Evolution of tactical support in the UK new car market – H1 2021 vs H1 2022

Overview

Amid the ongoing shortage of semi-conductors, as well a lack of raw materials sourced from Ukraine and Russia, demand for new cars continues to dwarf supply. Add into the mix increased cost of logistics, energy pricing hikes and we have seen the cost of car ownership rise dramatically in the last twelve months.

With total registrations taking a back seat for the time being, profitability has become the main focus for VMs. Reducing tactical marketing spend, but being mindful of the need to support their sales network in retaining customers, all the while endeavouring to maintain the flow of business through their respective captive banks.

Tactical spend on new cars in the UK has always tended to sit a little lower than those of its big Euro4 counterparts (DE, FR, IT, ES). But, the drop from 2021 to 2022 in the UK far exceeds that of our continental cousins, yet inflation in the EU4 is on a par with here, so what is happening? This is most likely to be related to additional supply constraints of right-hand drive units. Especially given that VMs will be looking to benefit from the low/zero C02 credits of their xEVs against strict EU emissions targets. Targets that have yet to be defined in post-Brexit Britain.

PCP Rates

Circa 85% of all new car sales are via Personal Contract Plans (PCP) in the UK. But, with interest rates at their highest level for 13 years, the cost of borrowing has risen to levels unprecedented since its inception in 1992.

APR Rates over 6% were once the hunting ground of the sub-prime lenders alone, yet today we see many of the captive banks exploring this very arena.

UK based Vauxhall Finance showcases this with particular clarity, with a shift from an average of 2.6 to 5.9% APR in the space of 12 months.

VAG, with their ‘Solutions’ PCP product have been perennially strong on finance penetration and have enough confidence that they can retain business, at an average, in Audi’s case of 6.7% APR in the current market conditions.

FDA Support

With captive bank APRs approaching those of the sub-prime lenders, the need although reduced, for brand supported Finance Deposit Allowances (FDAs) remains key in keeping the customer ‘in house’ and available for retention at the end of the PCP cycle.

With many order books full and delivery lead times in the region of six to nine months, there is little sense in throwing the proverbial kitchen sink in concern to discounting. And with news coming from the grapevine of people reselling units on the used market at a premium over the new list price, a tightrope needs to be tread. And with the supposed easing of semi-conductor shortage coming, brands will have to be wary about letting customers jump to a more keenly priced rival.

Monthly Payments

Alongside increased OTRs, higher APRs and lower FDAs, VMs have been saving their precious semi-conductors for their higher end, ergo more profitable units. Success for KIA not only comes in their being the second-best selling brand in the UK during 2022, but they are now selling a greater range of alternative fuel vehicles than their European competitors, with the EV6 and Sportage PHEVs gaining many accolades and engaging a new ‘premium’ demographic, all of which explains the 39% rise in MPs, highest of the volume brands that we have observed. ?

BMW too are directing sales towards their higher end units, with focus redoubled on the electric iX, i4, iX3 and M Competition models. This takes their average monthly payments above those of Land Rover in 2022, although to some degree this can be explained by the higher customer deposits in LRs representative examples vis-a-vis their Bavarian rivals.

Summary

?The brands, retailers and consumers have never had to cope with so many market changing variables hitting them so quickly, without warning or prediction. The market landscape has been turned on its head over the past two years. So, what happens next, how quickly and when? Our research focuses on multiple areas. New vehicle market incentives, new vehicle transactional pricing, new vehicle customer paid options, new vehicle finance, used vehicle transactional pricing, used vehicle finance and detailed analysis of retailer profitability. Thus far our immediate short-term view of the market is best described as “nervous stability”

However, all tides turn, but there is no evidence to suggest a massive or imminent shift in any of our key areas of analysis. There are some subtle changes with a slight change of behaviour between volume and prestige brands and EV v ICE. We feel that as the tide turns it will not be a one size fits all impact but will be very fragmented. I have always found in my experience that the new car market is driven by the used car market and our analysis of used vehicle transactional pricing and detailed analysis of retailer profitability is showing the tide in the UK used car market has started to turn.

Wholesale used vehicle prices have stabilised and, in some instances, started to fall. Used vehicle retail transaction prices have also stabilised and in some instances have started to fall. For me perhaps the most telling evidence of change is retailer used car stock turn which again has slowed over the past few months. Thus, if my assumption that the used car market significantly impacts the UK new car market, then the tide has indeed turned. I think we will see that new vehicles incentives and finance activity start to move in the second half of 2022, and perhaps more aggressively first half 2023.