By Dr Richard Parkin
It’s a competitive world in the used car sector, but despite the more positive news that the industry is predicted to grow this year, many dealers are still too focused on used car margins and aren’t paying enough attention to stock turn.
Dr Richard Parkin is director of valuations & analysis at Glass’s, where he coordinates the editorial and analysis team. Prior to joining Glass’s in 2012, he spent six years as a strategy consultant at Ernst & Young, with a focus on the automotive industry.
To maximise profitability, dealers should be focused on the profit made per forecourt space each week rather than on the margin made on a vehicle.
Glass’s studied a basket of vehicles over the course of 2013, monitoring the trade and retail prices in each month for a three-year-old/36,000-mile example, along with the average selling days. Astonishingly, the typical difference between trade and retail prices in any given month varied by as much as 25%, or about £500 for a typical B segment car. However, once the average time elapsed between trade purchase and retail sale was allowed for, the actual achieved gross margin showed a more consistent picture.
Such findings reinforce our view that trade and retail guide prices need to be derived from independently moving sources of data, otherwise this true behaviour is not captured.
Why used car margins do not give dealers the full picture
A consistent margin picture across 2013 suggests dealers are thinking about the gross margin that can be made on a vehicle acquired at trade, and adjusting their bids accordingly. However, Glass’s believes dealers are not getting the full picture.
The gross profit realised by dealers did not appear to be influenced by the change in selling days, and so the profit a dealer could make from each forecourt space in a week was at the mercy of how long it took to sell any given vehicle.
It is clear many dealers have not focused on selling days, possibly as a consequence of trying to hold on too long for too high a price. Not going in at the right price wastes time on the forecourt and reduces profitability; judging what the price and the hold period should be in a given locality is almost impossible without the right data.