Probably like everyone else reading this post I am genuinely astounded by the bad press the industry is receiving regarding PCP’s and the alleged miss-selling of these products; there appears to be a rush to label the industry as the next Banking Sector, (to be blamed for the levels of indebtedness of the nation), and I shall make no comment here regarding the folly of these sentiments.
These posts and this platform are reserved for content regarding best practice and used car business development initiatives and strategies but I think it is important to remember the vital role that all forms of finance package involving a guaranteed future residual value, play in the building of successful new and used car operations for dealers.
But first a history lesson because it is easy to forget where the structure of PCP’s came from and why they have been so important for the financial wellbeing of all dealer networks. In reality they have been around for over 20 years now and were available before that to business purchasers of cars, albeit under different names and slightly different structures. It is easy to forget that not that long ago, (the late 80’s and into the early 90’s), private purchasers invariably had only 2 methods of purchasing a car; one was an outright cash purchase and the other was a traditional hire purchase agreement.
In fact any finance agreement involving an element of a future residual value/balloon payment in those days, (Contract Hire, traditional Lease or Lease Purchase), was the preserve of the company or business purchaser. They were not available to the private purchaser and these were the days before in-house manufacturer owned finance companies; the majority of manufacturers and dealerships had credit supply relationships with independent finance companies and this left their business models vulnerable to outside forces. Why? Well because in this instance the success in the new car market for all manufacturers and their franchised dealer networks, was determined by the underwriters and those responsible for the setting of future residual values, employed at third party independent finance companies, and this was a situation that couldn’t be allowed to continue.
And let’s not forget just how vital this control is to the manufacturer and its franchised dealer network; it affords an element of control to the manufacturer that is pivotal in the success of its dealer network and their brand. It is important to remember that the moment any manufacturer doesn’t make the cars that customers want to purchase, available at a price that the customer can afford, (and via a method of payment that the customer wants to use), well then it’s franchised dealer network will be attempting to sell cars at uncompetitive prices and that invariably results in the manufacturer failing.
So both manufacturer owned finance companies and PCP’s were born but in reality all PCP’s are, is a form of Lease Purchase or Contract Hire, but for the private purchaser and why shouldn’t the private customer enjoy the benefits of the reduced monthly rentals by taking advantage of the cars future value, (just as the business purchaser was able to via a Contract Hire or Lease Purchase agreement), whilst the manufacturer retains more control over the factors affecting their success in the market place.
So why are PCP’s or indeed any finance package involving a guaranteed future value so important to the long term success of the manufacturer and it’s franchised dealer networks? Well if the commercial reality in the new car market is that the monthly rental amount that a car is available for, is the determining factor in the majority of new and used car purchases, then only a PCP, (or a similarly structured finance agreement), gives the customer the opportunity to reduce their monthly payments, by off-setting the future value of the car.
This ability to offset a balloon or final payment which is linked to the perceived and guaranteed future residual value has proved to be very popular with customers, who either want to reduce their payments or purchase a car of a higher capital cost for the same monthly budget. Therefore it is important to remember what factors determine what the monthly rental will be. One is the interest rate being levied and the other is the balance to be funded and it is the balance to be funded that is most critical.
Sure the interest rate being levied plays a part, but invariably these are set by forces outside of the manufacturer’s control, but the balance to be paid, well that is determined by the difference between the purchase price and the future residual value, both of which are in the control of the manufacturer. The ability to control these are vital, especially the future residual value, because the moment the future residual value goes down and the balance to be funded by the customer over the term of the finance agreement increases, the monthly rentals will have to go up and in a world where customers are purchasing on the basis of desire for a product and what they can afford for a monthly rental, well the cars are going to be more expensive to purchase and therefore harder to sell.
Just as importantly, the ability to control and set future residual values for the manufacturer gives both the manufacturer and its dealer network control over a very precious commodity, the future used car vehicle-park. This is vital because the manufacturer must retain, (as much as is possible), control and influence over future residuals because of the effect that falling residual values will have on future new car sales. Pivotal to this is control of the used car vehicle-park; not only is it valuable as a business commodity in its own right, (never lose sight of the fact that it was the market commodity that the founders and owners of We Buy Any Car borrowed £Millions for to target and acquire), but it is also the stock holding to support the growth of your approved used car operation in the future.
A successful and profitable used car operation is vital to the future of your dealership and too often I see manufacturers and dealers not giving enough thought to how cars returning to in-house finance companies, at the end of finance agreements, are disposed of. I appreciate that there are financial pressures for both the manufacturer and the in-house finance company, to achieve the highest value for all cars returning at the end of finance agreements, but in too many cases cars are auctioned to any anyone who can be bothered to come to the auction concerned.
Invariably this can result in them being sold to competitor businesses outside of their dealer network, which are then sold to customers living in conurbations serviced by your dealership. So in reality your manufacturer owned/approved finance company is selling valuable used car stock to competitors of your business and worse, the manufacturer is then in danger of losing control over residual values and putting them in the hands of outside influences.
If success in the used car market is at the very foundations of your success in the new car market, (and it will be), then manufacturers must never lose sight of the need to build effective and successful dealer networks that are successful and profitable retailers of used cars, (if they are going to have a network capable of disposing of the stock levels returning at the end of finance agreements), and franchised dealers will have to continue to invest in their used car operations, if they are to take full advantage of the opportunity that the used car market place presents, and this may take time.
Most of you by now will have the foundations of a successful used car operation in place that, with continued development of dealer staff and investment in the business, can ensure that success in the used car market place is assured. But for many of you reading this, your used car operations will be at different stages in their used car business development journey and as it is the part of business that is paramount to the long term success of your new car business, (I will explore this in more detail in my next post), just how do you take your used car operation through the process of structured used car business development required, in order to ensure that you can take advantage of the opportunity that is available in the used car market place?
And this will be vital because the used car business is very different to the new car business, yes at its core it involves the selling of cars in order to be successful, but operationally it is a different animal and requires different skills-sets from those required for success in the new car market.
Luckily help is available and 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 ajb@autoformance.com or Malcolm Thomas at mgt@autoformance.com
Alternatively please feel free to call us on 0345 057 3177.
For more information about our services please visit our website at www.autoformance.com.
Andrew Banning.
Used Car Business Development Director.
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