Bidvest Automotive businesses adopt a long-term business sustainability philosophy, with the accent on appropriate business strategies, sound values, people development and customer retention.

MAcro- and trading environment

As South Africa moved out of recession, there was keen focus on new vehicle sales, a lead economic indicator. The new vehicle market recorded a significant improvement and by June passenger vehicle sales were up 27,9% year to date. Gains, however, were from an extremely depressed base.

In 2006, new vehicle sales topped 700 000 and market size was projected to exceed 1 000 000 units by 2011. Unit sales for 2009 reached just 395 000 and in calendar 2010 are expected to recover to about 475 000 units overall – 34% below 2006 levels.

Statistics fail to disclose the financial legacy of vehicle manufacturer optimism from 2006. Considerable investment was required by brand principals to support market expansion that failed to materialise, adding to fixed costs and leading to over-stocking and margin squeeze just as recession forced unprecedented market contraction. Slow recovery from a low base has yet to offset these effects.

South Africa’s return to economic growth was hesitant. Consumers remained under pressure and banks remained risk averse. Credit extension increased only marginally. The macro-environment for motor retailing and associated activities remained challenging. Strong World Cup esp; ffects were expected to support vehicle rental. In fact, the tournament’s impact occurred much later than expected and was not nearly as substantial as some hoped.

After more than two years of extremely difficult trading, one positive is the emergence of a spirit of partnership between retailers and manufacturers as the industry confronts new realities and applies recent learnings.

Strategic and industry dynamics

Modest economic growth, higher levels of business and consumer confidence, lower interest rates and enhanced vehicle affordability contributed to a meaningful recovery in overall unit sales. Corporate customers accounted for much of the activity. Consumers remained cautious. Low rates eased debt servicing costs, but household debt as a percentage of disposable income remained high. Extension of vehicle replacement cycles put pressure on workshop utilisation and parts sales.

The first half saw a strong upsurge in used vehicle sales, but greater balance was apparent in the second half. At industry level the used-to-new ratio (at 2,3 used cars for every new car financed in November 2009) had recovered by June 2010 to 1,6 used cars for every new car.

We sold 29 697 new vehicles, 2% less than the 30 290 units sold in 2009. Used vehicle sales declined by 5% to 42 594 units. Total retail vehicle sales amounted to 72 291 units. Used-car profitability along with parts and service made a major contribution to the business.

Across the industry as a whole, the vehicle population shrank as the number of scrapped vehicles moved higher than the number of new registrations.

At Bidvest Financial Services, soft interest rates were negative for returns on bank deposits, though a strong recovery by the JSE was positive for the investment portfolio. Notwithstanding the reduction in vehicle sales, the BFS underwriting profits were 15,6% up thanks to improved penetration levels in all products, tight expense and claims controls and good retention strategies.

Industry-wide, the level of vehicle rental activity fell 0,8% for the 12-month period, reflecting cutbacks on corporate travel and consumer belt-tightening. Budget was also impacted by reduced international travel as a result of the global financial crisis.

Efficiencies

In an effort to improve efficiencies, a number of restructuring initiatives were implemented.

The asset-based finance business, McCarthy Fleet Solutions was sold to Bidvest Bank. We also sold 50% of McCarthy Vehicle Imports (the channel for importing Chery and Foton) to Imperial Holdings. Imperial took management responsibility for the resulting joint venture, now named Amalgamated Automotive Distributors.

The construction machinery operations of McCarthy Heavy Equipment were wound down and the materials handling division transferred with effect from May 1 2010 to Afcom, a subsidiary of Bidvest Industrial and Commercial.

Yamaha Distributors has been repositioned as an independent business reporting separately into Bidvest.

The three remaining businesses, McCarthy Motor Group, BFS and Budget Car and Van Rental, also started operating as independent businesses during the last quarter of the financial year.

The McCarthy corporate office was collapsed and the functions taken on by the three core operational divisions.

The restructure applies the Bidvest philosophy of smaller, focused business units, local autonomy and decentralisation of corporate services. Simultaneously, the potential succession problem was solved. Each division is led by an experienced management team, with in-depth knowledge of each operational area. The retirement of Bidvest Automotive chief executive, Brand Pretorius, is scheduled for March 2011.

Bidvest Automotive’s asset-base was much reduced, enabling significant interest savings.

Unfortunately, retrenchments continued and the number of employees fell from 6 942, before restructuring, to 6 699. By the final quarter, almost all loss-makers in the motor group were moving back into profit and margin recovery was under way.

Quality people drive our businesses and leaner teams continue to apply our long-term policy of optimum customer service to secure strong repeat business.

Performance

Performance as a whole across the restructured and decentralised division was satisfactory. Trading profit rose 60,4% to R424,1 million (2009: R264,4 million). Revenue at R17,3 billion was 10,7% higher (2009: R15,6 billion).

Following extensive rationalisation and restructuring over the past two years, McCarthy Motor Group staged a strong turnaround. Trading profit more than doubled to R208 million despite a 4% decline in vehicle sales to 72 291 units.

Increased emphasis on used-vehicle trading resulted in an improvement of 34% in profit contribution, despite lower sales volumes. Parts and service revenues increased.

Pleasing results were recorded at BFS as it transitions to a multi-channel business model while retaining its strong automotive linkages. The business increased operating profit by 165% from R58,2 million to R154,1 million.

Budget Car and Van Rental, Yamaha Distributors and AAD delivered disappointing returns.

Operating profit at Budget Car and Van Rental declined by 25% from R86,7 million to R64,8 million, mainly due to conservative used-car buyback offerings from McCarthy dealers and low levels of fleet utilisation during the last quarter of the financial year.

Yamaha Distributors recorded an increase of 51% in operating profit to R15,5 million from a low base of only R10,3 million. AAD incurred a substantial trading loss of R24,8 million.

Non-financial performance, which includes market share and customer satisfaction, was heartening. In the face of considerable marketplace pressure, Bidvest Automotive remained committed to the principles of long-term business sustainability.

Benchmarks

Accurate, up-to-date industry statistics permit precise benchmarking of performance. We continue to benchmark performance by business unit and department and constantly review criteria. Our dealerships remain among the highest industry earners of variable margin incentives from motor manufacturers, a reflection of our ability to attain targets within specified timeframes.

Rigorous monitoring of underperforming dealerships helped to improve the average performance across all business areas. A special performance group project proved highly successful in the used-vehicle area.

Finance and insurance personnel are assigned to each dealership floor and measured by the finance and insurance income they generate. Individual benchmarking is based on improving the “going rate” (norms achieved per marque per site in the recent past). Benchmarks are reset every quarter. BFS marketers (responsible for several dealerships) are measured on overall performance.

The dealer incentive commission structure was changed at McCarthy Finance. The new structure is risk-rated with the focus on the quality and finance rates at which business is written. The revision contributed to improved bad debt experience and improved margins.

Throughout Bidvest Automotive, sustainable business practice is incorporated into benchmarking as we continually measure factors such as market share, employee and customer satisfaction and retention.