Rising Used Car Values?,,,, We Don’t Think So!,,,,,,,

In our last article; Which Automotive Manufacturers Will Be Ready For The New Trading Conditions?  We launched our complimentary initiatives surrounding all aspects of returning liquidity to used car businesses and franchised dealerships, and it has been interesting to discuss this matter, (along with preparing for the initiatives required), with many of you, and one of the subjects associated with returning liquidity to your business that comes up in every discussion we have been having, is used car pricing and trade disposal values.

Now it is perfectly understandable that these issues are at the forefront of everyone’s thinking because assessing the value of, and the retail prices for, the used car stock you are going to be retailing is going to be paramount to your success, plus it should be directly impacting on your operational planning from here on in. And without exception everyone has asked us why we feel used car prices will, (in the vast majority of cases), fall drastically when businesses open their doors again and begin trading. So in order to explore our thinking let’s explore what lies at the heart of pricing for all commodities, including used cars?

Well as much as different commodities markets perform differently to each other, when it comes to luxury commodities markets, (which is where the car sits), different products within the same market can also perform differently when it comes to pricing. However the process for evaluating values and pricing in luxury commodities markets remains the same, regardless of the commodity being retailed; because the 2 main “Drivers” for pricing remain the same, which are;

Supply and Demand

Consumer Confidence

So let’s look at them separately and look first at “Supply and Demand” because this is the main governing factor on pricing. Now of course “Consumer Demand” has a huge influence on “Supply and Demand,” because it directly impacts on the number of customers you are likely to have, (we will come to this later), but in simple terms; the amount of availability of your product versus the customers you have wanting to purchase your product, will dictate whether or not “Supply and Demand” is working in a positive way and driving prices up/allowing them to stay firm, or in a negative way and in driving prices down.

In simple terms, the moment you have more product than customers, prices will come under pressure! However it is also important to remember that in the automotive sector, as in other luxury commodities markets, not all of you are equal! Those manufacturers and their franchise partners experiencing declining sales, (and many of you were), before the Coronavirus hit and/or are firmly entrenched in volume based markets with little or no perception of cache, will have little scope other than to make a commercial decision on pricing, assess the likely losses to be endured and hope that, in a market sector that was experiencing trading challenges and/or sales declines before the lock-down, you are not undercut on pricing by your competitors and fellow franchise partners.

In the evolving internet based “Click and Collect” trading landscape currently forming in volume markets, not being competitive on pricing is likely to leave your business struggling for sales, because in the world of oversupply, decreasing consumer demand and no cache attached to your product, sadly price is the only game in town!

For others these decisions will be more nuanced, (some of your product may still be in short supply and some won’t), and much skill will be involved in assessing genuine demand, pricing and building the sales and stock disposal initiatives required to get stock moving again. However there is one thing everyone reading this article has in common, you will be opening a business again that will still have the used car stock holdings of the past trading model. Now we are happy to put our professional reputations on the line and say that this level of used car stock, (outside of exclusive premium products), will hugely outstrip demand and not be profitable in the new trading environment.

Although nobody knows how the market will open and therefore the trading conditions to be encountered, it will be different from that of the past; how different it will be on an individual basis will be determined by “Supply and Demand” and the desirability of your product, but it will be different. We say this with such confidence, (as those taking up our offer to have a liquidity strategy conference call now know), because the “Perfect Storm” is forming over many commodities markets, especially the automotive market. As discussed in our previous Sunday Briefing Articles;

The Automotive Sectors 3 Most Pressing Issues Post Lock-down?

The Automotive Sector And The Coronavirus; Briefing Number 4!

the content of which we will not repeat here; but in brevity the vast majority of you will all be returning to used car markets awash with stock, no effective mechanisms for returning liquidity to your business, lacking in effective stock disposal skills, no effective trade networks and low consumer demand. This is not a trading environment that will allow used car values not to come under tremendous pressure and then fall; how far used car prices fall will only be determined by the weakest links in the supply chain, i.e. your fellow franchise partners.

Then we come to “Consumer Confidence” which is influenced by many factors but is a huge influence in determining the “Supply and Demand” ratio for your product and therefore pricing. At the moment “Consumer Confidence” will be coming under intense pressure, but the effects will be very difficult to read.

As we have seen no actions to the contrary, it appears that the mistake most senior professionals in the automotive sector are making right now is in not looking to discuss the wider issues effecting “Consumer Confidence,” (so therefore the entire automotive trading model as well as used car pricing), with experts and professionals outside of the automotive sector, so therefore looking to understand how events outside of the sector and your level of understanding and immediate control, are going to effect the entire business model, let alone just the value of used cars.

In fact instead of doing this, much of the automotive sector is turning in on itself, joining podcasts and talking just to each other, so lacking in effective and dynamic thought leadership, and refusing to countenance and/or discuss just how difficult this period will be for the automotive sector, and this will not be helping. Instead of looking to, and discussing the effects the Coronavirus will have on the world economy and how this will impact “Consumer Confidence,” too many think that looking at the initiatives to keep businesses afloat for a period of time until business returns to normal is the answer. We think this is folly, especially if any planned initiatives are designed to do nothing more than keep businesses on life support until “Normality” returns, because “Normality” is unlikely to return; in fact no volume of business is going to return until “Consumer Confidence” returns.

To us it appears that many in the automotive sector are not grasping the nettle, in fact many are predicting rising used car values until new car production can meet new demand, but for this wistful situation to occur in the sector as a whole you will need “Consumer Confidence” to remain high and we just don’t see this being the case.

Now we do not want to appear negative because we are not, but we have to be realistic and those in charge of shaping how companies survive need to start justifying their large salaries, making the difficult calls and having difficult conversations; why? Well in recent days we have all begun to see and grasp the impact that the Coronavirus is going to have on “Consumer Confidence” because the world is beginning to see the impact in lost jobs via announcements by big institutions.

We have a lot respect for British Airways in being upfront, frank and honest; no one wants to see people losing jobs but their announcement to make 12,000, (around a third!), of the workforce redundant and reasons for doing so, are a wakeup call to the fact that the aviation industry worldwide will take years to recover, if ever, and they are not alone. With elements of social distancing looking to be with us until a vaccine arrives, many sectors are reviewing business models and look unlikely to survive in their pre-lockdown form. Just one example is the hospitality sector, for whom social distancing regulations renders their entire operational and financial business model non-viable.

This sector alone includes everyone working in hotels, gyms, leisure facilities, coffee shops, bars and restaurants, all of whom cannot survive and it is seismic change like this that will effect “Consumer Confidence” and make the thought of pent up new and used car demand that we keep hearing about “For the Birds.”

In many ways it would appear that the global scientific, economic and geo-political “Drivers” on the automotive sector are becoming the “Elephant in the Room!” However we think they are so important that we should explore some the underlying geo-political, scientific and medical based “Drivers” effecting “Consumer Confidence” and therefore those that are going to be dictating the way business will be done in the future. But in doing so we have to begin to understand the virus itself and how it is likely to affect the way live and work, so therefore the buying habits of consumers in the future.

Now although that may be difficult at the moment, (after all the world of science and medicine is struggling to keep up with events and to understand how the virus behaves), the one thing the world of science and medicine does agree on, is the fact that the virus is not going away any time soon. So until there is a vaccine there is a real threat that we may have to continue to come in and out of some kind lock-down/social distancing restrictions, as the inevitable mistakes involved with living with the virus are made.

Let’s be under no illusion, should this environment transpire over the 12-18 month minimum period that the medical and scientific world estimate it will take to produce an effective vaccine, this is likely to have a huge effect on the way we all live our lives and is going to undermine Consumer Confidence, the number one driver, along with “Supply and Demand,” in all consumer commodities markets, not just the automotive sector.

So we think it is prudent to accept that just because lock-down restrictions are amended in the future to ensure that used car businesses and franchised dealerships can open again, it absolutely does NOT guarantee that customers will be rushing through the doors to purchase cars again.  Unfortunately from the commentary and comments being made it would appear that some are failing to be able to grasp that your business being open or not, is not the “Driver” effecting success, it will be the confidence of the consumer.

If you had all been rushed off your feet during the lockdown and still dealing with enquiries you would have found a way to keep retailing, as other sectors have. Unfortunately you haven’t been and the most important thing about that statement moving forward is why you haven’t? And the reasons are complex and are going to lie at the foundations of any success you have in the future.

And if don’t believe us; well the European automotive sector already has a post lock-down trading guinea pig to observe, the automotive sector in Germany which, at the time of writing this article, had been open again for 9 days. Those interested to read the article, written by James Baggott for Car Dealer Magazine, just need to follow any links to their website or James Baggott’s profile on LinkedIn where you will find it. But we warn everyone it makes for difficult reading; with dealers reporting new car enquiry levels collapsing to levels of just 40% of enquiry levels before the lock-down.

So as much as we are all preparing for a market and trading conditions that no one has ever experienced before, and this is going to be difficult, everyone has to begin to make some decisions moving forward. We appreciate that our view will not be a popular point of view but just because you don’t like it, (for the record we wish things were different as well), does not mean it is not correct.

If you are of the opinion, that shared by many of your pears we would add, that pent up new car demand will drive new car sales back to normal and result in rising used car values, you will no doubt be preparing in a completely different way to those who think along the same lines as us, and that train of thought can be governed by the brand you represent. However, regardless of your opinion you all have the challenge of returning liquidity to your business, something that must be achieved from a platform of successful used car retailing and stock disposal.

Realising just how important the operational issue of returning liquidity to businesses will be, we made the decision, (outlined in last week’s article listed at the start of this article), to make ourselves available for a free conference call to anyone, whether you are a senior member of personnel based at a manufacturer and/or anyone owning or running a franchised dealership or group.

During this call we will discuss your business, audit your current procedures effecting your ability to return liquidity to your business and discuss the skills and operational procedures that are going to be required.

If you would like to take advantage of the opportunity to discuss this with proven used car professionals, then please feel free to contact either Andrew Banning at [email protected] or Malcolm Thomas at [email protected] in the first instance, in order to arrange a no obligation exploratory discussion.

Alternatively please feel free to call me on 07796 260261.

For more information about our services please visit our website at www.autoformance.com

Please feel free to follow our used car market place blog at https://usedcarbusinessdevelopment.blogspot.co.uk

I look forward to hearing from you.

Andrew Banning.

Used Car Business Development Director.