Market Size and Trends

The following chart shows
the trends in market size between 1988 and 1998 for used car sales in volume and value in
Great Britain. For the first time in any analysis of this market we now have definitive
data on the actual number of used car transactions. This data has been made available to
MFBI by Experian.

Looking at the chart we can
see that volume and value demand for used cars rose dramatically in 1997 to reach 6.7
million units before falling back to an estimated 6.2 million units in 1998. This decline
in volume was obviously the cause of some of the market’s problems in 1998, but why
did it happen?

Consumer demand and
expenditure in 1997 was distorted by the effects of windfall payments from building
society demutualisations. Windfall payments added an extra £35 billion into the consumer
sector of the UK economy, which was equivalent to a 6% increase in disposable income or an
average of £1,500 per household.

This obviously enabled
households to either replace an existing used vehicle earlier than expected, or trade up
to a higher value used car than their income would normally allow. The net effect was a 9%
increase in used car volume demand and a 17% increase in market value in 1997.

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By GlobalData

The end of this effect in
1998 resulted in an estimated 8% decline in used car volume demand and a 14% decline in
market value for the year as a whole. With such dramatic shifts in demand, it is perhaps
of little surprise that used car values have declined in 1998.

Used Car Sales By Vehicle
Age and Value

If we analyse the sales in
1997 in greater detail we can see from the following chart that 60% of all used car sales
in 1997 were cars over six years old and that’s all retail sales including
private-to-private, independent and franchised dealer sales.

If we look at what this
means in terms of used car sales by price band, the next chart shows the volume of sales
in 1997 for cars costing under £2,000, 2,000-5,000, 5,000-10,000 and over £10,000. One
of the most significant features of the used car market which is not widely known is that
nearly three-quarters of all used car sales are of cars costing less than £6,000. It will
also be noticed from the chart that nearly 40% of all used car sales are of cars costing
less than £2,000.

The fact that the greatest
proportion of used car sales are of older and cheaper cars is a reflection of low
household discretionary income and explains why many car owners are price conscious when
purchasing car maintenance services. Of particular importance to used car retailers is the
trend in used car purchase price bands. Over the last ten years, the number of used car
sales of cars costing over £6,000 has risen at a faster rate than cars costing under
£6,000, but from a very low base of just over half-a-million units or just 10% of total
volume demand.

The following chart shows
the same information on price band trends but as percentages of the total market. It shows
that cars costing less than £6,000 have fallen as a proportion of all used car sales from
90% in 1988 to 74% in 1997.

This trend to a certain
extent has been fuelled by an increase in demand for nearly-new cars and you will notice
from the chart that sales of cars costing over £8,000 moved ahead of cars costing
£6,000-£7,000 between 1992 and 1994 as a result of nearly-new cars becoming more widely
available. So how do these price band trends actually relate to car dealers in the used
car market? The following chart shows the sales profile by price band for each of the
three used car distribution channels. It will be noticed that all three distribution
channels converge at the £4,000-£5,000 price band, this price point accounts for around
12% of each channel’s respective sales volume.

If we analyse each
channel’s sales distribution by price band and add up the columns, it shows that 80%
of private-to-private sales are of cars costing less than £5,000 and that 70% of
independent dealers’ sales are also in the sub-£5,000 sector. However, when we look
at franchised dealer sales, it shows that only 30% of franchised dealer used car sales are
accounted for by cars costing less than £5,000.

The majority of franchised
dealer sales at around 50% occur in the £4,000-£8,000 price sector which accounts for
35% of independent dealer sales and 25% of private-to-private sales. With franchised
dealers generally charging premium prices for their used cars, independent used car
superstores have been able to target the £4,000-£8,000 price sector with a low price and
high volume marketing strategy to compete against franchised dealers premium pricing.

This extract is taken from
MFBI’s research report called The Future of the Used Car Market.