IMI Magazine

IMI Magazine

Roadside recovery

Market ‘chasers’ with a debt burden

Garages tempted to sign up with franchised newcomers to the breakdown business should pause for thought. Evidence suggests that these entrants are trying to capture a slice of the market by incurring heavy levels of borrowing, reports John Kendall.

Cars don’t break down in the way they used to, but that hasn’t slowed growth in the breakdown and recovery sector. New car buyers may not even know who provides the recovery service that comes with their purchase and the chances are that most drivers have little knowledge of how many service providers are currently operating. If they stop at three - the AA, RAC and Green Flag – they’re still a long way short. According to a report from Plimsoll Publishing*,  there are at least 232 companies involved.

How healthy are all these competitors, though? The Plimsoll report sounds a note of caution. While market growth in the breakdown and recovery sector is a sound 6.4 per cent on average, 16 companies identified in the report as “chasers” are growing at the rate of 12.6 per cent.

Which prompts David Pattison, senior analyst at Plimsoll Publishing to comment: “These companies are attempting to change the balance of power in the market. Some look with envy at their strengths. Some say they would not want the risk that comes with that kind of company,” So just what is that risk? According to Plimsoll, it’s the level of debt. The companies concerned are borrowing heavily to capture market share.

That makes them vulnerable in several ways. Outside finance could restrict future decision-making. With interest rates having risen slightly and the suggestion that there are more rises to come, the debt burden could threaten long-term viability. This in turn fuels the demand for sales growth and cash flow to cover the debts. In short, Plimsoll says this is unsustainable as a long-term business strategy. In fact, the company gives them all a “danger” rating because they have a higher risk of failing. More than 20 per cent are already incurring losses, says the report. On the up side, the mavericks have attacked the market in an aggressive way, with their heavy investment giving them a 12 months jump on the competition. As David Pattison points out: “Others in the industry would do well to look at them from an acquisition point of view. New owners could well reap what these ‘chasers’ have sown.”

So how worried are the big players? “There have always been entrants, it’s not really new”, says Nigel Charlesworth at Green Flag. “It may seem like a lot of new entrants, but the main share of the business is still with the big three (meaning the AA, RAC and Green Flag). We believe that we can meet the needs of our five million customers - we have good customer retention.”

So what should potential customers take into account before signing up? “Pick a provider with good national coverage,” says Charlesworth, “Can they attend and deal with the problem? A provider with small volumes can often respond quickly, but many are cherry picking in urban areas where they have good coverage from their franchisees.”

Over-stretched franchisees are a concern of the RAC, according to spokesperson Charlotte Latham who said: “Many of the new players in the marketplace are totally reliant on the UK’s contractor network to provide roadside breakdown assistance. This network is already utilised by the existing long-term players to support branded patrols in providing specialist recoveries.

“The RAC is concerned that some contractors may find themselves over-stretched as they try to serve the needs of the ever-increasing number of breakdown service providers. This is why the RAC’s focus has been on bolstering the capability of its branded patrols.”

Of its 1,500 patrols, the RAC says over two-thirds now have rapid deployment trailers to enable recovery where a roadside repair is not possible. Looking to future developments, the RAC provides Audi branded patrols with RAC backup to assist Audi owners and also has strong relationships with other manufacturers such as Ford and Toyota. “We see this as an important and continuing trend,” says Charlotte Latham.

The AA has also strengthened its patrols with the introduction of a diagnostics computer system called Vixen, which offers patrols step-by-step guidance in problem solving and is designed to speed up roadside troubleshooting.

 David Pattison at Plimsoll was asked what signals spell possible danger for  potential franchisees. “Any business that comes with an offer that’s radically better than its competitors,” he says. “If it looks too good to be true, then it probably is. These businesses are coming to market with the objective of getting your business. The strategy works for a while – through volume comes business, but not always.”

Pattison urges any business looking to take on a franchise to undertake thorough homework. “What is the financial strength of the company? Look at the profitability and level of debt and the arrangements for repaying the debt. Ask how long they have been in the business?”

He suggests that retail franchise associations would be a good source of information. For example, members of the British Franchise Association are all vetted against a code of practice. The association lists all members on its website and it could be a good starting point for research, while banks and credit reference agencies can help form a picture of a company’s financial well-being.

*First Edition 2004 Plimsoll Analysis on the UK Car Breakdown and Recovery Market..

British Franchise Association Thames View Newtown Road Henley-on-Thames Oxon. RG9 1HG UK Tel: 01491 578050 Fax: 01491 573517 email: mailroom@british-franchise.org.uk

Kwik-Fit closes Hometune

Kwik-Fit has pulled out of the mobile servicing and repair business with the closure of Hometune at the end of December.

Kwik-Fit said the mobile service “would not prove to be a viable long-term option”.

Hometune features more than 120 mobile units, most of which are franchised. “Closure details are being worked out with franchised holders,” said a Kwik-Fit spokesperson.

“With the increasing complexity of vehicles, maintenance and mechanical work is best carried out at one of our 750 Kwik-Fit centres,” said sales director Mike Wise. “However, mobile tyre fitting will remain a major part of our business.”