The question we are asked most frequently by dealers, especially during buoyant new car markets, 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.
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, 2018. 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, 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 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, 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 industry professionals 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 as we enter a period of more challenging trading conditions and volatile customer sentiment, it is more important than ever to appreciate that 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 strategy can result in a situation where we have the manufacturer and their franchise partners 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 slowdown, as they are doing in the main, they start wondering why.
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 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 onerous 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 enables the manufacturer and their franchise partners to sell more new cars, not because they are priced competitively, when compared to the competition, but 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.
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 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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