Want To Grow Your New Car Business?,,, Never Take Your Eye Off Your Used Car Business! (UK Dealer Article)

The question we are asked most frequently by Franchised Dealers is this; “Why is performance in the used car market so vital to our future new car success?” Now this is the BIG question of our time and goes right to the heart of strategy for all automotive manufacturers and their associated franchised dealer networks, especially as new and used car markets continue to evolve; and with some manufacturers experiencing 20%-75% year on year declines in new car registrations this year, we thought now was the time to revisit this.

In doing so though I readily accept that the issue is difficult to write about in a generic sense, especially with a contacts and readership base as large and diverse as ours; you all have your own challenges, linked to the markets you are working within and the product you have to sell, but regardless of these factors one thing remains constant; if you want to build long term new car success you must plan for and deliver success in the used car market.

And I think we would all agree that regardless of the manufacturer you represent, trading conditions are becoming more challenging, and going to get more so as we enter, and plan for success in, 2019.  I don’t want to spend any time going over the socio-demographical or the geo-political influences attacking the market at the moment, because they will affect you all differently, and besides the articles discussing these can all be found on our Used Car Business Development Blog. But let’s agree that there are many affecting sentiment with consumers, just how far they affect your performance will be governed by the vulnerability of your customer base to these factors.

Anyway, back to the headline statement; the mistake most people make, is in not understanding the all-embracing effect that the used car market place has on their new car success, regardless of how well the new car element of the business is or is not performing. It is total and all-embracing and over the coming months I will look at all the integral effects that your performance in the used car market has, when it comes to new car success; including some vital issues such as, the financial resilience of your business, protecting residual values, cost of new car ownership, new car vehicle park turnover rates and the cost of funding new car businesses, all of which are directly linked to performance in the used car market place.

So where do we start? Well in this post let’s look at the cost of ownership of a new car, because this is vital in the customer’s decision to purchase and we must look at this, not from the manufacturer’s perspective, but from the customers!

In the UK we have been successful, (to a certain extent), in diverting the customers attention away from list prices when it comes to the purchasing price and cost of ownership for their new car; thanks to changing purchasing habits from outright purchase to PCP’s, (personal leasing arrangements), which still focuses the customers mind on pricing, but from the perspective of a monthly rental, not an ever growing list price.

Now critical to the cost of ownership of a new car is the future residual value of that car, because this directly influences the monthly rental and the overall cost of ownership, and if you allow residual values to fall, you are then in danger of trading in an environment where your new car product is more expensive than that offered by your competitors and/or the customer has a 3-5 year old car which is still reliable but worth very little, thus increasing the cost to change to a new car.

When this occurs one of two things will normally happen; the customer will purchase another make of car which is cheaper to purchase, (in terms of the monthly rental), or the cost to change can become too large for the customer to justify and this causes an apathy to change in the new car market, resulting invariably with the customer keeping the car, thus slowing new car sales. Either way you have lost a new car sale for today.

Resilient residual values are vital in decreasing the cost of ownership of new cars, which then enables the manufacturer and their franchise partners to sell more new cars, because they are priced competitively, when compared to the competition, and because they are both desirable, cheaper to own than the competition and affordable to the customer. Without retaining strong residual values cost of ownership for the customer will increase and your future new car success will be put in jeopardy, and strong residual values will only be delivered by one thing; a strong and resilient dealer network that is effective at selling used cars and supporting manufacturer approved used car programmes.

Now for those questioning the symbiotic relationship between success in the used car market and what the trading ramifications in the new car market can be, let me share with you some market intelligence. A few weeks ago a friend of mine asked me to help him change their car and to get them a “Good Deal” however, knowing what he had to part exchange and what he wanted to buy, I told him that getting a great deal on the new car would be difficult; why?

Well, without naming names, he currently runs what is generally agreed to be the best pound for pound small hot hatch that money can buy; it is a top of the range, 2 year old, 26,000 mile example and as the model has just been relaunched, (again to rave reviews as best in class), he thought that as his 2 year PCP was ending he would transfer over and get the new model, so was looking to change on a like for like basis.

Now, you are all no doubt wondering what the snag could be; he has a highly desirable piece of used car stock to part exchange, (looking at the approved used car website there only 16 similar example of this car available for sale nationally, on the manufacturers approved used car website), so we know that there should be strong demand? On top of this, for sure the new car may be slightly more expensive, but how much more can the new version of the same car, and to the same specification be? Well on an identical basis, in terms of the mileage and duration parametres on the PCP agreement, the car is nearly ￡100:00 or 50% more on monthly basis, in terms of the rental payment!

Now for sure, we all know that there will be some reasons that have affected this, maybe the net part exchange price for his car and the lack of discount on the new model, but this is irrelevant to the customer! All he sees is that a new car now costs him ￡100:00 PCM more than his existing car, so is he changing? No he isn’t.

And when you dig deeper it gets worse; the supplying dealer offered him 7.5% less for his car than a well-known internet based used car purchasing company, who will then be more than sure that they turn a profit when the car is disposed of via their trade disposal routes; and before you all cry yes but will they, he did take the car to one of their disposal centres and have the offer confirmed.

So here you have a customer who is motivated to change to a new car who can’t and the reasons behind this will all have their roots in the focus that both this manufacturer and their franchise partner has on the used car market. For me there would be 2 alarms ringing loud and clear; why is this model not being supported and retailed via the associated franchised approved used car network, there are after all only 16 similar cars for sale nationally and many more than this at the sites of independent businesses?

And secondly, allowing for a small trade profit of ￡250:00, why is the independent internet based used car disposal company offering 10%, (in actual gross terms), more for the car than the original supplying dealer? These are the trading realities that will be undermining new car success for the dealer and the manufacturer concerned, because of the way that new cars are now purchased; the new price may not have gone up by much but the end result is a customer being expected to pay nearly 50% more for the new version of the same car! And we wonder why new car registrations are down for so many?

One other important factor to remember in all this, for now; it is estimated by the SMMT that about 80% of new car purchases are now purchased via a PCP agreement and in the main these will be on 24, 36 or 48 month agreements. The customers driving these cars bear no overall responsibility or burden for the market value for these cars, this has been set by the manufacturer or the finance company when the vehicle was purchased, and it is this that could be the ticking “Time Bomb” for some manufacturers and their franchise partners, those who do not enjoy the support of resilient and strong used car operations and dealer networks, successful at selling used cars and supporting the new car objectives of the manufacturer.

The last 2 to 4 years have seen record new car registrations for many of you reading this post and these cars are out there and due back to the dealership or the finance company any day soon. Now for sure it will be inconvenient for the customer if the actual market value at that time falls short of the residual value set at the time of purchase but the customer, of course, can walk away you as the franchise dealer and the manufacturer can’t.

And for those dealers without successful used car operations and manufacturers without dealer networks who are successful in the retailing of used cars and supporting manufacturer approved used car programmes, this will be when the challenges really hit home. But that is for my next post.

If this post has resonated with you and you would like to know more about our used car business development consultancy programmes, because you would like to partner with an organisation of professionals who have faced the challenges of fast paced evolutionary markets and know how to develop a successful and profitable used car business on your behalf, (in order to keep your new car and total business objectives growing and on track), then we would very much like to hear from you.

The owners of Autoformance have owned and run successful used car operations and been at the forefront of the development of approved used car programmes for a host of manufacturers. For an exploratory conversation regarding our services and how we can develop bespoke used car business development and consultancy programmes on your behalf, please do not hesitate to contact one of our Used Car Business Development Directors; Andrew Banning at [email protected] or Malcolm Thomas at [email protected]

Alternatively please feel free to call me on 07796 260261.

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

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

Andrew Banning.

Used Car Business Development Director.