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Chartered Trust comment

The next few weeks will see the motor industry literally counting the cost of months of market uncertainty. Lack of customer confidence and falling retail sales will be hitting dealers where it hurts most - in their half-year financial results.

The causes are not hard to find; but the solutions and, more importantly, the long term effects are more difficult to predict.

Out on the forecourt, at the sharp end, a consistent story is emerging. Customers are still not convinced new car prices have fallen and are holding back from buying. Fuelled by tabloid press reports, they still believe there is 30% to 40% more to come.

So far, nobody has been able to explain where the extra money is going to come from. And the picture is further complicated by industry claims that prices have already fallen and cannot fall again. Indeed, all the recent surveys of prices paid seem to indicate that is true. But, which prices are we talking about?

Within the business we are all comfortable with the concept of transaction prices. Dealers recognise there has always been a wide gap between the list price laid down by the manufacturer and the transaction price actually paid by the customer. The carmakers would like us to believe it is transaction price which is important.

But the problem goes deeper than that. Dealers and finance houses know the important figure to the customer is not the transaction price - it is the cost to change. Yes, the sticker price is what brings the customer into the showroom, but the value of the car they own is just as important as the value of the car they are about to buy.

Much has been written in recent weeks about falling residual prices but there has been little or no analysis of the cost to change. If nearly-new prices are down by 5% and the value of a three-year old part-exchange is down by 10%, is the customer having to find more, or less, money to change?

This is an important question and not just because it makes the difference as to whether the customer can afford the car or not. It also has a direct bearing on the amount of money the customer has to borrow and therefore, the commission income earned by the dealer.

If we are moving towards a situation where customers are borrowing less money or, perhaps as a result, paying the debt off faster, then an important revenue stream for dealers is going to be affected.

With less commission coming from the actual loan, there will be an even stronger argument to focus sales skills on valuable products such as income protection and gap insurance.

Here at Chartered Trust we are closer than most to these issues and are continually offering support and advice to retailers. If you have not begun to focus on these issues yourself, then we would be more than happy to talk them over with you.

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