Group 1 Automotive, the US dealer group which operates 47 UK dealerships including the Barons and Chandlers brands has announced that it’s first quarter earnings will be negatively affected by weak market conditions, including pressure on used car margins, as well as costs associated with a series of long-term, strategic investments designed to further strengthen the used vehicle, parts, and service components of its business. The strategic investments include the introduction of Val-U-Line, a proprietary brand for high mileage pre-owned vehicles; and enhancements to aftersales and retention programs for critical dealership employees.
Commenting on the situation, Group 1 boss Earl Hesterberg, "Based on a strategic review of our operations, we have reaffirmed that our used vehicle and aftersales segments are the key elements of our business model, which need to be strengthened to compete more effectively in the auto retail environment as it continues to evolve in the future. The recent peak in the new vehicle market in both the U.S. and U.K. and the flood of nearly-new and off-lease used vehicles into these markets are applying significant pressure to our margins, which require that we seek additional used car and service volume to compensate. To set us on that path, we have made the conscious decision to make some significant upfront investments to support our long-term strategies."
Group 1 says it aims to expand it’s used vehicle sales within its existing facility footprint and a variety of investments in dealership employees and technology. With this in mind the firm has launched Val-U-Line, a proprietary brand for older model, higher mileage pre-owned vehicles. Val-U-Line targets a growing customer demand and enables the Company to retail lower cost units that would have otherwise been sent to the auction. With an all-new internal online buying center, an upgraded internal auction capability, and a new transportation infrastructure, Group 1 expects the Val-U-Line brand to capitalize on the Company's scale, provide incremental volume and grow to represent 10 percent of the Company's used car business. As part of this initiative, the Company has significantly enhanced the used vehicle compensation structure and opportunities for its sales associates. While there will be increased costs associated with these changes, the Company expects to benefit from increased productivity and retention over time. To support the launch and integration of Val-U-Line, the Company has added a used car director and functional support team at the corporate level.
Talking about Val-U-Line, Group 1 U.S. president Daryl Kenningham said, "We believe that we have significant upside to our used vehicle sales volume by better leveraging our existing dealership locations. We have become preoccupied with marketing service loan and off-lease vehicles and have neglected the higher mileage spectrum of the used vehicle market. As we deploy the Val-U-Line brand within our U.S. operations, we will evaluate the strength and success of this model for strategic replication in our U.K. market where similar opportunities may exist."
In regards to the aftersales and employee retention initiatives, Hesterberg commented, "One of the major challenges and obstacles to improving our dealership performance is the difficulty in hiring and retaining a high percentage of our key dealership customer facing service advisors and skilled technicians. Therefore, we have taken some aggressive steps in work scheduling for many of these critical professionals, which will incur some significant incremental near-term cost, but should allow us to meaningfully increase sales volumes and customer satisfaction in the long-term."
To support additional parts and service growth, the Company has also enhanced service personnel compensation. This includes an increase to the fixed component of service advisor pay, the creation of a well-defined path for career advancement, and the roll out of a new, flexible work schedule featuring substantially more days off over the course of a year to attract and retain talented service advisors and technicians. Additional actions include the finalization of an in-house Service Advisor University dedicated to training the Company's more than 800 U.S. customer service personnel.
Hesterberg concludes by saying, "While these actions are putting near-term pressure on our financial results, we believe they are necessary to better position the Company for future growth, as well as prepare us for the potential ongoing evolution in the automotive retailing space. In addition to the cost of the previously announced employee bonus of $500 that will add $2.9 million to first quarter 2018 costs, we estimate the total cost of these strategic initiatives will add approximately $3 million to our costs in each of the first and second quarters of 2018. When coupled with a recent tightening in market conditions in both the U.S. and U.K., which includes pressure on used vehicle margins in the U.S. that have declined approximately $200 per unit in the first two months, the combined effect is expected to negatively impact our first quarter earnings."