Dealers are facing a “severe and prolonged” downturn in the new car market, which will have a detrimental knock-on effect on the used car market, according to a new report.
New car sales will remain below the two million mark for at least the next three years warns the report, which was produced for BCA by Peter Cooke, Professor of Automotive Management at Buckingham University.
“The clear message is: change the dealer business model or expect a marked contraction in business,” he warns.
“The market that franchised dealers, in particular, operate in is changing…lower-cost new cars, fewer of them and a shrinking younger used car parc will all contribute to a much tougher, more competitive market.”
The report predicts that there will be millions fewer younger cars in the UK car parc in the next few years.
For dealers trading in cars up to five-years-old, there will be around three million fewer of these units ‘in stock’ by 2013 compared to 2005, which poses a serious threat to used car stock availability and used car volumes.
Pendragon has already said it is targeting the older used car market as a key area for growth.
“It is not difficult to work out the implications for the size of the service/repair market – or the huge task that dealers face to sustain their aftersales business.
"If there are substantially fewer cars on the country’s roads for any age group, then service and repair market for that sector drops accordingly – there is no way of producing units magically to fill the gap,” says Cooke.
“There is also a black hole looming in the aftersales market for younger cars – amounting to around £2 billion in the 2009 to 2015 period compared to 2008’s level – at its worst between 2012 and 2014.”
Scrappage has also had a pronounced effect pushing sales of small cars with considerable implications on manufacturer and dealer profitability.
“As a rule of the thumb, there is surely much less profit to be made from selling a €10,000 car than a €20,000 one,” said Cooke.
This ‘reduced margin’ model is likely to be replicated as these cars come back into the used vehicle market in three or four years’ time.
Funding scrappage also had implications for dealers and manufacturers who had to find half - £1,000 – of the scrappage deal consumers enjoyed.
According to the report, at least part of the manufacturer/dealer contribution appears to have been funded by the withdrawal of price-based promotional plans, substantial new car price increases and less generous finance plans for new cars sold under the scheme.
In addition, most new cars bought under scrappage were lower-priced models offering lower profit opportunities, no part-exchange to retail, little or no finance contribution, little opportunity of immediate aftersales business or the likelihood of the car entering the used car market in a normal replacement timescale.
Now scrappage has ended, dealers must ensure they have access to consumer credit lines to allow buyers to continue to buy new and used cars easily.
“Manufacturers’ finance houses have offered a major lifeline in the marketplace, but that funding has often focused largely on new vehicles,” said Cooke.
“As a result, there has been a significant shortage of funding for used cars which, in turn, helped drive down used car sales and prices in 2008. This will need to be addressed.”
The full report can be downloaded free from the University of Buckingham by here.