As we all enter a more challenging and fragmenting new car environment, one of the issues I wanted to explore is the potential for increasing amounts of stock returning to dealerships and manufacturer owned finance houses, (that were originally sold on a PCP agreement), where the actual market values are less than the guaranteed future values agreed when the car was sold. Now this unfortunate situation can always happen, but it is what happens at this stage that can dramatically affect future new car residual values and thus the cost of new car ownership, especially if it begins to happen in larger volumes.
Now future residual values are actually being targeted and threatened on many fronts; don’t think for one moment that the listing of your new car product on the websites of independent “E-Tailers” is helping the cause of strong residual values at all. Some of the discounts shown on these websites are mind boggling and terribly damaging to the perception of the brands associated, and just as threatening as this, is how these businesses are continuing to manipulate and change customer purchasing habits.
But for now, let’s return to the original discussion point of cars returning when PCP’s have come to an end, because the long term strategy for these cars will be crucial to future residual values and the cost of new car ownership. It is important to remember that current statistics indicate that approximately 85% of new and used cars are sold using the PCP finance model so how this stock holding is manged, upon returning to your franchise dealer network, is going to influence the cost of new car ownership, and therefore your new car success, for years to come.
Now not only does this stock represent an opportunity to supply your franchise dealer network with a supply of retail used car stock, If you are also supported by a network of franchise partners who are successful retailers of used cars, then you have a network of businesses with a shared objective to work towards, where deals can be done, incentives put in place, and you can trade your way out of these challenges by retailing the stock concerned; therefore retaining more customers and actually increasing the overall bottom line for both yourself, (as the manufacturer), and your franchise partners, whilst protecting future residual values and securing your on-going new car success.
However, if you are not supported by a dealer network successful in retailing used cars, well then you have some problems and there is a danger then that future residual values are out of your control, and let me explain why. Every car has a value and a there is a customer for every car, provided of course that the car is priced correctly within the market place; so let’s focus on what happens to used car stock, when it is not retailed via your franchised dealer network, and the threats that then poses to your future new car success.
Well at this stage it still has to be disposed of and the money concerned returned to the business, if on-going financial liquidity is to be assured, and in the UK we are lucky because we operate the world’s only 24-7-365 trading environment for used car stock; a stock market for cars if you like. We may not like the price we are offered, but unlike other worldwide used car markets, stock can always be disposed of and funds returned to the businesses concerned.
So what’s the problem I here you say? Well the problem lies within the market dynamics at play here and what then happens to that stock when it is disposed of outside of your franchised dealer network. For the funds to be returned, someone has to purchase the stock concerned and the people acquiring this stock are more than likely to then use that stock holding to undermine your franchise partners and the future residual values of your new car product, in fact everything you as a business hold dear.
This stock is not being purchased by a charitable organisation, it is being purchased by another business, the owner of which will, in all likelihood, have a far greater understanding of the global used car business than maybe you or your franchise partners, because retailing used cars is all the business does, and because it does it on a massive scale across the whole of the market.
This stock will end up at an independent specialist, who will be in direct competition with your franchise partners. So you can end up in a situation where valuable stock is sold and then being advertised for sale at a business in direct competition with one of your franchise partners; so in effect you haven’t got rid of the problem, you’ve created many more because this business is now undermining your franchise partners and taking customers from their businesses.
On top of this, the situation will also be undermining and, in all likelihood, be reducing the residual values of your own product, thus increasing the cost of new car ownership and undermining your future new car performance as well; why? Well for the independent specialist to be a successful business, invariably they have to offer the same stock for sale at a lower price than similar cars priced under your approved used car programme, at the businesses of your franchise partners; but to be able to do this they have to buy at a lower price, thus driving down actual used car values, therefore future residual values over the medium to long term.
If you don’t believe me, but want to get an idea of the size of the threat these organisations represent, I would recommend that every senior professional, (whether dealer based or manufacturer based), who has a responsibility to the future sales success of your brand, goes to visit one of these organisations in the guise of a potential customer. And I don’t mean your local budget car supplier, I mean one of the new used car specialists and supermarkets that are springing up around the country.
Just walk around the site, look at the breadth of product available for sale and the opportunity it presents; basically a customer looking at a car on a specific budget or as a genre of car, need now only visit one site to see the majority of stock on offer for sale within the local market, and guess what, with time at a premium in busy lives and the way technology is changing purchasing habits, especially in regard to price and value driven purchases, this is exactly what customers do.
Now if you make the time to do this you will leave with many questions but also having learnt a lot; you may even recognise some customers that you have seen visiting the businesses of your franchise partners, but if you are honest, you are unlikely to leave unimpressed. They may not represent what you consider “The Brand” and you may be tempted to look down a little on these businesses, but they are selling thousands of used cars a year, so by default they are doing something right, and the fact that they are will have a direct effect on your new car success, because they are becoming more representative of the true stock market of car values because they will purchase anything, providing there is consumer demand and there is a profit available. Perhaps the time to really worry is when they are not purchasing your used car product?
So as a manufacturer, what is the answer to the challenges of building effective and successful used car programmes for franchise dealer networks? Well the answer to this question is that it will take a standardised and fit for purpose approved used car programme aligned with the ability to deliver the support required to your franchised dealer networks, in order to ensure you develop the used car network capable of trading effectively and retailing the volume of used car stock required, (at the prices required), to support residual values and your new car aspirations, whilst also ensuring that you then enjoy the solid foundations of a financially resilient franchised dealer network that is both capable and successful at retailing used cars and therefore supporting your future new car objectives, but this of course does not happen overnight.
If you don’t there is a danger that the industry continues down its current path where some elements of the new car purchasing process are now being targeted by third partner technology entrepreneurs, the likes of We Buy Any Car and Carwow, to name just a few. This is dangerous, as your franchise networks are now not being seen as a “1 Stop Shop” by customers, therefore you are losing control over the customer, because these businesses are reacting to changes in consumer behaviour and becoming very powerful in your market place; something I have covered in my previous articles below;
Internet New Car Sales 2, Judgement Day!
“Wow An Internet Company Got Me Over £5,000:00 Off My New Car!”
On top of this there is a danger, (in a world where customers have immediate market information available on their smart phones regarding the cheapest price to supply their new car and then to service it once the warranty and any servicing pack has expired), that you will have to build a franchised dealer network asking institutions and private investors to invest large sums of money in a business where you have lost control over new car pricing and margin retention, as well as the lucrative servicing market once the warranty and servicing packages have expired.
If you don’t see the danger in this just run the figures through your dealer development programme business calculators and see whether or not you would be rushing to invest in a business with these sorts of returns? The only advantage you have is in control of the new vehicle park when it returns from the first period of ownership and that can be pivotal in the process building franchise dealer networks that are successful at retailing used cars and therefore supporting you as the manufacturer.
Sadly though all this will not be achieved overnight but luckily help is available. 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 me on 07796 260261.
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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