Fleet insight
Sector analysis
Huge SME market remains untapped
S
Seventy per cent of leasing companies expect sector to provide most growth By John Maslen
mall businesses are a big opportunity for leasing companies, which are working hard to identify the best path to profit from a potentially lucrative market. SMEs are seen as the growth engine of the funding sector, with 70% of leasing company respondents in recent research saying they expected the sector to provide most growth this year, compared to just 23% who cited large fleets as the biggest growth sector. The challenge is turning the potential into profit, as the small business sector is so vast, with a myriad of complexities and challenges. According to figures from the Federation of Small Businesses (FSB), there are an estimated 5.2 million businesses in the UK which employ 25.2m people, and have a combined turnover of more than £3,500 billion. The usual definition of small and medium sized enterprises (SMEs) is any business with fewer than 250 employees, which accounts for more than 99% of all business. As a result, just identifying the overall SME sector is not enough: it needs further segmentation to be of any use, particularly when it comes to transport operations. For example, there are just over 5m so-called ‘micro’ companies, with up to nine employees, with a total workforce of 8.3m and turnover of £655bn.
Small companies with 10-49 employees total 195,000 companies, turning over £515bn and employing 3.8m, while there are 31,000 medium companies with 50-249 employees, turning over a total of £477bn, staffed by just over 3m people. In total, these SMEs account for 15.2m people – around two-thirds of the workforce, and just under half of all business turnover. By comparison, the remaining 7,000 large corporates, with 250-plus employees, is relatively small in volume terms, but it accounts for 10m employees and £1,900bn in turnover. However, the size of the opportunity means it is already a crowded market when it comes to fleet supply, which is why smaller businesses can seem so attractive. Despite the need to clarify the opportunity, one thing is certain: transport is a major issue within the SME sector. According to the FSB, small businesses depend on their car or van to operate their business, with 72% saying it is crucial to their future operations. Disruptions to their transport services are also a major issue, with smaller firms suggesting that the poor state of the UK’s roads has cost their business up to £5,000 in the past 12 months. Furthermore, the pressure of running the core business means that there is little time spent on fleet management, particularly in terms of ensuring that it is effective. Dedicated fleet management resource is almost nonexistent within many SMEs. A recent poll found that 98% of those with transport responsibility in SMEs are juggling other jobs alongside their fleet responsibilities, and nearly a quarter say they can’t cope with all the roles they need to fill. Managers cite increasing administration and paperwork as their biggest concern in the survey, carried out by YouGov for RAC Business Services. At first glance, this looks like a perfect opportunity for companies that can provide help, support and resource, such as leasing companies, but this isn’t necessarily the case, because of the nature of the sector. Small businesses are typically cautious and defensive. They know that even small errors can have a disproportionate impact on a growing company, so long-term contracts for vehicle supply won’t be entered into lightly. Fleet Leasing April 2015 9
Fleet insight
Sector analysis
A study for ICAS, the chartered accounting industry body, found that some SMEs are ‘debt-shy’ and are reluctant to borrow funds to grow due to a lack of trust of banks and a resistance to yield control of their business to outsiders. The report says: “They are highly ‘reluctant borrowers’ even to fund growth, due to a lack of trust of banks and a resistance to any dilution of their own autonomy.” Report author Dr Ross Brown, from the University of St Andrews, says: “This research dispels some deeply held misconceptions in relation to high growth SMEs. These firms are predominantly funded by bank debt, not equity sources of funding. “While many use bank lending to fund capital expansion, some draw heavily on their internal resources to fund their growth.” It is an issue recognised by Lex Autolease, which found that in the LCV sector, more than three-quarters (77%) of SMEs have never leased a vehicle before and more than half (54%) say they are unlikely to consider it in the future. Instead, SME buy vehicles using the company’s cash reserves or with a bank loan. A spokesman for Lex says: “By not considering leasing, companies are missing an opportunity to better use their capital for future investment.” Yet identifying an opportunity is only the first step in a long road to a successful SME strategy. Among the key questions that remain unanswered are: ● What is the distribution of SME fleets in the UK? ● What is the penetration of fleets within the small business community? ● What is the typical proportion of cars and vans in an SME fleet? ● How often do SME fleets replace their vehicles? ● What are the key fleet profile differences between industry sectors? ● What is the SME decision-making process like? ● What are the triggers for change? ● How do SMEs utilise suppliers? The potential of the SME sector is so significant that it is being addressed in a new series of reports being published by Sewells Research & Insight this year. The SME initiative will be led by original research, with hundreds of SMEs interviewed about their operations and future requirements. A spokesman for Sewells says: “There is clear evidence that the SME sector will be an engine of growth in the future of the UK economy, including the fleet market. “Our research into SMEs will complement the successful Fleet200 project into large fleets that we have run for the past six years.” ● For further details, contact Sewells Research & Insight on 01733 468307 or email sewells@ bauermedia.co.uk.
“Some SMEs are ‘debt-shy’ – reluctant to borrow funds to enable growth due to a lack of trust of banks” 10 April 2015 Fleet Leasing
Total number of businesses in the UK by share of number, employees and turnover. 99.3% Businesses
Employees
Turnover
53.2%
47.9% 39.9% 33.2%
12.2%
Small (0-49 employees)
13.5%
0.6%
0.1%
Medium (50-249 employees)
Large (250-plus employees)
Source: Office for National Statistics
Resistance to taking on leasing For leasing companies, the challenge isn’t just securing SME business – it’s keeping that business for the long-term. Some SMEs talk of aborted attempts to switch to contract hire which have left a long-lasting reluctance to repeat the experience. For example, the experience of a director in a surveying company, with 32 cars and a staff of 50, provides a valuable lesson on the long-term impact of a failed foray away from outright purchase. He says: “We tried leasing some cars once, but never again, it was a total pain. We use cars as a recruitment tool and our outright purchase fleet is very flexible in terms of mileage and the employees’ needs. “With our outright purchase fleet, we can swap vehicles round and change them when we need to, but when we leased, dealing with the mileage restrictions was a nightmare, which took a lot of time to deal with. Also, you can’t swap people out of cars as easily if their circumstances change.” The original inspiration to try contract hire had come from the accounting team, who suggested it might provide some efficiencies, but this isn’t the case, the director argues. He adds: “I can’t see a financial benefit compared to buying and selling ourselves, either. We just sold a BMW 118 coupe after just over three years for £8,000 and I worked out it has cost us about £190 a month. You couldn’t lease a car for that. “If we ended up with 500 staff, it may change, but for my workforce where it needs to be flexible and easy to change, outright purchase is the easiest option.” However, this isn’t a view shared by all small fleets. David Gardiner, fleet manager for Assurity Consulting, which has a fleet of 50 cars, has shifted from multiple leasing companies to just one. He says: “A leasing company does save time and money, as hours are not spent dealing with fleet administration. I feel the role of a fleet manager should never be replaced by a leasing company but as it has in our company the role will change and become a part-time role.” The comments reflect analysis by Sewells Research & Insight which suggest companies can be persuaded to change only if they can see a clear cost benefit that is enough to outweigh other considerations. Resistance to change tends to be based on attitudes that support the rationale for using outright purchase in the first place, including the belief the company can ‘buy better’ or a perception that outright purchase provides greater levels of control and flexibility.