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AM spring conference - Used cars: the future

Retail resurgence could bolster used car profits

Rising demand from retail buyers for new cars, caused by lower prices and renewed consumer confidence, could transform dealers' businesses by redressing the balance between new and used profits.

Gerard Murray, Reg Vardy chief executive, said: “If capacity in the rental market falls, then manufacturers will have the problem of how to move metal like last year.

One avenue would be to look at giving fleet-type discounts to help dealers move the retail side.

“Some manufacturers are already doing this, others need to look at it.”

Manufacturer influence has seen retail sales rise sharply. In April they increased 18% on 2000 to 48.3% of the market, according to SMMT figures.

A stronger new retail market absorbs the industry's excess capacity but reduces the volume of 0-1 year-old nearly-new cars because private buyers tend to keep them for longer.

“This means the average age of used vehicles sold rises, reducing dealer profitability from this area because they are operating in a lower price environment,” said Mr Murray.

“Overall dealership profits will improve as a result of the new vehicle contribution.”

Changing tax regulations on company cars would give both sides of the industry a much-needed fillip through cash for cars schemes. “It would increase demand for used as well as new cars,” he said.

The lines between volume manufacturers and specialist carmakers are blurring as market share becomes an increasingly important benchmark.

Mr Murray said: “The emphasis has been on pushing new vehicles through the dealer network which creates oversupply and puts pressure on used residuals.

“This had been the preserve of the volume manufacturers, but now the specialists are getting in on the act with fleet deals because they are seeking to raise market share.”

Vehicle defleeting offered dealers opportunities in three sectors: budget, volume and specialist.

“There is an opportunity for dealers to profit from budget cars with the growth in eastern manufacturers in the UK. This segment could grow,” said Mr Murray.

“Specialist brands are moving towards volume with the launch of cars like the Audi A2 and Mercedes-Benz A-class.

They are advancing 1% a year as a percentage of the total market.

“Customers have more disposable income. They are aspirational and want to drive specialist marques, so this is a natural switch.”

However, specialists with established volume fleet deals, like Mercedes-Benz which supplies A-class to Enterprise Rent-a-car, were forcing through an “unnatural switch”.

Market distortion caused by 'crazy' plate changes

Conference chairman John Kiff called for an end to the “crazy” number plate change each six months because it distorted the new and used car markets.

He could not see the justification for fresh plate differentiator numbers each spring and autumn and challenged the thinking behind the new system which is to be introduced on September 1. This will include a half-year reference, starting with 51.

Mr Kiff is an authority on lean distribution through his role at Cardiff Business School, and as a director of the International Car Distribution Programme.

He believes the new system is not an effective alternative to the previous annual August change, because it creates two bulges.

“Other European countries don't change registration marks the way we do in the UK,” he said. “In the Netherlands, the prefix letter changes when all the variations of numbers have been used up.

“Of course, the government makes money out of the present system, but there are alternatives. We have a crazy system, and I am against it.”

He thought the switch to the new style of plate in September could attract up to 400,000 buyers, and certainly more than 350,000.

Mr Kiff said he wanted to see a move to lean distribution which would mean getting rid of targets and the concentration on end-of-month figures. “We have the technology to show rolling market shares and making demand smoother should result in a better level of service and bigger profits,” he said.

He told how dealers were forced to cram cars into spaces to store them and workshops were overloaded in the two busiest months. At one site he visited, staff had to move 15 cars so that one could be driven out for a customer.

Carmakers put squeeze on lenders and dealers

Finance houses and dealers were facing “ferocious pressure on margins”, said Martin Hall, director general of the Finance and Leasing Association.

This was because manufacturers wanted to get closer to car owners and drivers and were squeezing the middle – the lenders and dealers that made the market go round, he said. Yet manufacturers were reaching out to customers trying to control the deals.

Changes to Block Exemption might help dealers by affecting manufacturers' grip over customers through finance by introducing tighter rules on lock-in deals. Lenders needed to recognise whether their customer was the dealer or the car buyer.

Kia clue to power of effective data

One in three used cars changed hands last year, said HPI Group chief operating officer Paul Leo and 46% of used Kias in the UK were sold in 2000.

Mr Leo, who has rejoined HPI after 10 years, said the statistic illustrated the opportunities open to dealers to help make their use of data more effective.

“Since 1990, 15.1m people have changed their car at least once – 7.1m have changed more than once,” he said. Mr Leo said there were many opportunities for dealers to have contact with owners when they needed services and MoTs for their cars.

Internet can end 'hit and miss' buying

Partnerships between dealers and dotcom companies would be the way forward for online buying, said John Brewer, managing director of MSN Carview which was launched in April.

Strong brands would also help buyers have confidence to buy online.

“The standard of e-commerce literacy in dealerships is not particularly high,” he said.

Partnerships and co-operation with dotcom companies would allow dealers to be creative and innovative.

The traditional used car shopping process was hard work, a hit and miss affair, and relied on traditional core media.

“The internet should help people get the right car at the right time and at a lower cost,” said Mr Brewer.

He believes the internet should be used to cut distribution and marketing costs, which can account for up to 50% of a car's cost.

“Dealers are not as profitable as they should be because the infrastructure is costly, they have pockets of inefficiency,” he said. “The internet enables them to access people in a virtual way at a fraction of the cost.”

Profitability back as market settles

Block Exemption was likely to be modified next year to force dealers and carmakers to unbundle the sales process, according to Cap Network editor in chief Mark Cowling.

“This would make the sales process more transparent, but it would also allow dealers to take a little bit of profit from each area, including finance and insurance, sales and warranties,” he said. “I believe profitability is on its way back.”

The used car market was beginning to stabilise as demand returned. “Year-on-year prices have levelled out. The seasonal impact will hit residuals over the summer, but this will not be a reflection on the market,” said Mr Cowling.

“Residual values should increase 3% by 2002.” Despite the improvement, the upper medium and executive sectors were continuing to struggle as buyers downsized into small cars.

The new registration system, which is introduced in September, would begin to erode the plate-change premium. “Specification will become the important factor,” he said.

Mr Cowling predicted that changes to company car taxation would trigger an increase in diesel sales in this sector.

“Supply will increase because company car drivers are buying the more CO2 efficient diesels,” he said. This would have a knock-on effect in the used market, with a greater influx of CO2 efficient diesels in two or three years' time.

The internet would play an increasing role in the used car sale process, but dealers needed to make greater investment.

“There is a lack of investment because people are not completing the transaction online,” said Mr Cowling.

More than 60% of dealers said they currently received less than 5% of sales enquiries from the internet, according to Cap Network research. A similar number responded to enquiries within a day, but 36.3% responded within two days.

“This response time is not good enough,” said Mr Cowling. “Customers want quick access to information to enable them to compare cars – dealers should provide this via the internet.

“Online selling will reach its peak in two to three years' time. Now it's a case of getting car details online ready for the growth.”

Mr Cowling believes dealers should be able to achieve 10-15% of new/used car sales online.

Aspirational buyers want younger stock

The arrival of all-new registration plates in September would distort the used car market, said Adrian Rushmore, managing editor of Glass's Information Services.

The previous major change from suffix to prefix letters in 1983 created record demand for new cars because of the novelty effect of the new plates.

“We are forecasting 400,000 new sales in September this year,” he said. “That's optimistic and would need a 15% upswing over previous years but it's not out of the question.”

This would create “famine in August but feast in September”. But the new '51' plates would eventually lose their novelty appeal, smoothing out the peaks in the market, he said.

The used car market would begin to move to better quality, younger cars because customers “have greater aspirations, expectations and disposable incomes”, said Mr Rushmore.

He said Glass's was predicting severe price falls for cars more than five years old. This was because of the trend towards younger used cars and the requirement from January for dealers to provide one-year warranties on used cars.

“This means that dealers will take far less risk with older cars,” he said.

He was optimistic that the used car market would continue to improve this year.

The record start to 2001 left dealers ill-prepared with insufficient stock. But with trade demand continuing to be positive, they could be more selective.

“The result is a high degree of price stability,” said Mr Rushmore.

Network Q puts £375 on a car'

Dealers who retailed used cars under a recognised brand name could add several hundred pounds to the price, Vauxhall marketing manager Dean Barrett told delegates.

“The power of the Network Q used car brand allows dealers to achieve a higher price for their vehicles, including non-Vauxhalls,” he said. “The equity brought by Network Q takes competing with other franchises and superstores beyond price and helps maintain dealer profitability.

“Research by Network Q showed an average value of £375 a car although some valued the brand at more than £1,000.” He believed a strong brand name could be exploited through marketing to stimulate demand and loyalty for repeat purchases. “Individual dealers could not hope to match this by themselves,” he said.

“Leveraging the manufacturer used vehicle brand also vastly increases the chance to sell finance, insurance, accessories, extended warranties and other associated products, which provide income for dealers and manufacturers.”

Mr Barrett said many areas of the UK market were by nature “chaotic”. Dramatic restructuring over the past decade had resulted in dealer consolidation.

“Consumers are downsizing their cars and the new brands from Asia have increased choice. Niche cars are becoming more mainstream and the prestige cars are moving towards mass market,” he said.

“Dealers are not making as much money out of the used car industry as they should. They are under pressure from independents, insurers, dotcom companies and carmakers.” Mr Barrett said customers were still reluctant to buy online.

“Manufacturers and franchised dealers are in a stronger position than dotcoms to meet customers' needs – either alone or in partnership,” he said.

“Vehicles can be marketed in the virtual world using the resources and brand of the manufacturer with the knowledge that a strong physical presence is there to complete the transaction, deliver the vehicle and handle the ownership experience.”

But carmakers' investment in e-commerce had to be fulfilled by dealers. A poor experience at the showroom could force manufacturers to try to retail cars themselves, he warned.

An internet promoted Corsa Variant showed some consumers were prepared to go further in the purchase cycle on the web, though the transaction was at the dealership. The experiment demonstrated that e-commerce was not always cost-effective, said Mr Barrett. “Moving individual cars around the country to individual customers can be expensive and time consuming.

“But e-commerce can help to reduce dealers' costs base.”

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