Pre-registrations are not new. For the vast majority of franchised dealers, they are a normal way of balancing the supply of vehicles manufacturers want to sell, with the demand from their retail and fleet customers.
By Tom Seymour
This has always been the case, with dealers driven to hit their manufacturer targets while looking to register as few cars as possible themselves to bridge the gap.
However, the level of product being pushed through the UK market has been rising since the second half of 2014, according to figures from ASE.
This year has seen pre-registration levels continue to build and start to turn toxic for some dealerships, which are struggling to hit increased targets and fund stock.
Sources have told AM that as much as 20% of some manufacturer volume is being registered in the last four days of the month. A recent poll carried out by AM showed a quarter of respondents indicating that between 11% and 20% of their monthly sales figures were made up from pre-registrations.
Audi UK director Andre Konsbruck said the new car market has reached a level where it is being damaged by such high volume being pushed into the UK and that profits are being put at risk when the UK is required to absorb so much volume.
“It’s unnatural growth. There seems to be a push to go for a 2.6 million level, for whatever reason. It’s reached a level now where it’s really damaging. We’re already starting to see an impact on residual values of used cars, the new car offers are so attractive that used cars are suffering, and in order to hit these ambitious targets we’re seeing a lot of self-registration in the marketplace, which is damaging margins on both sides.”
Konsbruck believes the market is suffering about 150,000 forced registrations of new cars that have no end customer, or just under 6% of the total estimated market for 2015. He talked of seeing one manufacturer recording 43% of one month’s registration on the last day of the month.
The Audi UK network’s return on sales has dropped 0.3ppts since the start of the year, he said.
Steve Jackson, chief car editor, Glass’s said: “The number of vehicles under 12 months old for sale has risen, as has the number for 15-plate used vehicles, which is a feature of pre-registration activity.
“There is not a franchised dealer in the UK that has not got a selection of 64 and 15 plate vehicles for sale and most will tell you there are more in stock than at any other time they can remember.”
This “supply push” has come as a result of a decline in some emerging markets, notably Russia and China, and the very slow pace of recovery in European markets, meaning they are not a potential disposal solution. In contrast, the strength of the UK economy and the currently advantageous exchange rate with the euro makes the UK an attractive option.
Mike Jones, ASE chairman, said: “Once built, the cars have to be sold somewhere and the UK has proved to be a profitable and receptive market for this excess supply.
“The challenge is to ensure these cars end up owned by real customers in the shortest possible period of time.”
Determining a definitive total on the amount of pre-registrations being forced through the market is difficult. Part of the reason for this is the secrecy surrounding the activity, but also the fact any discrepancy between the total registrations and ‘true’ sales would also have to include dealer demonstrators, courtesy cars, manufacturers’ direct registrations for staff and their press fleets, as well as direct fleet sales supply from manufacturers.
Without all this information, it’s difficult to pick through what activity was necessary as part of the normal mechanics of the market and what has been forced.
Jones said: “Actual sales through dealers fell by 1.5% in the first half of 2015. Given the increase in registrations by 7% over the same period, this clearly points to an increase in pre-registrations.”
Targets increased significantly at the start of this year, after a couple of years where some brands underestimated the ultimate size of the market.
Jones said: “This increase has not been matched by a corresponding rise in customer demand for new cars, thus requiring manufacturers and dealers to bridge the gap.”
While dealers are feeling the brunt of the pressure to hit the increased targets, this pressure is also being felt by manufacturers’ UK operations, particularly where their head offices see the market seemingly perform so well.
While some in the industry may appear to have a negative view of pre-registrations, they are not necessarily bad.
Jones believes the most profitable UK motor retail group is also probably the largest self-registerer of vehicles. The key is in how these vehicles are then managed and disposed of.
Provided there is sufficient margin in the cars and they are sold quickly, they can still be a very lucrative source of profit for dealers and offer future aftersales customers.
Philip Nothard, CAP Black Book Editor - retail and consumer specialist, said: “If manufacturers want/need to force the market or dealers need to smooth out their target performance, let them.
“If customers are being treated fairly and the dealer can offer them heavily discounted cars with new RVs, that can only be good.”
Jackson said pre-regs play their part in the retail model, as the dealer is able to take the registration bonus from the manufacturer, a margin on the sale, a margin out of the aftersales when the vehicle comes in for service and possibly a small finance commission.
Jackson said: “Added to this, there may be a reciprocal arrangement that offers the dealer reduced funding costs for stock funding the more business they are able to refer to their captive funder.
“The consumer has cost-effective options with PCP and credit approval is relatively easy. Most are now not really considering ownership unless of a certain age as they know they will change car in two to three years and don’t want to bother with a depreciating asset.”
For many, pre-registrations are also a necessary evil, with a gargantuan carrot in the form of a quarterly bonus and the pressure from the franchise making it unthinkable to fail to hit target.
Peter Smyth, Swansway Garages director, said: “It depends on the manufacturer, but some are being very inventive with the bonus structure.
“Targets have gone up year-on-year from between 10-15% and while there was some pre-registering going on last year, it’s undoubtedly at a higher level this year.
“Certain manufacturers are feeling quite confident that dealers have no choice to pre-reg in order to hit 100% of their target because there is too much money at stake not to.”
“It’s getting to the stage where I fear for the end of September. The new car targets have never been higher and I think the last quarter of this year is going to be a bit of a bloodbath”
Peter Smyth, Swansway Garages
Self-registered cars are, however, uncomfortable for most dealers who would prefer there to be a much smaller gap between perception and reality.
Dealers legally have to sit on a pre-registered car for 90 days before they can sell it. The more those cars are sitting around, the more cash is tied up in them.
Pre-regs also pose a significant risk of loss, should prices begin to soften, and distort used car stocks from the desired stock profile.
Individual dealers and small dealer groups are both placed at a price disadvantage, as they are not able to deal in sufficient volumes to get huge discounts, and their stocks become distorted to a greater extent as they cannot share self-registered cars around a larger group.
Dealers as a whole are also disadvantaged as new car offers become more attractive to customers, who in most cases need to see a significant price advantage to choose a nearly new car over a new car.
Jones said: “The principal risk for dealers is in their stock. If a sufficiently large volume of dealers struggle to retail the vehicles, they will then start to distress-sell them through the auctions.
“This then depresses values, driving down the price of all used cars leading to stock write-downs for everyone.”
The market saw this happen in 2008 with a used car price crash. ASE has seen periods of pressure at auction earlier this year, but BCA is currently reporting that “supply and demand are well balanced”.
Dealers are reporting to Glass’s that pre-registration activity has affected them and that their average used vehicle margin is falling as a result.
Jackson said: “Some smaller dealers have said that where they have taken the pre-registration incentives they have lost money when they have sold the vehicles.
“It has become a numbers game and the larger groups are very focused on stock turn to get the pre-registration vehicles sold as the next batch arrives.”
Nigel McMinn, Lookers’ managing director, agrees there has been a difference between the SMMT’s reported new car registration figures and the true run rate.
“The market is being forced slightly. However, this is nothing new. Pre-reg has always been a feature of the model and to some degree I think the industry would be disappointed if it wasn’t,” he said.
“Lookers has never been at the harsh end of pre-registrations and it really does depend on your franchise mix as to how exposed to it you are.”
Lookers is not seeing margins eroded with pre-reg activity due to being able to retail out of the stock quickly.
McMinn said: “We’re clearing out that stock really comfortably. I think it can become toxic when you’re sitting on pre-reg stock into month four, five and six and that’s when it becomes a problem.
“I think the issue for the industry is whether you have enough capital to fund these pre-reg numbers. It’s not really a problem for the larger groups, but it may put more pressure on the smaller dealers.”
McMinn said it can also help to have pre-reg stock available, as it will fit the profile for some buyers looking for a deal.
He said: “With 80% of the market driven by a low monthly PCP payment figure, it actually helps to have some product that has been discounted as a pre-reg and there is a group of customers that are looking for that deal with that stock. They’re aware of it and they follow it.”
Swansway doesn’t market pre-registrations directly to consumers, but employs what Smyth calls “switch-selling”.
This involves selling a pre-reg to a customer that originally came in for a new car, as essentially, they are the same thing.
McMinn thinks the industry’s negative fixation on pre-reg is because it can turn toxic at the extreme end, with dealers forced to hit an aggressive sales target.
He said: “Dealers are wary of the level of pre-reg in their business getting out of control.
“We’re happy with the balance of production our franchises currently have in place and we don’t see this becoming an issue into Q4 or next year. We still expect new car retail growth. It will be a bit more modest, but I wouldn’t be surprised to see continued 2-5% growth.
“We’re hearing from some manufacturers that they’re planning for a 2.6 million or even 2.7 million market.”
Smyth is more cautious about the future.
“It’s getting to the stage where I fear for the end of September,” he said. “The new car targets have never been higher and I think the last quarter of this year is going to be a bit of a bloodbath.”
Can the new car retail model exist without pre-reg? Smyth thinks it would be far more profitable to operate without pre-registration as it is an “expensive way to reach target”.
“You have to treat pre-reg as the fourth stock type after new, used and demos. We watch it very closely.
“I can’t see an end to pre-reg in the UK. Some of the European markets aren’t growing strongly enough yet and, as a result, the UK is being seen as somewhere to get cars to the end user.”
Nothard believes manufacturers in general are too happy to force self-registrations and then “sit back and congratulate themselves on another record month”.
He said dealer margins are being forced down and used car margins are struggling as a result of keeping prices competitive.
“There are no signs the level of pre-reg will slow down in the near future. Are we now registration junkies – a short-term high followed by long lows leading up to the next fix?”
The view from the analysts
Automotive analysts at KPMG and PricewaterhouseCoopers are tracking the increased rate of pre-registrations in the UK in comparison with the picture of rude health being presented by the SMMT.
John Leech, partner and automotive specialist at KPMG, said: “The data has shown for the last six months or so that actual dealer sales have been running at a rate below official new car registrations.” Leech said activity has been brand-specific, with some manufacturers avoiding activity more than others.
“From some manufacturers… we have seen two thirds of their monthly total going through in the last four days of the month”
John Leech, partner and automotive specialist at KPMG
“There has been a push from some manufacturers where we have seen two thirds of their monthly total going through in the last four days of the month,” he said.
“I would say it is starting to get out of hand, but the situation is not desperate. It’s not industry-wide, but some manufacturers are struggling with how they predicted UK demand.”
However, Leech believes the situation could worsen in Q4 if manufacturers don’t rebalance their production against current demand.
Leech said the UK is running at the “top of the market level” and the new car run rate is higher than it would be due to the genuine demand driven by competitive PCP deals.
However, there is a big risk to the market if the PCP bubble suddenly pops.
“That could be a possibility with residual values predicted to fall and if interest rates increase things could become more expensive,” said Leech.
“What history tells us is that if RVs are to crash, they will crash hard and fast. It could mean a crunch on new car sales.
“I think the industry is starting to sense that it might need to be a bit more cautious.”
Phil Harrold, PricewaterhouseCoopers partner in the automotive practice, also believes the biggest risk to the industry is around PCPs, which are helping to prop up new car volumes.
“The finance support manufacturers are pumping into the market has boosted new car volumes. Part of this reason is because Europe didn’t react or anticipate the drop-off in demand during the recession as well as other markets like North America,” he said.
“It left the market with an overcapacity problem, but manufacturers have supported that with strong financial incentives with PCP over the last three to four years. It’s what’s made PCP so prevalent as a purchase option.”