The question we are asked most frequently by manufacturers is this; “Why is performance in the used car market so vital to our future new car success?” In fact we are asked this so often that I have decided to write some posts over the next couple of months, (it will take that long to cover this subject), in order to bring some much needed clarity to this issue.
The mistake most people make, is in not understanding the effect that the used car market place has on their new car success; it is total and all-embracing and in the UK we have learnt to build new car success, on the foundations of successful and effective used car operations and manufacturer approved used car programmes. So 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, 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! Now this may take a leap of faith for some manufacturers who, it would appear, never seem to take the perspective of the customer in mind, when setting the prices of new cars.
Why do I say this? Well the customer of course will purchase their new car on the basis of what he or she can afford, not on how some manufacturers appear to be pricing product at the moment, on the basis of how it compares to their competitors in the market place. This results in a situation where we have the manufacturer thinking they have set pricing at a competitive level, when compared to their direct competition, but giving no thought to the actual cost of ownership of the new car, so when sales slow down, they start wondering why.
In the UK we have, to a certain extent, diverted 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 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 the cost to change can become too large for the customer to justify and this causes apathy to change in the new car market, thus slowing new car sales.
Resilient residual values are vital in decreasing the cost of ownership of new cars, which then enable the manufacturer to sell more new cars, not because they are priced competitively, when compared to the competition, but because they are both desirable and cheaper to own than the competition. Without strong residual values nothing will change in the new car market and your future success will not be assured, 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.
In the UK the new car market, although slowing in terms of registrations, has remained stubbornly resilient to recessionary trading conditions, thanks to decreasing costs of new car ownership, changes in new car ownership habits and the fact that we are the world’s premier example of a continual 365 day trading environment for used car stock. You could argue that London may have some competition when it comes to being the financial centre of the world, but the UK does operate the world’s only effective used car trading market where stock is always bought and sold. It may have its problems, but these effective and successful foundations in the used car market mean that the UK new car market is far more successful for manufacturers, (in the main and over the long term), when compared to other European markets.
A good indicator of this can be to look at individual markets and the age profile of cars within markets; generally the higher percentage of new to nearly new cars and a lower percentage of older cars, is indicative of markets where people are not keeping cars for extended periods, and they are changing more frequently, thus the customer purchases new cars at a higher rate than they do in other markets.
I appreciate that there can be other socio economic factors at play but if we compare the most recent figures available for the percentages in the UK and Italy, the difference is quite startling. In the UK, during the last analysis of the market, 15.86% of the total vehicle park was under 2 years old, where as in Italy only 7.38% of the total vehicle park was under 2 years of age. And when we look at the percentage of the vehicle park that is between 10-20 years old, in Italy it is 49.64%, (nearly half of the total number of cars in the country), whereas in the UK it is only 32.04 %; clearly indicating that UK buyers are purchasing new cars more frequently than their counter parts in Italy.
This scenario can only happen when new car ownership is affordable and the cost to change to a new car is not prohibitive for the customer; a trading environment that can only be delivered to manufacturers off the back of high and sustained residual values, which in turn can only be enjoyed by manufacturers who enjoy strong and resilient dealer networks who are successful at selling used cars.
It really is the shared and common objective between manufacturers and their franchise partners, and not just in terms of new car success. There are many financial benefits to both the manufacturer and their franchise partners, in having effective and resilient used car programmes, which I will be sharing in my posts over the coming weeks, when we will move on to the critical process of stock liquidation, the part of your business that keeps funds available at all time; critical to the performance of your business as a whole.
Unfortunately though, strong and resilient used car dealer networks do not happen by accident, but luckily help is at hand. 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 dealer network programme 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 0044 345 057 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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