‘Stressed’ market hits dealers

The Colonial Motor Company’s chairman has highlighted how its trading environment has “changed significantly” since posting record profits in the 2022 financial year.

Ashley Waugh says the company is now being challenged, especially in the tractor business where economic downturns result in farmers “misplacing their wallets”. 

A pullback has also been experienced in light-vehicle dealerships and Colonial has recently seen some softening in its truck operations, although they have continued to process good monthly volumes.

“The 2024 light-vehicle market year-to-date is down 16.7 per cent on the prior year,” Waugh, pictured, told shareholders at the company’s annual meeting in Wellington on November 8.

“This at a time when new-product availability has freed up considerably and many importers have seen record inventory coming to market.”

He said the industry is experiencing “stressed selling activity”, which is having a “cascading impact” on the market and particularly new-vehicle sales. These being the almost 17 per cent fall in the current calendar year and sales in the 2023 year dropping by 9.5 per cent. 

“These are not only seismic declines in volume, but also a complete reversal of conditions experienced over the prior decade,” explained Waugh.

“Within this general decline, the Ford Ranger, Everest and Transit were some of the very few vehicles to post stronger sales than the prior year. While driven to a degree by rentals, it has also been driven by our committed dealer group. 

“This stressed vehicle environment makes it tough for our dealers to navigate increased inventory levels, market-share expectations of our franchise partners and having to reduce cost bases to a new ‘normal’ in terms of volume.

“It’s manifestly apparent that high interest rates have smashed demand for new tractors and equipment to a level not seen for many years. The market essentially halved overnight for us in the deep south. 

“Even though the dairy payout forecast is favourable, the negative state of the red-meat sector, massive increases in on-farm costs and continuing interest-rate burdens have seen the lights turned out by many of Agricentre’s traditional customers.”

That said, Agricentre has continued to secure its share and more of the “limited action out there”, but the reality it it has has been “swimming against a significant tide but it’s a tide that will eventually turn”. 

Within what Waugh described as a “rather bleak portrayal of the market environment the financial result for 2024”, a trading profit of $17.9 million and total dividend of 35 cents per share “is possibly better than expected”. 

His view of the market is focused on the back end of the financial year as Colonial traded “reasonably strongly” in the first six months to December 31, 2023. 

“Our safest course of action, which we have been following for some time, is to rebuild profitability based on the market in front of us and not wait until the market comes right or returns to normal. 

“This is our new normal and we must deliver satisfactory shareholder returns based on what’s in front of us. Our dealerships reacted quickly and are well on the new journey, but not all are not there yet.”

Waugh pointed out that Colonial’s shareholders have enjoyed an extended period of “exceptional” returns over the past decade or even longer. 

“This coincided with the new-vehicle market posting year-over-year growth as favourable trading continued. 

“At times this was boosted by artificial intervention and stimulus as a result of government policy. But it mainly arose from the company having leading brands and new models coming to market at the right times.

“Our dealerships continued to grow as they focused on increasing customer satisfaction across all product ranges, and in our parts and service support business. 

“We certainly made the most of this positive environment. It culminated in a record profit in the 2022 financial year when light vehicles, trucks and tractors all fired at once.” He was referring to a trading profit back then of $33.3m.

Near-term outlook 

Waugh said his view of the trading environment Colonial’s businesses have experienced and continue to face as being “a graphic and purposely negative picture”. 

He added the current six months have been “tough” with the company sorting its way through cost-reduction requirements across the group. 

“This is an oversupplied, so over-competitive, market where some of our competition are ‘moving the metal’ just to keep cash flowing. 

“The market and economy remain flat at best. At our core, Colonial is a ‘new vehicle’ retail and service business that rides the wave of consumer confidence and discretionary income. 

“Our view of the forward market is dominated by immediate economic issues. New Zealand should not underestimate the potential disruptive influences that lurk offshore and potential for further supply-chain disruption from global conflicts.

“These could impact exchange rates and oil prices at any time – one gets the feeling we are inches from that in the Middle East. 

“Here are some comments you won’t hear from me – ‘green shoots’, ‘I think the worst is over’ and ‘lower interest rates will solve all our challenges’. 

“We could catastrophise on many fronts. But we must continue to be the architects of our forward performance. It’s up to us to make the changes necessary to create the success needed to reward our shareholders. 

“We have a strong product and brand portfolio, and we have new product to bring to market. These basics have held us in good stead over the years.”

Governance of company

Last year, the Shareholders’ Association gave Colonial a “fail” rating in some areas of its governance disclosures. 

In regard to that, Waugh said: “We know our shareholders expect the board and management to be focused on the financial strength and performance of the company. This is to ensure it continues to provide solid returns that underpin the dividend stream. 

“I made a commitment at our last annual meeting that the board would review our disclosures and public-facing material. This has been done. 

“We’ve broadened website disclosures in a number of areas and this year is our first year of reporting on climate-related disclosures. This has enabled the company to be fully compliant in terms of its reporting obligations under the regime. 

“We have no doubt climate change is a real issue. Equally, I’m confident the work we carry out in our annual risk reviews was meeting the need to identify the risks to our business – be they short, medium or long term – as this isn’t new to us. 

“There are elements of the process and detailed requirements that were onerous and bordered on being of no real benefit to anyone. We can only hope common sense prevails, and the reporting requirements are reviewed and refocused on only ‘stuff’ that matters.”