As demand for dealers’ equipment
declines, and manufacturers are producing less, what is the future
of stocking finance? Fred
Crawley investigates
Stock funding (SF) has
traditionally been associated with the motor industry, but dealers
of all asset types are equally in need, potentially no more so than
at present.
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On the face of things, however,
stocking finance could well have hit the doldrums. After all, as
Mike Killbee, a consultant at the law firm, Salans, points out:
“New asset stocking is by definition an alliance between
manufacturers, financiers and dealers, and is driven by sales
allocations between manufacturers and dealers.”
All of these sectors are feeling
the pinch, thereby leaving a potential shortage in both demand and
provision of stocking funding.
First off, captive funders
especially are growing cagier due to ties with embattled
manufacturers, which in turn are under dire pressure. For instance,
the SMMT reported October’s CV sales as 41 percent down
year-on-year, while UK consultancy off-highway research predicts a
21 percent sales slump for construction equipment in Europe in
2008.
In turn, dealers are seeing a
drying up in retail demand for assets, and in turn find it ever
harder to fund the purchase of assets.
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By GlobalDataNonetheless, dealers must still
fund stock to stay in business. Furthermore, the problems faced by
manufacturers, funders and dealers vary in degree, depending
largely on what asset the reseller is most focused on.
Commercial vehicles
In the CV market, there is a
widening gap between consumer demand and vehicle supply, which in
turn is creating a bottleneck among dealerships.
On the one hand, despite worsening
asset values and falling profits, factories keep moving units out
to resellers.
This is partly because of
pre-existing stocking agreements requiring dealers to take
manufacturers’ assets. For instance, large LCV dealers still accept
these stockpiles, since the SF agreements of the captives involved
often entail lower rates and fees depending on retail penetration
for their products.
“In some areas, there is still a
tendency to stockpile”, according to Stephen Dawson, a partner at
Shoosmiths, a law firm.
These agreements open a gamble: if
dealers can maintain sales levels, and avoid the interest burden of
holding speculative stock by keeping turnover high, supply is
matched and the system stays healthy. But if dealers cannot move
the units before the end of the agreement’s subsidised period, they
face big problems on their balance sheet and a sales shortfall that
hits the manufacturer.
At the same time, as shown above,
there is a marked slackening in demand for dealers’ goods, from
consumers and businesses alike.
The light commercial vehicle market
is better able to adapt to large numbers of stock, even if retail
demands are thin on the ground. This is because these smaller
assets are more versatile, offering more avenues through which
dealers can sell stock. Also, their lower unit value incurs less of
an interest burden to dealers holding stock.
The scenario for HGVs is different,
according to Alan Rhodes, sales and marketing manager at Scania
Finance Great Britain. Due to high interest payments on stocked
HGVs, he says, “dealers will generally not carry stock just for
sale”, with units built and imported after sale instead.
Stock facilities are offered while
units are imported, built at bodybuilders and painted before
delivery.
“With our plans, we pay the
importer and he owes us money. We then keep the unit on the
facility until it’s built, when it is sold to the customer, giving
the seller the money to pay us,” Rhodes says.
Heavy equipment
The problems with narrow asset
specification and bottomed-out RVs that creep into the high
value/low volume end of the CV market reach their crescendo in the
highly specialised construction and agricultural equipment
markets.
For at least one major European
construction manufacturer, demand for stock has crashed to such an
extent that almost every unit to come off the production line has
been built to customer specifications.
Consequently, speculative stocking
of generic units at dealerships has evaporated, and SF for the
captive involved has become simply a means to an end – vehicles are
out of dealerships almost as soon as they are in.
The exception to this rule comes in
the case of small “compact units”, which have much smaller values
and are often stocked speculatively by dealers.
This creates a problem for captives
as it becomes vital for them to track stock movement closely and
collect funding back from dealerships as soon as possible.
Issues of supply and demand are
even more complex in the agricultural equipment, where resellers
require more assets during particular seasons of the year and less
during others.
Nowhere, however, is the symbiosis
of manufacturers, funders and dealers clearer than in the
construction sector. Here, shrewd SF may help keep ailing sales
afloat. As a result, some captives are happy to provide stocking
finance, even if there are few, if any, immediate economic benefits
in doing so.
“We don’t do stocking to make
money,” explains Nigel Greenaway, marketing manager at JCB
Finance.
“It is a means to an end, to keep
the dealers viable and the cashflow sensible,” he explains. “For
us, the key issue is speed of payout – part of the service we offer
dealers is the speed with which we get them their money, not just
the speed with which we underwrite the customer to facilitate a
retail sale.”
Office equipment
A different situation prevails
at the other end of the spectrum – in the high volume/low value
world of office equipment finance.
The first difference is the lack of
necessity for SF: dealers here can purchase low value stock with
operating capital.
However, in certain instances where
dealers do require funding, then financiers can provide the
stocking finance support. Funders in such cases are often driven by
the fact that by easing a dealer’s cash flow with a stock plan, the
dealer will be more inclined to act as a vendor channel for the
provider.
SF in the office equipment sector
also allows dealers to maximise margins when selling discounted
stock.
“When a special offer comes along,
and a manufacturer wants to push one product more than another.
They will give special pricing to a channel. For that channel to
get a good volume of stock in and so make a better margin, they
need a solution beyond spending operating capital,” explains
Gabriele D’uva of Xerox Financial Services.
SF terms in the office sector tend
to be short, due to the generic specification, low cost and high
demand level of assets, and thus fast sales turnaround. This
mitigates a certain amount of risk for funders, at the expense of
revenue on each deal.
But high asset volumes and fast
turnaround times are a double-edged sword. Above all, the dynamics
of this sector illustrate the importance to all SF of asset
tracking and robust software systems.
The more assets pass through a SF
system, the more time and energy must be invested by funders in
keeping track of dealer stock levels (see technology stories, page
34).
