A new study says that franchised dealers will need to source a higher proportion of their revenues and profits from used car sales to offset declining profits from new car sales and related bonuses as well as finance and insurance (F&I) income.
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However, the research for Trend Tracker’s MFBI study, ‘The Future of the Used Car Market 2006-2011’ also found that franchised dealers have lost share of the used market’s growing GBP8,000+ segment. The report said that they are losing share of that segment to growing numbers of used car superstores .
Despite charging premium nearly-new car sales prices, franchised dealers’ average per-unit used car margins are lower than those achieved by their independent competitors. Moreover, manufacturers’ approved new car schemes for dealers are charging often uncompetitive wholesale prices, and consumers are able to buy the same cars at lower retail prices at superstores.
To expand used car sales profitably, dealers without high-growth used brands in their franchise portfolio need to wrest control of used car buying from the encroachment of manufacturers and display wider ranges of competitively priced cars, the researchers said.
An opportunity exists for dealers to retail used cars in viable volumes on separate sites, which some, notably Arnold Clark and Lookers, have seized.
With few lucrative sites available for new used car superstores, Trend Tracker predicts acquisitions of existing independent stores by dealer groups, with GMAC’s CarLand chain the first target.
On average, gross profits from used car sales accounted for 18% of total franchised dealer gross profits in 2005, and new cars for just 4%, the study found.
Franchised dealers have traditionally relied upon high-margin captive aftersales demand to offset low profits from new car sales, but now face falling service volume due to longer service intervals and less service labour content, and increased competition from independent garages as a result of the recent block exemption regulation.
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By GlobalDataBecause warranty-period servicing has been a captive market, dealers have been able to offset a decline in the volume of sold service hours by increasing their labour charge-out rates, but consumers and competition authorities are beginning to baulk at the higher prices charged by franchised dealers compared with independents.
With the prospect of reducing revenue growth from new car sales and aftersales, franchised dealers will therefore need to turn their attention to used car sales to secure sales and profit growth, according to the research.
Franchised dealers on average sell 400 used cars per year at an average selling price of GBP9,300 and an average gross profit per unit of GBP975. Their share of the used car market has remained static at 28% since 1998, while independent dealers’ share has increased from 32% to 34% in the same period.
Trend Tracker’s Robert Macnab explains the significance of these figures:
“Over 90% of independent dealers sell used cars priced under GBP8,000, a segment of the market which has remained static since 1998, whereas the market for used cars selling at GBP8,000 or more has grown by 125% since 1998. So just to maintain the status quo, franchised dealers’ used car sales volumes should have increased by 125% as well. But in fact they have grown by a mere 21%.
“The reason for the slow growth in dealer used car sales, in a rapidly growing market, has been the growing competition from larger independent dealers, and the used car superstores in particular.”
The number of used car superstores in the UK has grown by 71%, from 70 in 1998 to 120 in 2006 – a period when the total number of independent used car dealers has declined by 17%. Used car superstores account for 8% of total used car sales (0.6m units), each selling an average of 5,000 units per annum. Used car superstores tend to sell used cars in the same price range as franchised dealers; they also achieve comparable gross profits. Other large independent dealers display an average of 300 used cars and achieve GBP850 gross profit per unit, while large franchised dealerships display an average 166 used cars and achieve GBP870 gross profit per unit.
Robert Macnab points out that many used car superstores boast lower prices than franchised dealers, yet they achieve comparable gross margins to franchised dealers, partly through lower reconditioning costs – on average GBP195 compared with the GBP259 per unit average incurred by franchised dealers. Large independent dealers take longer on average to turn their entire stock at 91 days compared with 72 days for larger franchised dealers, but then they hold more inventory than their franchised dealer counterparts.
Macnab explains a curious irony behind these differentials: “The key to independent superstore success in the used market is the sourcing and buying of stock. A perverse feature of the used car market is that the main source of stock for large independent superstores is other dealers, and more specifically franchised dealers!”
Pressure to achieve new car volume targets can force franchised dealers to order stock to sell on to used car superstores at a discount as new or delivery-mileage cars, retrieving a margin through bonus payments from the manufacturer. Falling demand for new cars has resulted in an increase in supply of nearly-new cars. Normally a downturn in new car sales results in an increase in demand for nearly-new, but in 2005 demand for nearly new cars also declined, for the first time in six years, as consumer confidence in making major purchases collapsed.
The key route to disposing of high volumes of nearly-new cars without destabilising residual values is the manufacturer approved used car schemes. These are the main source of used car stocks for 27% of franchised dealers and a secondary source for 33% of them. But while these schemes may help manufacturers maintain new vehicle production volumes, they result in high wholesale and high retail prices for used cars through franchised dealers.
Trend Tracker’s MFBI study has found that a significant and potentially growing number of consumers are no longer prepared to pay premium prices for manufacturer approved used cars when they can buy cars of similar age, mileage and condition from used car superstores at lower prices.
For franchised dealers, premium prices on used cars constrain sales volume, and high approved used car scheme wholesale prices constrain gross profits. The MFBI study’s data on dealer used car sales shows that independent dealers achieve higher overall gross profits per unit at an average GBP1,078 compared with an average of GBP975 for franchised dealers. To increase their profits from used cars, franchised dealers need to source a higher proportion of stock independently of manufacturers, who are increasingly encroaching upon dealer used car operations and reducing their profitability.
To win more profit and compete more effectively with used car superstores, franchised dealers need much larger displays of used cars across a wider range of vehicle makes. Dealers fortunate enough to be representing the high-growth used brands (Lexus, Kia, Alfa Romeo, Skoda and Mercedes-Benz) can achieve high gross margins and operate viably on a low volume, solus-brand basis. But most other dealers representing only the average- and low-growth brands (Citroën, Peugeot, Fiat, Vauxhall, Ford and Nissan) need to sell in higher volume or sell a wider range of higher-margin vehicle makes.
There is a particular opportunity for dealer groups to establish high volume multi-franchise used dealerships away from solus-dealership sites, and some are beginning to do just that. Of the 120 used car superstore outlets identified and mapped in the MFBI study, 22 were multi-brand outlets operated by franchised dealer groups.
Arnold Clark and CD Bramall, the latter being acquired by Pendragon in 2005, are the leading dealer group used car superstore operators. With the few remaining lucrative locations left for establishing used car superstores now limited to the South Midlands area around Oxford, Luton and Milton Keynes, acquisition of established superstores by dealer groups is likely to increase. Lookers’ acquisitions of the Bristol Trade Centre and Ian Shipton Cars in 2005 are likely to be followed by a dealer group’s acquisition of CarLand, the Masterlease- (GMAC)-owned six-outlet used car superstore.
