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Has the boom in PCPs hit extended warranty sales?

extended warranty feature

By Debbie Kirlew

Even taking October’s fall into account, the number of registrations so far this year is up 6.45% on the same period last year. Surely the growth in new cars means the demand for extended warranties has fallen? Not so, say providers.

About 80% of new car sales are funded by personal contract purchase (PCP) agreements, which enable more motorists to drive new vehicles and to change more frequently, which suggests a diminishing market for extended warranties as there is less likelihood of things going wrong.

 

Mike Macaulay,  AutoProtect“The extended warranty market has been broadly in line with new and used car sales volumes”

Mike Macaulay, AutoProtect

 

However, Mike Macaulay, AutoProtect’s corporate business development manager, said the extended warranty market has been broadly in line with new and used car sales volumes.

“Classically, dealers often give away a shorter period of warranty as part of their offer and upsell it. We are helping more to move towards a longer-term model that is sold with the customer having a clear idea of what is covered and the claims process. This high-integrity approach is seeing sales increase,” he added.

Nick Franklin, head of partnership & distribution at Mapfre Warranty,  agreed: “The growth of PCPs in the new car market has had little impact on extended warranties.

“Used car sales remain buoyant which is, in part, due to attractive PCP deals. It’s also important to note that while good PCP deals can encourage consumers to change vehicles more quickly, there is evidence that suggests average ownership life-cycles have actually increased over the last five years due to the challenging economic conditions.”

At WMS Group, extended warranty sales have also increased. Business development director Eric Stone said: “A major consideration for most buyers these days is preparing for the cost of an unexpected repair bill, so we have found that warranty protection is remaining as valuable as ever.

“This year, we have seen a 15% growth for the group and 20% growth in longer-duration policies due to our field team support and extensive dealer training. More and more dealers are offering a six-month warranty and then upselling 36 months in total. From our research, warranty is still top of the customers’ list above all other added value products.”

 

Used car PCPs could help extended warranty sales

But warranty suppliers would say that, wouldn’t they? No supplier would talk down their own market.

However, statistics do indicate a buoyant used car market,  which is the preserve of the extended warranty. Drawing on DVLA figures, Auto Trader calculated that used car transactions were up 3% year-on-year for July-September 2015, while in the first 10 months of 2015, used car transactions were also up, having increased by 4.2%, or 225,000 units, year-on-year.

Data from the National Association of Motor Auctions shows the volume of wholesale used car transactions for the first 10 months of 2015 was up 6.4% year-on-year, with 1.04m in 2014 and 1.11m in 2015.  

 

“There’s opportunity for retailers to match warranty protection to the length of any used car PCP deal”

Tim Heavisides, Car Care Plan Group

 

Tim Heavisides, chief executive officer of Car Care Plan Group, said: “PCP is fuelling a steady and continued supply of quality used cars in the market and retailers remainexceptionally proficient at listening to their customers’ needs and offering products that match ownership cycles. Invariably, warranty is a key part of that solution and retailer success depends on having a full set of products that suit buyer needs.”

 

How the long-term manufacturer warranty is helping

Warranty providers also point to another trend that may seem to fly in the face of logic. The growing number of manufacturers offering new cars with longer warranty periods, for example Toyota with five years and Kia’s seven-year warranty, has not led to a decline for extended warranties.

Instead, consumers’ expectations appear to be shifting towards the longer warranty, so rather than being happy with the remainder of the manufacturer’s warranty on a used car or the standard 12-month warranty for approved used vehicles, customers are more likely to opt for an extended version. Meanwhile, motorists are also increasingly opting for an extended warranty when buying new.

“In the used car market, most vehicles are still being provided with either the balance of manufacturer warranty or with 12 months’ cover, so there’s exceptional opportunity for retailers to match warranty protection to the length of any used car PCP deal that’s being arranged to provide customers with a monthly motoring cost that they can budget for,” said Heavisides.

Franklin said: “Consumer awareness of warranties has increased as well, due to the various promotions that manufacturers run about their new car warranties.  This has had a positive knock-on effect in the used market as the importance and value of a warranty seems to be front-of-mind for many consumers.

“Even if there is the residual of the original warranty or a manufacturer-approved used scheme in place, this will typically only be for around one year on average. Based on average ownership lifecycles, that still leaves room for a strong extended warranty proposition.”

Macaulay agreed: “The impact of PCPs on extended warranties has largely been cushioned by the trend to long warranties featuring as a core part of the new car sale. The impact of PCPs would probably have been more pronounced but for the well established trend towards three-year-plus warranties, which themselves have tempered the market for extended warranties on new cars over recent years.”

Macaulay said: “PCPs are not the sole preserve of new cars and the new under-two-year-old market is seeing a growing use of the product. For new cars, with manufacturer warranties commonly available for three years and longer, the potential for extended warranties is limited, even to protect the guaranteed minimum future value (GMFV).

“However, in the new under-two-year-old category we see switched-on dealers helping their customers to add vital end-of-contract value by extending the warranty for an additional one or often two years. It is a smart, customer-centric approach.”

 

Does the extended warranty have a future?

CAP has predicted that new car registrations in 2016 will exceed the record 2.6 million in 2015 and the share of that business funded by PCPs is unlikely to fall, so what does that growth mean for the extended warranty?

For Heavisides, PCPs and the extended warranty go hand-in-hand, with one offering affordability and the other peace-of-mind against any unexpected repair costs.

“Customers rate warranty exceptionally highly when they buy a car – in fact, it’s one of the strongest individual factors after vehicle cost – and there’s no reason why that should change with an increase in PCP funding. In fact, as PCP opens up the door to increased affordability for new and used cars and more buyers are assured by the certainty that affords, warranty will become even more highly valued by the market.”

Heavisides added that as PCP becomes more popular and prevalent in the used car market, retailers will align their warranty and PCP periods to provide consistency in costs for the duration of the PCP deal.

“Retailers need flexibility in their warranty proposition to allow them to offer the cover and the duration expected by customers, so we’d encourage all dealers to review their products to make sure they’re poised for any changes the PCP market may yield,” he said.

Franklin said: “Most dealers that are successfully selling extended warranty understand the important role it has in terms of driving customer retention as it’s one of the few F&I products that can create a longer-term ongoing customer relationship.”

Macaulay takes a step further in his analysis, suggesting a possible further shift, away from the rise in longer new car warranties and towards a ‘bundle’ package at the point of sale, incorporating servicing and an extended warranty.

He said: “Looking ahead, with pressure on other revenue streams, we wonder if the long initial warranty offers with new cars will be sustainable.

“We see a move in personal banking away from free banking and provided the value proposition is clear we can see a move towards a total ‘convenience’ package to include warranty and service work. It is something we are investigating.”

 

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