Used cars: a harder and harder job for franchised dealers … unless …

Used cars are a key ingredient of retailing, and the most profitable market segment (combining both volumes and margins) is represented by the band between 36 and 50 months. That is, when vehicles are remarketed at the end of a leasing / rental period. But over the last 10 years, in this segment there has been a strong increase in competition with many different players involved.

The largest franchised dealers, in the UK earlier than in the continental markets, have often developed a strong ability to source vehicles from multiple sources, and in some cases have also created their own leasing and rental companies which guarantee a natural buy-back flow. Historically, the profitability of large UK dealer groups is strongly influenced by used cars (often more than 30% of overall profits come from this business), and in other continental markets some large dealer groups have been able to exploit this opportunity, although less frequently. But there are many signs that times are becoming more and more difficult for franchised dealers, because the access to more profitable used cars is more complex due to the competition with other players when sourcing vehicles. Hence, in some cases, both volumes and profitability are under pressure, pushing some dealers to reduce their expansion plans (like Pendragon in the UK, for more details see recent article in AM-Online HERE

Among the competitors, we see three main threats for franchised dealers, with a different impact according to individual markets.

First of all, the growth of independent used car superstores, which have exploited scale economies, efficient processes and the offer of innovative additional services, with a consequent improvement of volumes, image and often also profitability (especially in the UK and Italy).

Furthermore, more and more often leasing and rental companies have started to increase their direct operations in reselling used cars at the end of the contractual period, in many cases developing an omni-channel approach, to maximise profits. In some markets and for some specific companies the weight of direct sales is already significant and is still growing, for example Hertz in the US already sells directly one third of total de-fleeted cars and, in Europe, Leaseplan, through their own CarNext brand, in 2018 sold directly around 20% of remarketed cars with the declared objective to arrive at 40% within 2022.

Finally, in the last decade we have seen the birth and growth of new entrants, usually characterised by a strong digital footprint and a lower physical presence, putting more pressure on price competition. In continental Europe probably the best example is Auto1, which is now the largest used car player in terms of volumes, and which started mainly with older used cars and recently more and more transactions involve ‘younger’ used cars, especially between 48 and 72 months.

The combination and competition among these different players means growing challenges for medium and large franchised dealers, especially in sourcing and pricing. Under the current circumstances, in order to exploit opportunities in the used car business, franchised dealers have to find new solutions to collaborate with car manufacturers and leasing/rental companies with the idea that specialisation can be a win-win solution. Hence dealers need to find scale economies in used cars (e.g. refurbishment, marketing, sourcing) thanks to higher volumes to make more viable the ‘genuine’ business of leasing and rental companies which should improve the residual value management so that direct retailing might be less attractive. On the other hand, dealers should also change approach in ‘private’ retailing offering more customised solutions (both in sales and aftersales) pushing customers to see dealers like a more exciting destinations, exploiting better spaces and technology, also creating new ways of entertainment in their sites.