FEATURE: Signs of recovery in UK used car market
Although the UK used car market shrank by 5.9% in the first half of this year, that was nothing compared to the 26.6% year-on-year drop in new car sales in the first six months of 2009. The show of relative strength began in the first quarter, when used car sales increased by 17% compared with the previous three months, and then, fell back by only 1.1% in the second quarter.
While the UK used car market - which has long been one of the most highly developed in Europe - has declined in volume since a peak in 2004, it has nevertheless grown since 1999 to an estimated 6.8 million units for this year, thus achieving an increase of 7% in a decade.
Vehicle manufacturers tend not to promote their used products consistently, and the used car trade remains a favourite target for consumer media. But the relative stability of used car demand has been a boon to the franchised dealer networks facing a melt-down of new-car demand until, for some, the UK's relatively modest scrappage incentive scheme kicked in the second quarter of 2009.
The research firm Trend Tracker forecasts that nearly four used cars will be sold for every new one this year, the used-to-new ratio having moved up from 2.9:1 back in 1999. Part of that used growth has been fuelled by the pre-registration of new-car inventory, in small volumes by OEMs who are required to notify the authorities of such pre-registrations, and in larger numbers by dealers wanting to hit volume bonus targets. But what was a torrent of late-plate inventory hitting new car dealerships and independent supermarkets, pumped up by widespread overcapacity and overproduction of volume models, turned into a trickle as new-car demand evaporated in the second half of 2008. VMs cut headcounts and capacity, and excess production fell back.
Coincidentally, the leasing companies, which make up a substantial proportion of the UK's business car market (typically, around half of all UK new car demand is corporate), have lately been urging their customers to hang on to their cars for another year after their typical three-year contract. With a relative dearth of new contracts in the offing, leasing companies feared substantial losses on vehicle disposals.
This strangulation of nearly-new and ex-lease stock supply worked nicely to avoid those losses, leading to successive monthly year-on-year increases in used vehicle values, as measured at vehicle auctions. In July 2009, BCA (British Car Auctions) recorded a ninth consecutive month of rising values. Half of the cars sold by rival auction house Manheim were exceeding 100% of 'CAP Clean' trade price guide values.
The used car price guide CAP reported in mid-September that a three-year old Land Rover Discovery could cost GBP3,500 more than a year earlier. CAP competitor Glass's raised its guide prices by between one and two per cent in September.
Part of the rise in trade values has been due to franchised dealers snapping up what (relatively) little good used stock has been available at open auctions; until recently, they tended to rely more on retailing recent part-exchanges proffered by their new-car buyers, now markedly thinner on the ground.
The recent revaluation of used cars (as much as 22% up year-on-year) is somewhat exaggerated by the exceptional weakness of residual values a year ago when the crisis in the car market and the UK economy as a whole was becoming clear. However, all concur that there is a genuine shortage of attractive used cars for retailers (even rental fleets are buying in former courtesy to supplement cars, according to the Motor Trader weekly).
It is less clear that the buoyancy of trade values corresponds to any equal exuberance in consumer demand. That is more likely to remain steady, as the Q2 vs Q1 figures for 2009 suggest.
Sales of some used cars, mostly small, relatively cheap and fuel-efficient models, have taken a dive because up to 300,000 more new ones will be bought during the year than would have been bought without the UK scrappage incentive; some, but not all of these would otherwise have been used car purchases by consumers disposing of cars over 10 years old.
All cars on the road are by definition used cars, and for most of their owners, replacement is an expense that can be delayed indefinitely, especially if their job is under threat, financing scarce (as is the case), and used prices strong enough to increase the cost to change up to a newer model.
Despite the growing importance of used cars to British motorists, little change has been seen in the fortunes of used car retailers. The number of small, independent traders has declined, hit by property costs, the (until recently) declining popularity of dealer finance, and the recent inception of FSA regulation of finance and insurance sales.
Supermarkets and larger used car specialist retailers have been cautious about expanding in recent years, constrained both by a lack of suitable sites and by a dearth of financing.
In May 2009 Trend Tracker completed a survey of 200 used car retailers for its latest UK used car market study. Asked to compare the volume of customer enquiries they were receiving in Q2 2009 with the situation a year earlier, 81% of the franchised dealers interviewed and 75% of the independents said they had detected a decline in customer traffic. Both segments forecast full-year 2009 used car sales down 10% on 2008.
The survey found that the profitability of franchised dealer networks' used car operations looked robust relative to their new-car business, with dealer respondents suggesting their used car gross margins - of around 10% - were holding up. Independent used car retailers traditionally made bigger gross margins on used cars because they spent less on reconditioning their stock, but their margins had fallen, to just under 13%, because they were finding it necessary to spend more on reconditioning.
The recession was also found to be forcing a majority of dealers on both sides of the franchised-independent fence to review the profile of their stock. All were carrying less stock overall, and substantial minorities, including almost half of the independent dealers surveyed by Trend Tracker, were focusing on cheaper cars.
Trend Tracker's latest used car report, now available from just-auto's store, forecasts used car market trends, including sales volumes, used car values, and franchised and independent used car retailer numbers, for the coming five years.