Getting used cars to fire on all cylinders

Used cars have featured frequently in various conversations over the last week, but from very different perspectives.  ICDP research over the years has consistently demonstrated the importance of getting all aspects of the used car business right in order to get the maximum performance out of this key activity.  Depending on market, there are anywhere between three and six times the number of used car transactions each year compared to new (present crazy circumstances excluded), so although each transaction is lower revenue, that is still a lot of opportunities for someone to make a margin – not only on the car, but also on finance and related aftersales.  It’s not therefore surprising that it attracts interest from many different quarters.

As we have witnessed in the last two or three years, that includes people outside the industry, such as Softbank backing Auto-1, and entertainment and property entrepreneur Alex Chesterman launching Cazoo.  Neither business is profitable, and certainly in the case of Cazoo they are now admitting in regulatory filings that they may never make a profit.  The share price has tracked that of Carvana – a business that was referenced by Cazoo as benchmark in their flotation documents in March last year – and now sits at US$0.70, down 93% from its high.  This happens to be very similar to the Carvana performance, though that’s probably not the aspect of Carvana that Chesterman was hoping to emulate…  The market capitalisation has dropped by over US$250 million since I last referred to Cazoo just four weeks ago, more than the value placed on UK used car independent group Motorpoint that sold over 100,000 used cars in their last financial year, and made a profit.

The issue is not in my view related to the fundamental positioning of Cazoo as a pure online player – it is down to the operational challenges that they never got to grips with, perhaps because the whole Board and most of the executive team have no car industry experience, and instead have a focus on online businesses – clothing, gambling, and price-comparison sites amongst them.  OEMs and many traditional dealer groups and used car supermarkets have managed to develop their online offers to a standard that is at least as capable as Cazoo – and in some cases such as handling customer with negative equity on their existing cars, better.  The main challenges for Cazoo were those that everyone in the used car business faces every day, and some manage better than others – sourcing, preparation, stock management and pricing.

That brings us round to some of the other discussions of the last week.  Perhaps the biggest concern for dealers in discussions about moving to the agency format for new car sales is whether agency will be extended to used cars by OEMs at some later date, and even if this does not happen, whether the closer involvement of OEMs at retail will affect their ability to source used cars in the future from the OEM as they come off lease, or are replaced in the test drive fleet.  Although it is easy to make an economic case for OEMs extending the scope of their activities into used cars, this would require them to master the same skills that Cazoo has struggled with.  In our conversations with OEMs, they mainly seem to recognise this, and in our view should focus their efforts on getting the retail skills in place to handle new car demand planning, pricing and promotions.  That in itself is a significant transformation in skills.

The second area that popped up in some discussions was vehicle preparation.  Cazoo invested heavily in this area to be fair through acquisitions (even though some facilities now face the axe), but historically it has been common practice for aftersales departments to use vehicle preparation as a fill-in job with an open cheque book to drive departmental profit.  Best practice is to establish tight standards, a target spend per car, and concentrate the preparation in large, factory-style facilities.  For AAA/Driverama in central Europe, preparation cost vs budget is closely analysed on a car by car basis and is one of their main KPIs.  The importance of cost effective preparation is also then reflected in the conversion by Renault of part of their Flins factory into a reconditioning centre, with more to follow, and Stellantis acquiring a majority stake in Aramis, a leading B2B and B2C used car player.  The economics of sub-contracting vehicle preparation to a third party, and particularly to an OEM with a higher cost base, must be marginal, but for smaller players it might still make sense in terms of the added value created.

A further issue that arises from poorly managed preparation is a delay in getting cars on sale.  Best practice is just a few days, but it is not unusual to find some dealers who are measuring this delay in weeks.  That is a period where cash is tied up, the market is moving, and the car (usually) will be depreciating.  Although many players measure used car performance primarily on profit per car, the emphasis should be on profit per car per day – i.e. not just profit but also how long it took to achieve that profit.  Delays in preparation or holding out for a better price kill this measure.  Achieving a high gross after a car has sat in stock for six months is not good business.  The physical space and capital that was tied up over that period could have been used to sell six cars, each within a month, each bringing F&I commission, potential aftersales business and a possible opportunity to buy in a trade-in car.  From Cazoo’s numbers, this appears to be another area where they are falling well short of best practice – possibly exacerbated by poor buying policies.

A high-performing used car business is easy to define – but much more difficult to deliver.  Buy stock against a target mix at the right price.  Prepare quickly to a standard that is appropriate for the age of the car.  Get it on sale through multiple channels at the right price, and if it sticks around, adjust the price so that it sells.  Maximise the opportunities for adjacent revenue through F&I and aftersales.  Sounds so simple, yet so hard to consistently deliver an engine that runs smoothly on all cylinders.