By Tony Willard
Retail demand for used cars is stronger than at any time since mid-2011. This poses a potential problem for dealers because good stock is hard to find and buyers have become fussy about price and condition.
Many customers are believed to be using their share of the £15 billion or so banks have paid out in compensation for mis-selling of PPI (payment protection insurance) to buy cars. Low interest rates mean there has been little incentive to put the money in the bank.
Used car sales are expected to grow further as the economy recovers, but an open, competitive market means retailers will have to offer something special to win sales.
CAP believes it has the answer: dealers will boost sales if they give customers more information about living with the car they are trying to sell them. CAP spokesman Mike Hind said consumer appetite for used cars had grown every month since the start of the year, with the exception of March, which registered a reduction as franchised dealers focused on the arrival of the 13-plate.
“This represents a genuine upswing in consumer interest,” said Hind. “Given that retail demand for used cars is not a problem this year, the ability of dealers to differentiate themselves from their peers presents one of the best opportunities to boost business.
“Understanding customers is one of the keys to this, so that they get a sense of bespoke service rather than experiencing a hard sell.”
What motivates a customer to buy a used car?
CAP has learned much about what motivates customers by talking to 500 car owners during research for its consumer-facing ‘total cost of motoring’ tool.
Hind said it was striking how many consumers surveyed did not feel confident about the car-buying process. Among males, only 18% thought they had enough help and advice. For women, that fell to 6%.
“It isn’t surprising that consumers lack confidence when buying a car, when a large proportion of them said they had previously regretted a purchase,” he said. “But it is clear the information on which they had previously based purchase decisions had proved either unreliable or insufficient to give them a true picture of the forthcoming ownership experience.
“Good dealers may be frustrated to find that all their efforts to improve car purchasing are taking a long time to filter through into customers’ perceptions, but this is the reality. If the customer relationship is important to a dealer, this fundamental lack of confidence should be addressed.”
CAP believes independent information about ownership costs – more than just purchase price and fuel consumption – is one way to tackle this.
“The importance of choosing an ‘economical’ car may seem self-evident, but does not mean consumers fully understand what it constitutes,” said Hind. “One of the best ways dealers can distinguish themselves from competition that is most likely focusing on winning the deal with an attractive up-front price is to share better, more thorough ownership information.
“What better way is there to win the confidence of customers – and sell more cars – than by being upfront about more than just the purchase price and what it says in the manufacturer’s brochure?”
Giving used car consumers more information builds trust
Le Etta Pearce, Manheim Retail Services sales and operations director, agrees with CAP’s belief in whole life information about cars.
“Increasingly, consumers want to know as much as possible about a vehicle and its lifetime running costs before committing their budget,” she said.
“Information about tax, insurance, CO2 emissions and fuel consumption can all be helpful to encourage a sale. The more information dealers can provide directly about a used or new vehicle, the more likely customers are to trust and stick with a brand.”
Buyers doing more online research probably account for BCA’s finding that just one in 10 viewed distance as important when deciding they wanted to inspect a car.
“Consumers can begin the search for their next vehicle from anywhere in the world at any time of day or night,” said Pearce. “In the past, when a customer was looking for their next vehicle, they might visit a variety of showrooms, talk to a number of dealers and make their choice following a series of test drives.”
She said that is why dealers have to ensure their online presence is as strong as their physical site. When someone searches for a dealership, results include forums, review sites, social media and news platforms, as well as the brand’s own website.
“Buyers are also likely to take into account the views of friends, family, forums and review sites as part of the selection process,” she said.
“But the key to selling used vehicles is having the right mix of stock on the forecourt and understanding the demographics of buyers. Knowing when to move a vehicle on if it isn’t selling is also crucial.”
Pearce said it was also essential to invest in professionally trained sales people so they are confident, passionate, friendly and know everything about the vehicles they are selling.
Daren Wiseman, Manheim Auctions UK valuation services manager, said retail buyers were becoming more educated about the specification they wanted to see on a used car.
“Dealers are looking for specific options, especially with premium brands, which will make the vehicle more desirable to consumers and achieve a higher sale value,” he said.
“A used vehicle will never retain the full value of the specification because navigation, climate control and entertainment systems depreciate. But the right options can make a car a far more attractive proposition.”
Retail buyers want to be choosier about the stock on their forecourts, but challenging shortages mean many motor retailers have had to relax their stock profiling policies.
“This means that to fill a gap on the forecourt, a dealer may opt for an older, more basic model, rather than hanging on for a high-spec car which hasn’t yet reached its fourth birthday,” said Wiseman.
“As a result, good quality, young stock is still yielding strong values at auction, and is in significant demand in the showrooms.”
One finding in the 2013 BCA used car market report, published last month, is at odds with CAP’s research about customers’ lack of confidence about buying cars. BCA spokesman Tim Naylor, who edits the report, said: “Customer satisfaction levels with their used cars now are among the highest recorded for the annual report. Dealers have been working hard to improve the perception of the sector, and the standard of products is much higher than even a decade ago.”
Used car customers’ expectations still climbing
Naylor said research for the report shows “very subtle yet significant changes” in the market over the past 12 months.
“Customer expectations in the used car buying process continue to climb and there are changes in how information is gathered when it comes to making buying decisions,” he said.
“There is a little more confidence in terms of the economic climate, the products they are buying and the service they are receiving. With improving economic indicators, we could see more people looking to replace their used car with a better used car.”
BCA asked owners about the biggest influences on the way they had approached their search for a suitable used car.
Nearly two-thirds (64%) cited ‘price range’ as the driving force while 40% judged ‘brand’ and ‘model range’ as the key factors.
Other factors were ‘type of used car seller’ (24%) and the ‘variant and specification’ of the car (17%). Travel and distance to view a potential purchase is still a factor, but only for 11% of those asked.
Samantha Cripps, UK sales development manager at Alphera, BMW Group’s loans provider for brands other than its own, said the used car market had taken a bit of a dip during the past two years because of manufacturers’ heavy subsidies on new cars. “Further add-ons, such as discounted upgrades or free fuel and insurance, can make the used car market seem less attractive to consumers,” she said. “It is, though, still buoyant for good quality used stock and plenty of consumers are looking for an attractive and competitive HP or PCP deal.
“The used sector provides significant opportunity for dealers who can add real value to a customer’s decision-making. Through understanding the local market and offering a strong portfolio of good quality stock, dealers can focus on delivering the right product at the right rates and with the right terms.”
Cripps said consumers increasingly searched online for used stock, which has led to the growth of classified sites and vehicle locators. The latest data from Auto Trader reveals that its website visitors spend an average of nine minutes 36 seconds searching for cars, including two minutes 13 seconds at the editorial section and two minutes 58 seconds looking at videos.
“It is imperative for dealers to have a strong online presence to attract customers,” said Cripps. “It is also essential to think about how to reach new target audiences through good ranges of holding stock and finance products.
“Used car finance should not always equate to just selling hire purchase. Using competitive residual values, where available, and promoting competitive monthly PCP rates can both attract buyers and drive footfall into dealerships.” Cripps said success for dealers came from understanding the market, “and being a little creative”.
Rupert Pontin, Glass’s chief car editor, predicted a problem this autumn caused by the poor condition of many cars going to retail at a time when customers are increasingly choosey.
He said vehicle condition was paramount and could cause problems from remarketing right through to the retail sale process. Dealing with cars in poor condition is costly and complex and is likely to worsen as more cars go to market from this month.
Glass’s estimated that refurbishment costs rose by 12% this year as a result of poorer stock quality.
“The quantity of vehicles defleeting will go up in the coming months as a direct result of improved new car sales going back two to three years,” said Pontin. “This issue of condition will come to a head and residual values for certain products may be significantly affected.”
Years of business and personal financial difficulties led to neglect of maintenance and care of vehicles as a cost-saving measure. The end result has been a marked decrease in the condition of vehicles coming back to the market.
Pontin said stock from defleet centres was often fairly bland, with significant volumes of basic, dull-coloured cars, often of poor quality. This often led to reduced auction attendances, fewer sales and fluctuating prices, all driven by used car buyers’ desire for the right specification and condition.
Used car dealers need new metrics to boost margins
Margin, stock turn and gross profit metrics are the traditional ways to measure the success of a franchised dealer’s used car operation. However, Tim Peake, Trader Media Group strategy director, believes they are no longer enough and that dealers who do not act may lose out.
“Changes in consumer behaviour mean new metrics should be considered, such as desirability rating, cost to retail and price position,” he said. “They can establish if a car is in demand in the local market, recommend the price at which it should be bought to give a realistic margin and determine the optimum selling price.”
Additional metrics can strengthen a used car operation by ensuring correct stock profile at the right price with a healthy margin, meaning an increase in stock turn and gross profit potential. A survey of 10,000 used car operations with 10-plus stock volumes by Deltapoint, a division of Trader Media Group, supported this.
Peake said the survey revealed an average stock turn of 8.5 and an average margin of £1,661. A dealer with 10 cars would have a gross profit potential of £141,180. But the top 25 dealers surveyed had a stock turn of 16.3, almost double the average, with a margin of £1,529. A 10-car forecourt with these metrics has a gross profit potential of £249,280.
“These results should encourage dealers to use market data intelligently, but many still either don’t or won’t and they are in danger of getting left behind,” said Peake.
“There is strong demand for lower-priced cars and dealers should consider offering entry-level stock to attract new customers who wouldn’t normally think of buying a used car from a franchised dealer.”
He said franchised dealers started stocking older cars during the recession, attracting buyers aged 18 to 20: “If someone buys a five- or seven-year-old Ford Fiesta they may stick with the dealer for their next buy. Research shows 25% are brand-loyal.”