Used Cars – The Dealers’ Friend

As any good dealer knows, used cars can be your friend in need.  If a dealer business is considered as having three pillars, used cars is the one that tends to stand strongest through whatever disruption is going on in the broader market.  The new car market can dip, but the retail buyers in many cases will then switch to used.  In aftersales, customers can defer work, or switch to an independent with prices that are at least perceived to be cheaper.  As long there is a need for personal mobility however, there will be demand for used cars, even if tastes and budgets change.  Unlike new cars, and to a growing extent aftersales due to more managed business, success in used cars is almost entirely down to the operating skills of the dealer.

Data from Indicata for 13 European markets shows strong used car demand in June and July, up 12% to 13% year on year, despite the influence of some markets that were still under partial lockdown.  There is a broad picture of supply shortages which is holding back sales, but also ensuring that pricing has improved over the last couple months.  Reports from some of the UK dealer groups whose shares are listed support the information from Indicata, with Marshalls reporting “strong demand” and “positive used car residual values”, and Vertu “a record level of used vehicle gross profit” in July.  Although some markets report additional demand for older used cars as commuters choose to avoid public transport, there are significant variations between markets in the volume growth by age.

Nobody can predict with any confidence what will happen in the coming months as job losses start to mount, and taxpayers need to start meeting the cost of the widespread interventions, but these are more likely to influence mix than market size.  This will put more emphasis on the need to manage the used car business in a nimble way, making best use of the huge volumes of data that are available from a number of third party providers including Indicata, as well as the main used car platforms, auction houses, and not least a dealer’s own data.

Nimble is important because this combines reactivity with not carrying too much weight.  In a sector where a benchmark used car inventory is under two months, reviewing buying policies, pricing or aged stock every month is too slow.  This needs to be a continuous process to ensure that stock is turning, and the capital and space released to offer another car, which will provide another opportunity for F&I and aftersales business.  Each sale may also present an opportunity for another purchase if the customer has a desirable trade-in that can be retailed.  Carrying excessive inventory means carrying excessive risk – in an upturn, it might be your friend if the mix is aligned with the growth, but there remains the possibility that the growth is in the segments and ages that you do not have in your stock.  In the possibly more probable event of another downturn, that stock is depreciating, costing interest, filling your dealerships, and restricting your flexibility.

In a dynamic and unpredictable market, data – as close to real time as possible – is your best weapon, as long as you have people on your team who can extract the value from it, and the rest of your team are willing to act on the insights offered.  However many years’ experience a used car buyer or sales manager may have under their belt, that was in a different time, when economies and used car customers were responding to very different, and somewhat familiar, cyclical trends.  It was not in a market influenced by a pandemic, and “will they, won’t they” questions around lockdowns, second waves, mass immunisations and business rescue packages.  The data will show what is moving, what is stalling, and where capital and effort is best invested to meet the trends of that week or month.

In past research we have talked about the “10 golden rules” of the used car business, including active sourcing, strict reconditioning rules, robust stocking policies and strict pricing rules.  They were important four years ago, but in today’s environment, they are critical to ensuring that dealers can ride out whatever the coming months have to offer.