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Chartered Trust comment

The industry is going through a period of uncertainty which may last through the summer -perhaps even until the next registration plate change at the beginning of September.

The new car registration figures for April demonstrated clearly the effect that such uncertainty can have – new car sales were down by over 8%.

A similar picture is painted by the official figures for new and used car finance issued by the official trade body, the Finance & Leasing Association. Although business car finance is holding up relatively well, retail customer finance figures slumped by 12% in March and are already down by 3% over the previous 12 months.

The cause of all this is not hard to find. Customers still believe new cars prices are going to fall and are either holding off from buying or preferring alternative supply routes, such as travelling to continental Europe. A series of high profile internet-based importers - Virgin, One-Swoop, Broadspeed - have succeeded in keeping the issue on the front pages.

The Government is not helping, with the official Competition Commission report finding UK prices were, on average, 10% to 12% more expensive than in continental Europe. This is far less than the 30% to 40% which some consumer bodies have been claiming. Yet the message was completely buried as the press looked for a quick headline.

In such an intense commercial climate, it not surprising carmakers are beginning to use 'cut price' promotions as a marketing tool. The last few weeks have seen several manufacturers launch 'Spring sales' which quite openly offer headline price cuts on selected models.

But, study the small print and it becomes apparent the cuts are on old stock, often cars built more than six months ago. Like all good clearance sales, these promotions are designed to shift product which has been sitting on the shelf too long and, at the same time, generate some showroom traffic.

So, what is the problem? In the past these old stock models would have arrived on the market not at a cut price but as special editions.

The old marketing philosophy of adding value, not cutting prices, would have ensured the customer got a bargain, residual values were maintained and dealers would see several profit streams from the transaction. Herein lies the danger.

Focusing on headline price - and then cutting that price to the bone - takes out the other potential profit streams which have proved so essential to the success of most dealerships. Not only that, profit margins on a per unit basis are likely to be cut to help fund the reduced pricing. In a business environment with a high fixed investment, this is a particularly unhealthy scenario.

In the longer term, such action separates the finance package from the product in the mind of the customer leaving him or her more likely to wander down the High Street to arrange a finance package before coming to visit the dealer.

Among all the pressure to concentrate on lower prices, dealers who aggressively promote finance find it may well be the best way to replace lost unit profit. Added value for the customer should always mean added opportunity in the showroom.

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