Car retailers will have to cope with reduced margins and increased competition as changing market conditions spell the end of “super profits”.

That’s the view of Alastair Cassels, head of automotive advisory at MHA, who spoke at the Vehicle Remarketing Agency’s (VRA) annual general meeting this week.

He said: “During the last few years, Government support during the pandemic and new car supply constraints have resulted in the most benign risk environment for car dealers of the last two decades.  

“Retailers have enjoyed ‘super profits’ largely driven by appreciation in their used car inventories and ongoing new vehicle shortages. However, signs are emerging that the market is slowing in line with the macroeconomic conditions affecting the UK. We expect to see some distress in H2 2022 and into 2023 as economic conditions squeeze household disposable incomes and inflationary pressures drive vehicle pricing higher.”

He added that a retailer selling 500 new cars per year, whose manufacturer partners implement Agency sales could face a reduction in gross profits of around £500,000 by 2025 while at the same time seeing an erosion of service revenues due to the shrinking segment one parc and electrification. To offset these losses in revenue around 800 more used cars would have to be sold per annum or £700,000 worth of operating cost reduced.

Cassels said: “This is what our forecast shows but how should retailers respond? They can increase revenues by investigating options such as multi-branding sales and services, and grow remarketing capability through leasing personal contract hire. They can also reduce costs by divesting secondary locations and automating more administration.”

The VRA’s annual general meeting outlined that the next few years would be “highly challenging” but also “exciting”.

Philip Nothard, the VRA’s chair, said: “Consistent themes came through in the predictions of all three speakers – including electrification, the ongoing semiconductor shortage, the agency model and more. Of course, none of these were perhaps surprising in themselves but it was enlightening to see their potential implications spelt out in so much detail.”

Lee Swinerd, automotive sector lead at Interpath, looked at ongoing new car supply issues and how this was likely to continue to impact on the used sector. He said: “What we are seeing is an automotive industry facing a period of wholesale change that is perhaps unprecedented. This is causing not just supply shortages but liquidity and cost pressures, especially in the supply chain.

“It’s important to realise that not all of these changes are uniform nor will they continue to be. Not all manufacturers have suffered the same from COVID, semiconductor shortages and the war in Ukraine – indeed, some have posted good financial results.

“Similarly, even within manufacturers there have been significant variations across different model ranges and, in turn, production scheduling and allocation of components have partly been affected by their desire to hit EU emissions targets.

“Life is perhaps especially difficult for suppliers to manufacturers, who are having to try to match operations and scheduling to very erratic levels of demand as production stops, starts and fluctuates.”

Marc Palmer, brand director at Auto Trader, provided a more short-medium term look at the used car sector, highlighting trends that were likely to develop in the next few months and into 2023.

“While personal finances are under pressure, visits to Auto Trader are strong and at least 80% of consumers are as confident that they could afford their next car this year as last. Also, while our used car market health measure is down on last year it’s ahead of pre-COVID levels, supply is stable and pricing has evened out. Overall, those planning to buy are still buying, prices and volumes are stabilising, and things are returning to more normal patterns.”

He explained that the major trend of the next few years would be the ongoing impact of the two million ‘lost’ new car registrations seen by the end of 2022 compared to normal market conditions.

“This means growth in the UK car parc will slow over the next few years, with fewer used cars available and within that a greater mix of older cars. We can already see that franchise dealers are stocking older vehicles and taking in more stock of other marques, so current market conditions are likely to continue,” Palmer added.