The challenges of the used car market have been well documented in the last couple years. Whatever your role in the industry – manufacturer, dealer, lender, leasing company, service provider – you will almost certainly have faced some impact from the challenges of the used car market.
I was reminded of the golden days of the post-pandemic period when used cars went up in value by Philip Nothard of Cox Automotive earlier this week – happy days!
Since then, we have obviously seen the big impact on electric car values of oversupply, but also changing fortunes of the used car supermarkets, the rise of car-buying portals, more sophisticated offers from the online marketplaces and much more besides.
The impact is not only for those who are directly involved in used car retail, but also those who are dependent on the efficient operation of this channel. The choice of channel and related pricing and promotions is influenced by the values that will be achieved when the cars return to the used car market in the weeks, months or years ahead.
The profitability of the various leasing companies in a market is driven mainly by how well they have judged the eventual residual value, but if they are too conservative, their rates will be uncompetitive; if they are too optimistic they will most likely win market share in the short term, but regret that optimism when they are taking write-offs further down the line.
As the owner of a car (business or consumer) there are now more options in terms of disposal than used to be the case. Twenty years ago, cars would either be sold to dealers (franchised or independent traders) as individual trades or routed through auctions in bulk.
There was limited transparency on the values being achieved, price guides were not available in some markets, or published in others, but with opaque valuation methods and only periodic updates, typically monthly. This information vacuum acted as a damper on the market – pricing moved only relatively slowly as it took time for the word to get round on what was hot, and what was not.
Technology has been the main driver of change, working in two ways. It has allowed new channels to be created that can connect buyer and seller in ways that breach geographical constraints, and also as a result of that means that data is being created and becomes accessible to those who understand how to leverage that.
This was the opportunity identified by the founders of CarMax in the US back in 1993, coincidentally the year the internet was launched. The founders did not come from an automotive background, and with fresh eyes, decided that they would have a competitive advantage if they had perfect knowledge of the market.
That meant that they would need to know the detail and value of every used car in the US market – that’s 194 million at the time. If they had this data, they figured that could value and price cars more accurately, but to do that, the only solution at the time was to acquire a Cray supercomputer, as used by NASA and others. They recognised that there was value to them in having data, so offered a no commitment valuation to anyone, with no pressure to sell, because they wanted that additional data point.
These are the same principles that are being applied now thirty years later, but you don’t need to get the current owner to bring the car to you, because almost all cars are being advertised on a platform somewhere – dealer sites, marketplaces and online advertising.
If you can access this data, then in close to real time you know in huge detail what cars are being offered for sale, how quickly they go off sale (presumed sold) and what the last advertised price was.
AAA/Driverama in Central Europe, whose development parallels that of Carmax, was a pioneer in Europe in this area, but there are now many retailers and service providers like Auto-1, Auto Trader and Indicata who use similar techniques to understand the market.
To make the online channels work, whether B2B, B2C, C2B or C2C, you need to have confidence that the car offered is as described, so we have seen the rapid evolution of high quality imagery, standardised condition classifications and apps that enable an untrained user to conduct a detailed condition report.
AI is used to enhance the capture and assessment of images. Traders can be more confident in buying cars offered directly by a fleet or private seller, the private seller can offer their cars through trading platforms to a much wider range of potential buyers, and private buyers can buy (or at least reserve) with much greater confidence without actually seeing the car in the metal.
The widespread adoption of technology-driven options for the valuation and sale of used cars will result in more harmonisation of buying and selling prices, and therefore compression of margins with more dependency on managing the bit in between – preparation costs and stock turn – in order to maximise profitability.
It suggests to me that scale will become more important, to master the technology for buying, selling and interpretation of data and to optimise operations. For a smaller dealer or independent trader, it may become less valuable in the overall business mix as you will be competing with a catapult against larger businesses armed with light sabres.
What it will not do is anticipate the actions of governments or maverick industry bosses who take sudden and unpredictable actions on taxation or pricing that then make certain brands, powertrains or vehicle types more or less attractive (and therefore valuable) overnight.
In the context of the used car market, those are ‘black swan’ events that defy forecasting. The consequences of those can only be managed rather than avoided.
