Car-boom!

Yesterday’s Guardian G2 section led with the somewhat self-consciously juvenile word, ‘Vroom!’.

Subtitled ‘Why Britain can’t stop buying new cars‘, the cover story tried to answer why car sales are rising in the UK while stagnating everywhere else in Europe.

It provided a handy platform for assorted industry mouthpieces to congratulate Britons on being clever little consumers. Apparently we are becoming adept at signing personal leases and/or rushing into car dealerships to blow PPI payouts on deposits on car loans.

And to be fair, £69 a month for a brand new Skoda Citigo runaround isn’t a lot more than a his’n’hers iPhone/iPad contract. Assuming of course that you can chop your old car in for the £2,500 deposit.

And to be fairer than fair, the writer did ask some awkward questions. Why are fewer and fewer young people bothering to learn to drive? Why are annual mileages dropping?

Naturally, the industry came back with ready-prepared answers. Young people just need the right kind of ‘marketing’ to turn them back on to car ownership: cue ‘cool’ car ads that are so painful you want to stick needles in your eyes. Mileages are really falling only in London and the south east, because public transport is quite good there and executive-level company car users all use Skype or the phone these days.

To be honest, it all sounded rather defensive. The overall picture painted by the article was that of an industry whose existing customers are happy to use alternatives when they become available while potential new customers are increasingly disinclined, not to mention financially unable, to contemplate buying its products.

Cheap credit and the fact that Britain is not in the euro are behind this mini boom in UK car sales. The article pointed out that carmakers are assiduously pumping production into the UK to try to keep their factories humming as demand in the eurozone collapses.

The big risk to the UK car business is that it is storing up big problems further down the road. Sales are being bought expensively through wafer thin margins, heightened credit risks and discounts that end up depressing second values and thus hurting the all important fleet sector, which makes up half the market.

So the answer to the Guardian’s question appears to be: ‘Because British car buyers are easily-influenced novelty-seekers with an underdeveloped sense of consequences. Rather like four-year-olds.

A much more interesting question, which hopefully the Guardian will get round to investigating, is why so many Europeans have apparently broken themselves of the new car habit?

What do they see that we don’t?

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AllStar Gets Credit Crunched

In a credit crunch, banks, hedge funds, mutual funds, and other organizations sell what they can, not what they want to.” Mike ‘Mish’ Shedlock

Of the satanic corporate mills I’ve worked in over the years, perhaps the most glowering was the dark bulk of Arval Centre; squatting atop Windmill Hill on Swindon’s westernmost fringe.

When I was there, it was called PHH Centre and its beating heart was the AllStar Fuel Card business.

A fuel card is like a credit card, except that drivers can only use it to buy petrol, diesel and lubricants. AllStar is the grand-daddy of all fuel cards, with a pedigree going back 45 years. Today, there are million AllStar users and it enjoys a billion-pound turnover.

It’s such a strong product that it dominates the UK fuel management scene even though, unlike its rivals, it doesn’t give customers volume-related discounts. And most AllStar customers also have to pay annual fees for their cards and services.

Big money

But the really big money comes from the cut that AllStar gets from filling stations. It may be only a couple of per cent of each transaction these days (it used to be more)… but just look again at that turnover.

They once reckoned that PHH’s profit margin went up by a million quid every time the price of fuel went up by a penny a litre. PHH just sat back, watched the numbers change on the garage pole signs and counted the pennies. That’s what you call a cash-cow.

AllStar was sold several times over the years. First to PHH, then, always along with the fleet management and funding side of the business, to Avis, then Cendant and then to Arval, the fleet finance arm of BNP Paribas.

The ‘ker-ching!’ noises made by this tasty little profit machine must have been music to the ears of the French bank, which is otherwise drowning in toxic instruments of financial fiendishness and bucketfuls of imploding euro sovereign debt.

But just before Christmas, Arval announced that it had sold AllStar to FleetCor Technologies, a leading US-based fleet card provider (although virtually unheard-of in the UK) for what looked like a bargain price of £192 million.

AllStar “was not central to the business,” Arval airily averred.

A spokesperson added: “The Arval Group business model allows companies of all sizes to outsource their fleet management and company fleet related risks through a comprehensive bundle of funding and fleet solutions, while the business model for AllStar is to deliver transactional services.”

Not central?

In other words, we should believe that it’s better for Arval to pin everything on the hard work, low-margin, overcrowded funding and management end of the fleet business, while it gets rid of the bit that makes the company a mint just for the effort of getting up in the morning.

Mish Shedlock sees it differently. Referring to the on-going fire sale of assets by French banks, he writes:

Banks are shedding assets, not because they want to, but rather because they have to. The reason they have to is they are over-leveraged or need to raise capital for numerous reasons including new Basel requirements.

The unfortunate irony is banks may be shedding profitable organizations simply because there is still a bid for the assets.

Credit Crunch Math

In a credit crunch, banks, hedge funds, mutual funds, and other organizations sell what that can, not what they want to. In essence, distressed sellers weaken themselves by shedding profit centers to retain assets for which there is no bid.

He’s right, of course. It’s nonsensical to suggest that fuel isn’t central to a fleet services business. Not only was AllStar an enviable profit centre for Arval but its pre-eminence in the fuel management sector also gave Arval a high level of ‘lock-in’ with its major fleet management clients, who got a great one-stop-shop service for their cars and vans.

It also gave Arval a direct channel for punting additional products to the tens of thousands of SMEs and public sector fleets that relied on its fuel cards.

It’s a sign of how bad things really are in the global economy that, after four decades of ‘standard’ recessions, and three oil-price shocks, the business has finally parted company with AllStar.

Footnote

As a footnote to the Arval story, Fleet Support Group, a UK fleet services business, was sold to another US fleet company a few days after the AllStar deal was made public. FSG is based only a few miles from Arval Centre (where AllStar will remain for the next few years), in Chippenham.

All it would take is for one of the new US parents to flip AllStar or FSG to the other for a quick profit and you’d have more or less replicated the old PHH one-stop-shop service model (less the burden of the finance risk on Arval’s 87,000 vehicles) in a brand new business.

Stranger things have happened.