Market leaders: AM/Manheim address critical issues facing the industry

In a market where new car sales are falling and chassis margins have been stripped away, why don’t more groups put greater resource and effort into the sales department that offers the best potential to make real money – used cars?

Overview

Cast an eye down the AM100. Very few groups achieve even a 1:1 new to used car sales ratio.

Two exceptions are Perrys and Hartwell. Even fewer achieve the industry benchmark of 1:1.5, though Arnold Clark does even better with its ardent focus on used car sales.

The potential is there, although the used car sector hasn’t escaped the economic woes unscathed after a near-collapse in residual values over the past two months.

It took most groups by surprise. Part-exchanges that had been sitting on forecourts for too long lost most – if not all – their margin.

Sandicliffe head of sales Rob Butterwick, speaking at the AM used car round table in association with Manheim, summed up the views of many.

“At the end of March we couldn’t see the economic storm clouds and such a dramatic turn-around happening in such a short space of time.

We are in a cycle and it could mean a similar correction to the early Nineties.”

There are still buyers in the market – they just aren’t willing to pay as much money as a few months ago.That means the key to success for used car managers is two-fold: buying cars at a price which leaves a margin, and at a price that means they can be sold on quickly.

Stock turn has always been important, but as residuals continue to dip, with EurotaxGlass’s predicting a 12% drop in the second half of the year, any policy over 30 days will potentially put margins at risk.

“Do the sales job properly and you will get the margin” - Paul Jennings

AM/Manheim Round Table

The wholesale market

Dealers quick to realise the downward residuals trend have mostly washed out their stock, according to Manheim auctions and remarketing managing director Mike Pilkington.

But plenty were slow to react and still have cars whose values have been slashed over late summer.

Activity at auction has picked up in September as dealers try to replace lost new car revenue with used.

Perrys managing director Ray Sommerville said: “We’ve gone from 60-65% conversions at the beginning of August to now selling near to reserve on most stock.”

However, both Sommerville and Hartwell group used car general manager Patrick Lawrence believe that dealers are keeping more stock on site and sending only the cheaper, lower-quality models to auction.

Some of those cars don’t even make it that far. “Because of the price of steel, it’s better to scrap some cars than send them to auction,” said Sommerville.“You can get £150-175 for cars now.”

Much of the focus at auction is on lower-value, smaller-engined cars; 4x4s remain a problem, according to Pilkington.

It’s symptomatic of customer demand, says Paul Jennings, used car director at Johnsons Cars.

“Dealer part-exchanges in the past four weeks have come back strong. Retail activity is strong up to £15,000 but retailing at more than £15,000

is a problem; cars are still selling but for many it’s almost a psychological ceiling.”

Used car supply will rebalance in October due to the falling new car market, said EurotaxGlass’s managing editor Adrian Rushmore.It was unsettled in March when new car sales were strong but used was faltering, which meant lots of stock entering, but getting stuck in, the wholesale market.

However, he added: “If you track the residuals performance for three-year-old cars versus new and start at the last recession, in percentage terms we are lower than we were at the depths of the last recession.

“Cars are more available than they have been for 18 years but we are in uncharted territory. Values probably won’t go a lot lower but we don’t know for sure.”

“Most incremental sales are after the fifth or sixth contact with the customer” - John Simpson

AM/Manheim Round Table

Demand & Marketing Strategies

Showrooms are seeing lower foot-fall, but the type of person that has been lost is the floating buyer – serious buyers are still coming through the door, according to Manheim Retail Services managing director John Simpson.

The ratio of test drives to enquiries has been maintained, as has the level of sales conversions. But the value of vehicles sold has fallen.

Simpson points to the internet as a way for dealers to maximise interest, highlighting a 5% year-on-year increase in the volume of people visiting manufacturer websites.

Drive Vauxhall sales director Simon Reeves agreed. Drive’s website traffic has risen 10% year-on-year to 25,000 visits per month. Of these, 55% are looking for a used car. Its website generates 2,000 phone calls and 300 emails per month.

While the ability for customers to search nationwide via the internet has driven prices down, dealers can protect margins by presentation of the vehicle, the information they provide and the speed and efficiency of the follow up.

The internet gives customers the opportunity to do more research than ever before. Before buying a car, they now visit three or four websites before making a serious enquiry.

But it is exactly that – a serious enquiry – and dealers need to better understand that.

“Handling is different,” acknowledged Reeves. “People have to be up to the mark and well briefed because customers are better informed.”

A year ago, the first contact with the dealership would be the customer entering the showroom with a piece of paper; now it’s via email. Speed of response is crucial – customer expectations are 90 minutes to two hours.

But don’t assume that one conversation will be enough. “Most incremental sales are after the fifth or sixth contact,” said Simpson.

Drayton Group’s email enquiries used to be directed to a showroom – it was the wrong approach, says group used car manager Mark Austin.

“Now they go into a call centre,” he said. “If it’s out of hours, they get an automated response; if it’s in work hours we respond within minutes.

Enquiries are passed on to trained salespeople in the dealership; they know it is a hot lead so they are keen to handle it.”

Sales process is crucial. Three years ago Drive Vauxhall set out a long-term strategy on training which saw it introduce regular re-coaching.

“It used to be a case of sales training for sales staff, but it wasn’t used in the showroom sales process,” said Reeves.

“Now it starts at the top and the sales managers coach the sales staff.”

Views are mixedon the importance of good service to repeat purchase. “People used to pay more for service, but at the moment it’s all about the cheapest price,” said Austin.

Sommerville added: “In the old days, companies with good customer service got the loyalty. Now it only puts you on the shopping list. But if they can get a better deal elsewhere, they will.”

But service can still generate the price premium, according to Reeves. “Sell the features and benefits and use the demo car to create desire to buy the car,” he said. “That’s where the premium margin comes from.” Jennings agreed: “Do the sales job properly and you will get the margin.”

The selling process

Selling the car is only the end of the process, though. It starts with the purchase, either through part-exchange or at auction.

Sommerville said: “Buying is core, not selling. If you have the right car you will get the right value for it – this is where we combat falling sales and falling margins.”

The battle is to have buyers who pay the right money at auction and can walk away from the wrong deals.

“They have to think about what we can sell the car for and work back to protect the margin, adding in recon costs, etc,” says Butterwick.

David Gough, Inchcape Ford Wokingham used car sales manager, added: “The sales manager is closest to the market and is best placed, but often they are not in that position – it’s a group buyer and that might be a conflict.”

The best margins come from older cars – three to five years – because they are less of a commodity; it’s more difficult for customers to compare like-for-like models and prices.

They are the hardest to price correctly, but that’s where the buyer earns their worth. "We look at the dealers in our network that are doing well,” said Jaguar UK used car sales manager Paul Stavers.“The top 25% tend to have a better range of vehicle age profiles – three to four years, not two to three. They return better GPU than up to one-year-old cars.”

Austin added: “You have to manage the process tightly. The speed at which the market is moving means you have to take the first profit that is offered rather than turning it down and trying to sell it again – the next price won’t be as good.”

Fourth quarter into 2009

Dealers expect a tough fourth quarter, but are hopeful that the market will pick up in the New Year.

“We see it coming back and we are stepping up our training and marketing and planning an event to kick off the year,” said Reeves. “You have to be optimistic – otherwise it becomes a self-fulfilling prophesy. There are still customers there.”

Austin added: “A lot depends on what the manufacturers do in the fourth quarter with their new car campaigns. If they have strong campaigns it might bring people forward from the first quarter of next year. If they don’t, then it might create some pent-up demand.”

Which option would dealers prefer they take? “To stabilise the year and give a platform for a good start next year,” said Reeves.

“We want something to reduce our new car stocks but we also want a consistent marketplace, not the peaks and troughs,” said Austin.

“We want demand to match supply,” said Johnson.

Attendees