While foreign exchange pressure caused Halfords’ margins to back-pedal, bolstering its Autocentres is needed to ensure the group remains resilient to future headwinds.
Halfords’ broad offer, which spans from car enhancement, cycling and outdoors, to fitting and maintenance services, has typically helped offset the adverse effects of the economic cycle.
However, its rising star category, cycles – which accounts for just over a third of its retail sales – has been coming under pressure recently.
Halfords expects cycling market growth of 3 to 5% per annum on average over the medium term.
This would be driven by both new entrants into the market as well as existing participants replacing and upgrading their bikes and accessories.
Despite cycling participation in the UK remaining low, especially for females, an increase in female cyclists is set to drive an increase in families and children taking up cycling.
“The profitability of the category is particularly vulnerable to foreign exchange movements and the weather”
Although the financial year proved a challenging period for the cycling category – Halfords boosted like-for-like sales in this division by a respectable 5.1%.
While sales were bolstered by its acquisition of etailers Tredz and Wheelies in the year, profits have been squeezed in an already (relatively) low margin market.
The profitability of the category is particularly vulnerable to foreign exchange movements and the weather, which both took a turn for the worst during the first half.
Foreign exchange impact
As a whole, Halfords sources much of its product range in US dollars – between $250m (£195m) and $300m a year– so it’s no surprise that the weakening of the pound over the last year has had a significant impact on the group’s profitability.
The value of sterling has fallen nearly 20% in the past year.
“Halfords’ hedging means the effect trickles in phases and the impact is expected to roughly double to £25m in 2017/18”
While it’s difficult to conclude whether this is a new norm, Halfords anticipates the total headwind related to the weaker pound in 2016/17 will result in nearly £50m in cost inflation between 2016/17 and 2018/19.
Halfords’ hedging means the effect trickles in phases and the impact is expected to roughly double to £25m in 2017/18 compared to the previous year.
Indeed, the retailer is attempting to renegotiate and revise its prices as it expects pressure to continue over the next couple of years.
From carburettors to cameras
However, Halfords needs to look beyond its retail arm to boost margins and this is where its Autocentres should come into play to shore up profitability.
While Autocentres account for less than 15% of its overall sales, looking ahead, the statistics are encouraging for Halfords.
“As cars become more complex, the ‘do it for me’ culture is likely to increase as customers become less in tune with mechanics”
Cars have become a product of technology, and as we continue to adapt, retrofitting the latest tech to our ageing cars should flourish.
Dash cams are a particularly strong line for Halfords, with the retailer fitting five times as many dash cams this year compared to last.
As cars become more complex, the ‘do it for me’ culture is likely to increase as customers become less in tune with mechanics.
Creating Autocentres of excellence
Halfords is well positioned to be playful with promotions at its stores to drive consideration to Autocentres, which should become easier as the group harnesses more customer data.
The ongoing challenge for the group is boosting productivity at its centres. Staff turnover is high, there’s generally a shortage of qualified technicians, and fresh talent requires training.
If it can successfully boost productivity at Autocentres through better retention, it should prove a healthy medium-term strategy to bolster group margins, as opposed to mitigating economic headwinds through renegotiation and price assessment alone.
Additionally, if it can join the dots by delivering a consistent branded experience across retail and Autocentres, it could prove to be the dominant player in all things cycling and motoring in the long run.