Brand and operational dynamics

McCarthy remains one of the industry’s strongest retail brands. During the industry crisis, honoured warranties derived some competitive advantage from our position of trust as vehicle buyers looked for a no-risk purchase in the tough times.

McCarthy’s smaller motor franchises bore the brunt of the cutbacks, but we retained a well-balanced franchise portfolio. Our automotive brand bouquet remains one of the most extensive in the country, and during the year we added Citroën and Mahindra.

The automotive industry is extremely cyclical and as the cycle turns we are strongly placed to obtain relative advantage from our reputation for fair dealing in good and bad times.

New initiatives

The major new initiative was our comprehensive restructure and creation of decentralised teams. The second important development was the establishment of the vehicle import and distribution joint-venture with Imperial.

Our insurance and financing business – BFS – not only has a new identity, it is in the process of adopting a new multi-channel, multi-product business model. BFS retains a high-profile presence on the showroom floor of our dealerships, but will now seek additional income streams outside of the motor industry.

Business risks

A stable rand contributed to new-price deflation in 2010, but the risk of a softer currency does exist. Fortunately the motor group is the market leader in used-vehicle retailing and well positioned for any market swing from new to used.

High volatility and the cyclical nature of the automotive business create enduring risks, but leaner structures and stringent expense management have improved our ability to respond.

Though motor retailing remains sensitive to consumer and business confidence, strong performance by our parts and after-sales operations confirms that after-sales service business provides a measure of balance when car sales stall.

The restructure of BFS addresses a major area of risk in that area – reliance on a single distribution channel. Equity market risk has always affected this business and is addressed by portfolio diversification and long-term commitment to strong “value” counters.

Yamaha remains very sensitive to developments affecting the leisure segment of the market. The likelihood of a strong consumer-led recovery appears slim. Two of the divisions have proved remarkably resilient to the economic downturn; namely, parts and accessories and musical instruments.

Sustainable development

Staff morale was a key focus area. We continued to invest in our people and our ability to bounce back was evident as the year progressed.

Economic performance – McCarthy is a level 4 contributor under the DTI Codes. While employment equity remains a challenge, improving only marginally at middle management level, we are determined to improve through training and internal promotion. Stars of Africa (a NUMSA partnership) continues its training of informal mechanics in the Orange Farm community. Training investment amounted to R86,7 million, of which 69% was spent on black participants. We launched an owner-driver scheme involving 20 parts delivery vehicles, owned by former employees – a significant enterprise development project.

Environment – The carbon dioxide emission-based tax has led to an average increase in the retail selling prices of cars of up to 2,5%. In principle, McCarthy is supportive of government’s policy, but notes the negative impact on vehicle affordability, a key factor required to improve access to motoring for more South Africans. We achieved considerable success with the launch of South Africa’s lowest priced new car, the Chery QQ, imported from China.

Human resources – The aftermath of recession continues to affect staff and 376 employees were retrenched following business closures. Of these, 87 were cross-skilled for deployment in other dealerships. Job security and concern over personal finances were the most pressing issues. With the closure of a further four branches in the dealership network this year (from 120 to 116), staff morale has needed constant support. There was no industrial action and our staff survey again recorded satisfaction levels of over 70%; a consequence, we believe, of open engagement and our determination to live company values.

Training – McCarthy Automotive Artisan Academies remain the leading automotive industry training provider. We registered new automotive and maintenance qualifications from level NQF2 to NQF5 (380 of our learners achieved NQF certification) and participated in the Department of Labour’s new accelerated artisan training programme, engaging 52 trainees. The Midrand academy was upgraded, with an additional R600 000 investment in equipment, to improve the training and transfer of practical skills. Our automotive artisan academies delivered 13 600 training days; 8 340 internally, the balance to external customers. Black students accounted for 77% of total students trained.

Health and safety – The division’s LTIFR is still low for the industry at 2,6.

Society – In fraud cases, we take decisive action, listing all losses and the measures taken to resolve these cases and reduce our vulnerability. Transgressors are named and shamed.

Product responsibility – We established a customer complaints resolution centre. Survey scores for used-vehicle customer satisfaction continues to top 85%. We are training customer-facing staff to ensure compliance with the new Consumer Protection Act.

Corporate social investment – Our CSI spend increased to R7,4 million and we were able to garner additional support through corporate sponsors for our flagship programme, Rally to Read. Staff members benefited from their involvement in the “Maintaining the momentum” mini-Rally to Read events.

Future

The benefits of efficiency improvements and rationalisation were felt strongly in the second half and continued momentum is anticipated in the coming year. A net reduction in the vehicle population in 2010 is an indication that the belt-tightening cycle cannot continue for much longer and meaningful replacement demand should occur.

This creates potential for continued improvement in core motor retailing activities, with positive knock-on effects for BFS. This operation is making a rapid transition to its new multi-channel business model, a platform for further growth.

Budget is also well positioned, with a quality fleet rightsized for a new environment. This division will also benefit in future from a more favourable vehicle buyback arrangement as well as more flexibility in terms of the management of its fleet.

Yamaha Distributors should experience slightly better trading conditions on the back of the modest recovery that is expected in consumer spending.

AAD traded profitably during the last quarter of the financial year and is likely to deliver much-improved results.

The trading environment may become somewhat easier, but challenges will persist for some time. The introduction of a carbon tax on new vehicle sales may encourage consumer down-trading. However, Bidvest Automotive will seek continued revenue gains and significant trading profit growth.

McCARTHY MOTOR GROUP

The benefit of last year’s corrective action came through strongly. Revenue recovered and trading profit moved significantly higher. Our ROFE improved to 22% and cash flows remained healthy. Strong contributions were made by the parts department, after-sales service and used vehicle sales.

Burchmores, our car auctioneer, put in another excellent performance. In the first half, its volumes were boosted by the large number of vehicle repossessions by financial institutions. Repossession business declined as the economy improved, but the success of Burchmores “wholesale to the public” sales strategy ensured continued momentum in off-the-floor retail sales.

Top performers across our brand bouquet were VW/Audi, Toyota and Mercedes-Benz. Each marque is supported by an extensive dealership network. New model introductions supported sales growth.

BMW/Mini demonstrated the resilience of strong brands. General Motors had a difficult year. Land Rover put in a pleasing performance, bolstered by new model launches. Volvo had a challenging year as the line-up remained static. Our fairly recently established Ford/Mazda dealerships continued to record losses. Pleasing contributions came from Chrysler, Jeep and Dodge, though Mitsubishi had a tough time. The Peugeot franchise got off to a slow start, but improved.

The Peugeot improvement was driven in part by the addition of the Citroën franchise to our existing outlets. The newcomer is internationally aligned with Peugeot and is marketed jointly with its sister brand, contributing to improved viability of these dealerships.

Our Nissan passenger and commercial, Fiat/Alfa and Renault dealerships staged a dramatic turnaround and delivered much-improved returns.

The Mahindra range of SUVs and light commercial vehicles also joined our brand line-up. Our Value Centres now provide a distribution channel for both Mahindra and Suzuki (another brand that had a good year). Chery and Foton are also sold through this channel. Although the losses incurred by the Value Centre network reduced from R73 million to R15 million, its performance remains most disappointing. Of the 19 Value Centres established in 2007, only eight remain. Further rationalisation is likely.

New initiatives included a strong effort to increase the reach of our parts business. Multi-franchise deliveries to customers ensured distribution efficiency while boosting volumes. Our owner-driver scheme handles deliveries in the Gauteng region. This enterprise development initiative has proved its worth in Gauteng and will be extended to KwaZulu-Natal.

The web-based sales tool McCarthy Call-a-Car put in another good performance as did the Club McCarthy loyalty programme. Corporate Marketing, our platform for serving multi-franchise corporate fleets, did well.

We project continued growth in revenue and trading profit in 2011.