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Don’t believe the hype – it’s not all roses in the retail car market

Philip Nothard

By Philip Nothard, Black Book Editor - Retail & Consumer Specialist at CAP Automotive

Half-way through the year, it is becoming apparent that not everything in the retail car market is as rosy as the figures on the surface would suggest.

The signs of this can be seen in both the new and used car retail markets. Turning to new car registrations first, the headlines have all been about records tumbling. April saw another increase of 5.1%, making it not only the 38th consecutive month of growth, but the highest figure for the month since 2005. Overall, we have seen a 6.4% year-to-date increase against the same period in 2014.

But what does this mean for dealers?

There is some debate over the lagging performance of private new car retail sales and questions being asked about why the increase in this sector has only been 1.4% year-to-date.

Some are identifying a growing number of customers opting out of company car schemes. Initially, this boosted retail sales because PCP was so often the preferred route into a private car. However, many of these customers are now opting for a PCH scheme and these cars are, of course, being recorded as fleet and business registrations.

There is also a growing issue for dealers relating to extended lead times for new vehicles. My colleague Robert Hester, who oversees short-term residual forecasting at CAP, had this to say on the subject:

“With the continuing pressure from manufacturers for year-on-year increases in volumes, there has been a noticeable shift in the length of time customers are having to wait for new cars. The days of ‘off-the-shelf’ cars are pretty much gone, and it isn’t unusual for customers who want to individualise their car to have to wait for several months before taking delivery of their new car.

“Lead times vary considerably, with 12-14 weeks being quite common, and in some cases we hear of buyers having to wait as long as 12 months. This often leads to a situation where dealers are having to negotiate on a part-exchange value for several months in advance. The responsibility for reliably assessing a part-exchange value that far ahead has been just another pressure on dealers.”

Indeed, such has been the pressure on dealers from this issue, that CAP has begun forecasting monthly residual values from 0 to 12 months.

More pressure is mounting on dealers in the used car market, directly stemming from all of this new car activity.  Perhaps the strongest is the impact of margin compression – especially in the case of cars up to one year old. I hear horror stories around the dealer network every day about new cars that can be taxed and put on the road cheaper than an equivalent used car.

Interestingly, this is beginning to lead to a more cautious approach to tactical and pre-registration deals than the old ‘lemming-like’ rush to unquestioningly meet manufacturer targets.  

I don’t usually dwell too much on the subject of pre-registrations because my view is that transparency is more important than curbing the practice. CAP stands apart from those commentators who think pre-reg activity is somehow wrong in itself.

However, I do share dealers’ concerns about the situations that arise when one tranche of heavily supported new car deals is superseded by even greater support for the following registration month. We cannot overlook the fact that September is fast approaching and many of the current cars could well still be unsold by then.

The other headache is the relentless rise of repair costs. When you take both these issues into account, there are profound effects on margins.

My own research among dealers confirms that few are succeeding in preserving, let alone increasing, their margins on used car sales.

With the reduction in the number of quality repair centres, demand is gradually outstripping preparation capacity – leading to rising costs. This reduction is also leading to an increase in transportation and general logistics costs.  

Whatever the route to market chosen by manufacturers, the pressure is consistently felt by dealers across all their sales channels. I am aware of increasingly fractious conversations between dealers and manufacturers over targets relative to market territory and aspirations around market share. There is no sign of this settling into a sustainable pattern any time soon.

> AM Poll: What percentage of your new car business each month is pre-registrations?

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  • hojomo - 07/07/2015 14:29

    Phil, this is a great commentary on the state of the industry, highlighting two significant, but fairly obvious, trends. Firstly, who, honestly, ever believed that pre-registrations were a “good” thing? In the short term they appeared to get rid of an abundance problem, but it soon became clear that all it was doing was starting a new merry-go-round which just continued to pick up speed. Like the real thing, they might be fun when you first get on, but if they get faster and faster, someone sooner or later is going to get thrown off. Then things get messy. I’m sorry to have to take issue with you, but pre-reg was wrong as soon as it passed the first couple of months of having been introduced. Manufacturers have absolutely no clue how to extricate themselves, and those reliant on them, from the mire they have created. Meanwhile the metal continues to build up in yards around the country. Secondly, as more and more cars become connected, and the above situation continues to grow out of hand, manufacturers have less & less wriggle room around the need to speed up their operations. They have produced websites where cars can be specified – and that means highly personalised – online, leading to a point that consumers are now well acquainted with elsewhere, the “Buy” button. If we click that in most other places, we can expect delivery within the week. Car buyers WILL become less & less tolerant of the excuses why their chosen vehicle cannot be delivered within the month. Yes, cars will have to become more like mobile phones – they already are internally. Less stock will mean more build-to-order, and that will need to be short-order. Software now meets hardware in the automobile. The first manufacturer who recognises the need for speed (in production, not on the road) will be the one who can, albeit briefly, start to win the race. That will force all others to move up a notch. Manufacturers, Groups, and Individual Dealers should make no mistake, Disruption is coming. What you have illustrated is the beginning of the end of the latest phase of the motor industry. It’s an evolutionary business after all.

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