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New car demand: Are customers genuinely returning?

car purchase

Need to know
- Conflicting views on 2012 pre-reg activity
- Production levels continue to dictate the market
- Important source of profit for dealers
- Oversupply and pre-reg could affect used car values

As long as there is over-supply and high paying volume incentives there will be pre-registration.

Consumer demand has appeared to have made a resurgence in the first half of the year. Private registration increases over the first six months and a 26.4% rise in July have prompted calls from the industry that pre-registration activity is distorting a true picture of the market. Dealers have had a good September and according to Vauxhall boss Duncan Aldred the predicted 300,000 units from the plate-change month will actually reach past 400,000. However, he believes the majority will be coming on final two days of the month.

Are customers genuinely returning to showrooms or is the picture of consumer confidence distorted?

A shroud of mystery surrounds pre-registration as official figures are only truly known behind closed doors. The media is in the dark and while customers are aware of cheap nearly new stock, they’re largely unaware of how the process works.

Complicated politics are at play. Manufacturers have already allocated production, which is keeping factories in business, which in turn is keeping voters employed.

The Society of Motor Manufacturers and Traders (SMMT) believes the increase is from genuine retail sales driven by strong deals, but it also says the growth has been delivered against “an unsettled economic backdrop”.

A dealer told AM: “Dealers wouldn’t do it if they had a choice. There’s an inevitability to it happening.

"Manufacturers want to hit market share targets, production has to be allocated and dealers make money from the volume bonus.

“Most manufacturers will claim dealer pre-registering doesn’t even happen.”

Such is the extent of pre-reg that one industry insider told AM 47% of a major manufacturer’s monthly new car total was registered on the last day of the month.

And there are conflicting views from the market. Residual experts CAP believe as many as “three in every 10” new cars are pre-registered in the UK.

Whereas Auto Trader’s statistics for delivery mileage cars show that activity is at its lowest level for the
last three years .

David Raistrick, UK manufacturing leader at Deloitte, said: “The continuing growth in new car sales in the UK, compared to increasing pressure due to tough economic conditions, which is resulting in reducing sales elsewhere, is starting to raise questions in global markets.

“This has led to recent suggestions from both retailers and industry insiders that an increase in pre-
registration of new cars is perhaps distorting the level of growth being reported in the UK market, particularly in respect of private sales.”

Deloitte said its “official data” shows recorded pre-registrations are up 76% on the first six months
of 2011.

The RMI is now looking into how it can provide a more “transparent view” of the market by consulting
its members.

What are the damaging effects?

Dealers caught in a constant cycle of pre-registering can find themselves sitting on stock for three months, which in turn affects cashflow.

It appears there are “paperwork techniques” which see dealers retail nearly-new stock immediately to eliminate that problem. Under the Supply of New Cars Order 2000 European regulations, a newly-registered car must not be sold within three months if the dealer has received a bonus from the manufacturer for taking it.

However, dealers can create one purchase invoice and a sales invoice simultaneously for each car to sell from day one.

Despite manufacturers knowing that pack deals have been taken on, it still counts toward how a dealer’s next target is calculated, which then creates the vicious circle of increased pressure on a business.

If the registrations have been forced, it also ties up money in stock that a dealer might not choose to buy and creates an imbalance of cars that is too heavily weighted towards nearly-new.

This prevents dealers from sourcing the two-year-old cars that the market wants and that offer greater profit margins.

This stock is also competing with dealers’ new stock. If the price gap between new and nearly-new isn’t big enough, customers will naturally buy the new car; if the gap is too big then it will affect depreciation.

Why do dealers do it?

Many dealers carefully manage the pre-registration process, giving them access to low price nearly-new stock and access to large volume bonus payments.

Some schemes can earn dealers in excess of £500,000 which is keeping them in profit and jobs in place when aftersales absorption and margins are being squeezed.

It also helps to keep transaction prices down on nearly-new cars to pull customers into showrooms with discounts of up to 40%.

Another plus it that it keeps part-exchanges rolling in with opportunities for finance and other add-ons, as well as keeping customers coming back for aftersales work.

And it’s for these reasons that pre-registrations are likely to continue as part of how the market operates for the foreseeable future, but it still makes it difficult for dealers to get a sense of whether consumer confidence is returning.

What the numbers suggest

According to figures from the Finance and Leasing Association, 324,012 new cars were bought on dealer finance in the first half of the year.

According to statistics from SMMT, 476,283 new cars were privately registered in the first half of the year.
According to the official pre-registration figures submitted by manufacturers to the SMMT, and the ones made public, show 1,933 new cars were pre-registered in the first half of 2012, representing a total value of almost
£19 million.

Manufacturers are required to disclose their own pre-registration figures as part of the EU’s Supply of New Cars Order 2000.

So, excluding officially declared pre-reg and new car private dealer finance purchases, 150,338 new cars were either cash purchases, funded by high street finance or were pre-registered. Somewhere within that number is the true picture of the market.

Industry views

John Leech, partner in KPMG’s automotive practice, told AM: “It can be very advantageous with bulk deal arrangements coming with extra volume bonus payments.

“It’s not necessarily a cashflow disadvantage if the amount of stock taken on is managed carefully. However, if a dealer is left in the position with surplus stock which can’t be retailed quickly it can become an issue.

“I believe the current new car market performance is being driven by beneficial finance rates from manufacturers, particularly in the premium lease segment. Good dealers that buy at a sensible level and turn them out can make a good profit, but if you’re not careful it can go wrong.”

Adrian Rushmore, managing editor of Glass’s Guide, and a spealer at the AM Used Car Market Conference on October 9, also believes there is a real danger that the UK car market faces oversupply.

“It could be driven by forced registrations due to the exchange rates being in favour of sterling and we could see that in the final quarter of this year,” he said. “We would then start to see values of used cars tumble.”

Rushmore expects to see a sharp increase in pre-registration stock towards the end of the year.
Oversupply of cars into the market will drive values down as dealers look to compete on price rather than seeing values increase due to a lack of choice stock.

Pre-reg discounting has a negative impact on the prices of used stock as the gap between nearly-new and genuine used is squeezed. To the consumer, the appeal of so called new over genuine used becomes muddied.

Tim Peake, Trader Media Group strategy director, said: “Our research indicates that while there is undoubted evidence of pre-registration activity this year, the overall volumes are potentially not as high as last year.
“With well over 300,000 cars offered by dealers on Auto Trader at any one time, the number of cars with delivery mileage (less than 100 miles) accounts for just 2% of the total.

“This time last year, cars less than one-year-old accounted for 10.5% of the total stock offered on Auto Trader, while this year that figure is at 9.4%, the lowest level for the past three years, caused largely by declining new car registrations in the last few years and a shortage of quality young used stock.

“There was a ‘spike’ in the proportion of cars less than one year old in September and December last year while in March this year the proportion of cars less than one year old remained the same as 2011, which suggests less pre-registration and more genuine retail sales activity.” 

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