Back in April, second-hand car valuations reached their highest level in more than a decade*. Driven by dwindling new car stock, the uncertainty of the pandemic and supply chain disruptions caused by war in Ukraine, consumers were faced with a 32% price rise, compared to the same period in 2021. Yet, prices seem to be softening due to the soaring cost of living and negative hype around fuel pricing at the moment. Indeed, while still 28% higher than the previous year, May reported the first month-on-month drop since 2020. Moving forward, predictions show a gradual return to market normality, despite continuing pressures on the OEM supply chain.
For the consumer who’s waited patiently in anticipation of lower prices, this is welcome news. For dealers, however, it represents more of a challenge. Here, Paul Jewell, CEO of vehicle management platform CarCloud and experienced motor retail entrepreneur, discusses the impact of changes in
second hand valuations from a dealer’s perspective.
“Since the end of 2020, we have seen an artificially high level to second hand car prices. For the dealer, it led to a temporary improvement in margins, even though acquisition prices were also higher. And with cars generally sold on finance, we saw average advances grow by up to 30%. So, despite the pandemic, dealers in the main have had a good run.
“But things have started to change. Overheads increased dramatically, driven by a number of factors. Staff retention is challenging, so admin, sales, prep and servicing roles are all commanding greater salaries; dealers don’t want to lose good people. Elsewhere, business rates continue to rise, as do the cost of energy and parts. And that is the same for a franchised operation as for an independent dealer, or indeed an MOT station.
“So, while sale prices are still temporarily high but softening, the cost of getting a car ready for the forecourt will remain high, if not increase, putting added pressure on margins. The reduction in prices will also mean a reduction of loan sizes having a negative impact on Finance commissions for the dealer. Simultaneous to this people will be increasingly nervous of getting into further debt so demand will start to drop off and the softening will continue.
“For the dealer, that has meant the need for even more innovative cost management. And it is increasingly important that dealers seek to further understand the desire and behaviour of their customers, by harnessing the digital landscape through creativity and innovation.
“For many of those customers, we will reach a time over the next 18 months where there will be a pinch point, when a negative equity bubble arrives – but this will only emerge over time. Cars bought during 2021 were at a high and haven’t come down to their ‘real’ level yet. Consumers will be looking for different ways out, while some will hold on to cars for longer, cutting down on mileage at the same time. Unfortunately, there will be bad debt, because of the high price bought at, so one has to look at what choices the consumer has. And that’s really important for the dealer – it’s about communication with
the customer, while driving activity and consideration.
“So, prices are starting to soften, with some dealers looking to accept smaller margins. However, it’s not all doom and gloom. Most dealers are able to ride the vagaries of the current marketplace and are hugely innovative in their thinking of what is best for their customer, while continuing to deliver a great service. It’s about understanding further the life cycle of the consumer bybeing smart in the digital landscape, re-connecting with previous customers and driving more referrals.
“There are many ways to buy a car, be it from your sofa, a broker or via a banking app. But nothing will beat the physicality of a good dealer. So for the retail sector, it will become more about the experience and dealers are embracing that need to deliver that by knowing their customer better. There will be bumps and bruises over the course of the next 18 months – and the amount of change over the last three years has been profound – but the industry is in a better place.”
