The Future Collapse Of The Used Motorcycle Market? Part 2!

Well, lots of discussion following the first of my articles surrounding the future trading challenges forming in used motorcycle markets (an article that can be found in my feed on LinkedIn), so I thought I would expand a little and also provide some clarity on just why this is one of the markets I am choosing to comment on.

?

Well the commentary is directly linked to my businesses, those that look for opportunities to disrupt automotive markets, and where that disruption is possible for a plethora of reasons. Automotive markets are fascinating in this respect as those currently operating within them seem to be veering off course (or choosing to ignore operational disciplines at the foundations of their success), in terms of understanding their target customer bases and therefore in many cases actually setting their businesses up to fail.

?

I see this across many automotive markets, manufacturers and their franchise partners becoming disconnected both from each other and from their customers; therefore not understanding what drives the purchase. In this regard the motorcycle market is no different, and I speak as both a market disruptor and a customer.

?

As a disruptor I have been looking at the motorcycle market for opportunities to disrupt; firstly through successful acquisition and then from successful retailing. However this is not the subject matter for this article (I will return to this in future articles over the coming weeks), the subject for this article is the considerable problems looming in the near future for the motorcycle retailing eco-system.?At the foundations of which will be those motorcycles returning from PCP finance agreements over the next 1 – 3 years.

?

However at inception it is important to understand the importance that the PCP finance agreement plays in automotive markets; it is transformative as it brings ownership into a far more affordable financial structure for customers, therefore changing the purchasing behaviour of consumers over time. Something that is very powerful in motorcycle markets; markets which I predict will provide tremendous opportunities for growth as the personal transportation landscape and market continues to evolve.

?

So great news for the new motorcycle market (which it undoubtedly is) but when looking for opportunities to disrupt automotive markets, it’s no good me looking at the current. Success comes from identifying opportunities in the future, those not appearing to be on anybody else’s radar, and this is what I have been looking at.

?

Now I predict that the new motorcycle market will enjoy some considerable growth over the next 1-5 years, provided those responsible at manufacturers and those owning franchised partner businesses understand how the get “The Message” out there to defined target audiences? This is by no means guaranteed of course; to do this you must understand how to approach target audiences with a message that resonates and link this to a powerful ownership proposition. Something PCP is a gift for, in terms of achieving these aims; that said (and I speak as a customer as well and an industry professional) not many are doing this at the moment.

?

This aside, in order to bring clarity to my argument and predictions let’s look at some current examples of PCP agreements and the likely effects on the associated used motorcycle market. To do so, let me highlight my own experiences and look at a highly competitive sector of the market; Nakeds.

?

This highly competitive sector of the market has seen some new and very competent newcomers to the market this year; the Honda CB750 Hornet and the Suzuki GSX-8S. An admission; I have ridden them both and will undoubtedly buy one of them, I just can’t make up my mind. The Suzuki is the better bike for me but is over ￡1,000 more expensive; is it over ￡1,000 better than the Honda?

?

I’m not sure and have little doubt that Suzuki (in time) will have to offer pricing incentives to get nearer the Honda on pricing, but I want my bike now! I will probably flip a coin, but there is no doubt that both bikes will provide considerable retailing problems for the other competitors in this market sector.

?

So let’s look at some PCP figures and the likely financial ramifications for the finance partners in the future used motorcycle market. To do this let’s look at the Suzuki first; please find the PCP finance figures I was quoted below.

?

Deposit: ????????????????????????????????￡1,600:00

Monthly Payment (X36):???????￡?????94:22 (3,000 miles per annum)

Final Payment???????????????????????￡4,903:00

??????????????????????????

Now in many ways how this finance agreement is made up is largely irrelevant to the used motorcycle market in 3 years’ time; what is relevant though is the Final Payment. Now the term “Final Payment” is actually misleading because what it actually is in practice is a guaranteed future value. For sure, you can write out a cheque for this amount if you want to purchase the bike after 3 years? Alternatively you can look to refinance the balance on traditional hire purchase, but no one will, and here’s why.

?

Firstly funding the balance via a traditional hire purchase agreement through your bank at a likely base rate of 10% is going to cost ￡177 per month (approximately) over 3 years; nearly twice the monthly rental payment of the new motorcycle PCP agreement. I don’t think many will write out a cheque to settle the final payment either; why would they when this figure is nearly 3 times the deposit amount required for another new example?

?

So what will happen at the end of the term? I predict that customers will just hand back what will then be a very expensive ownership option and go and seek another new motorcycle; another funded via a PCP agreement because this (after all) will be the cheaper option. And this is when the problems for the finance partners and the associated used motorcycle market will really start.

?

At this point (and depending on the commercial agreement in place with the manufacturer involved) the finance company will own the 3 year old Suzuki above at ￡4,903:00. The only option really open to them (they know nothing about retailing and/or the used motorcycle market) will be to look for the used motorcycle retailers to purchase these motorcycles for used stock and retail; only there’s a problem, they won’t! And here’s why; retail margin, of which there will be none, not in the PCP driven motorcycle market that will have formed by then!

?

Let’s explore this point further and assume (as it is entirely reasonable to do so), that the business acquiring used stock for retail will want at least a ￡1,500 margin across the motorcycle, for preparation, warranty and profit? Well add that to the figure required by the finance company (￡4,903) and you have a 3 year old example that has covered up to 9,000 miles, retailing at a price of ￡6,403; when a new version of the direct competitor (the Honda CB750 Hornet) currently has a retail list price of ￡6,999:00!

?

This is only ￡596 more for a brand new motorcycle; one which is also curretly cheaper to purchase on a PCP finance agreement. Please see figures below.

?

Deposit: ????????????????????????????????￡1,350:00

Monthly Payment (X35):???????￡?????90:09 (3,000 miles per annum)

Final Payment???????????????????????￡3,703:03

?

And PCP won’t save the associated used market for the 3 year old examples either. Although on a like for like basis (and when compared to a new motorcycle), in a traditional Hire Purchase (HP) agreement the payments would be less for the 3 year old example (the total balance you are paying is smaller), this is the wrong comparison to make; why? Well customers are very unlikely to pay more (in terms of their monthly payments) to own a 3 year old version of a motorcycle (on a traditional HP agreement), when a new and more up to date version is available for less via a PCP agreement.

?

So why won’t PCP be the saviour in the associated used motorcycle market, by offering a 3 year old example for less, in terms of deposit and monthly rentals? Well PCP is structured very differently to a traditional HP agreement and as much as it is a fairly recent funding structure for used motorcycles, it will undoubtedly have to become more widely available within used motorcycle markets if the used motorcycle markets are to survive and prosper, thus underpinning the new motorcycle market.

?

That said there is a major flaw for used motorcycle markets; in a PCP agreement you are not funding the entire balance, you are funding a balance between the purchase price and a perceived future value, which is actually a guaranteed buy back value from the finance provider. Now it will no doubt be different for every motorcycle and for individual finance providers, but depending on the future values guaranteed by the finance providers, you could end up funding a larger balance on the 3 year old used example, than you are funding on the new example; thus rendering the 3 year old example more expensive than a new motorcycle.

?

In this situation all the used example will prove to be is a great financial advertisement for why you should buy a new motorcycle and in truth, market dynamics dictate that there can only be one winner in this situation; the new motorcycle market.

?

So where will this leave the finance providers and the used market for these motorcycles returning on PCP agreements? Well this is the $60 Million question, because this is where the opportunity lies for those professionals possessing the skills required to disrupt automotive markets and provide solutions, currently resides.

?

I can’t predict how the finance companies will react when motorcycles are returning in volume and at prices for which there is no market for them; or how the manufacturers will act for that matter, should they use their own in-house finance company, so indirectly own the problem themselves. But one thing I do know about used automotive markets and customer behaviour is that when the consumer doesn’t see value they do not purchase! And this is when the problems really begin to start.

?

My prediction is that the finance companies will panic and end up doing the wrong things; those responsible will do nothing right now (just the time they should be planning their strategy), they will ignore it and hope that the problem goes away; that the market will save them! They will ignore this article and the questions that it raises because they are not retailers, they are finance people.

?

But then the problems will begin to arrive and my question to them today would be just what do you think you can do in that moment? I would caution that by then it will be too late and as much as you have “Baked” losses into the finance agreement (they can’t be avoided), the scale of them can be mitigated.

?

To achieve this though will require access to the very best automotive professionals who unfortunately come at a cost; a cost that in the vast majority of cases the motorcycle sector has not wanted to pay. But for the finance companies, the losses involved in using the blunt instrument that is pricing (in order to liquidate these motorcycles within networks lacking the expertise to build the retailing programmes required in order to retail them profitably), will be staggering.

?

In reality I think it is about limiting losses now, but this can only be achieved from a platform of successful used motorcycle acquisition and retailing. Whether or not this expertise exists within manufacturer networks or not, I’m not sure; and herein lies the opportunity for those possessing the skills to disrupt used motorcycle markets by providing successful solutions.

?

In reality and albeit for different reasons, I think the finance companies, the manufacturers and the franchised partners will need to build performance based strategic alliances with those professionals with the experience required. Those who are forward thinking enough to do so will actually enjoy a once in a generation opportunity to grow their business.

?

Should you wish to explore synergies and the potential to collaborate in this regard, please do not hesitate to contact me via LinkedIn, so we can arrange a mutually convenient time for an exploratory call.

?

Andrew.

?