What’s the best approach to the used car business?

By automotive-mag.com 9 Min Read

Steve Young

There have been a few bits of news over the recent weeks all related to the used car business, all biased towards the UK market.

However, as the pressures that have driven the various actions are not specific to the UK, then I hope that readers elsewhere will bear with me, because I believe that the lessons are transferable.

One of the trends that we have seen starting before the pandemic but perhaps accelerating through that period was the creation of standalone used car businesses by large dealer groups.

Probably not the first, but certainly in the leading pack were Pendragon, then headed by Trevor Finn, who set up the CarStore division along with supporting central infrastructure to enable online sales, the transfer of cars from the stock location to a more convenient location for the customer, and lowest price guarantees amongst a number of other innovations.

Following the recent acquisition of the Pendragon dealer business by Lithia, then it was announced last week that all of the CarStore sites will close and either be repurposed as additional franchised outlets or transfer to the core Evans Halshaw brand.

This followed on from an announcement last November that Inchcape (prior to its sale to AutoNation recently) was closing most of their Bravoauto dedicated used car sites in the UK and the closure in August last year of the Peter Vardy Carz used car superstores.

This only leaves Sytner (the UK arm of Penske) operating large scale separately branded used car outlets who own the CarShop brand following two acquisitions that they made in 2017 and 2018.

Many in the industry have watched with a degree of satisfaction the decline and collapse of the Cazoo business set up with huge naivety on the basis that the traditional players in our industry were all dinosaurs.

It quickly expanded into multiple European markets through acquisitions of fledgling start-ups, and equally quickly retreated back to the UK, closing and selling those businesses along the way.

Following continuing losses in the remaining UK business, Cazoo then announced two months ago that they were withdrawing from the B2C business and instead going to operate as a B2B marketplace.

There was much scepticism that dealers and used car independents who have been insulted by the Cazoo founders earlier were then going to turn to this marketplace when much better alternatives already existed.

This has been borne out by the company filing last night that there was a real possibility of the business going into administration as it needed additional funding but had no indication that this would be forthcoming.

Given that they are also in breach of New York Stock Exchange reporting requirements, I think it’s fair to say that Cazoo will not make it into the summer.

All of this is happening against the backdrop of volatility in used car prices particularly on BEVs but not restricted to them, and a drop in the number of three to four year old used cars due to the corresponding drop in new car registrations during and immediately following the pandemic.

This downturn was entirely predictable and it is equally certain that availability will improve again in three years’ time as new car registrations have generally returned to 2019 levels.

That leaves the question of whether closing businesses in which effort has been built to build a brand and recruit staff is the appropriate response to a set of conditions that might be temporary, or was it misguided to establish them in the first place when the market conditions were defined by a very specific set of circumstances?

You can look at the used car business from two perspectives and the strategy that you follow depends on which perspective is most important to you.

From the point of view of a car manufacturer or their franchise dealers, the used car business is the foundation of an annuity that is created with every new car produced.

It is the opportunity to attract customers to an OEM brand at lower price points, and generate F&I and after sales profits over a number of additional ownership cycles.

From this perspective the focus must be on offering cars of the OEM brand that can economically be prepared to a suitable standard for their age and are sold with the benefit of the brand experience and backing in terms of warranty.

This should result in pricing which sits above the market average, although in reality from both OEM data that we have seen and insights from our friends at Indicata, this premium does not seem to be commonly achieved.

Being involved in the used car business from this perspective is not optional for a franchise dealer so the challenge is in optimising performance to maximise the returns for this activity – an area where we still see wide variations across networks in Europe and across dealers within each of the national networks.

Considered as a standalone business, whether under the ownership of a dealer group or an independent, then there is much greater flexibility about the offer and the investment in the sales channels.

This flexibility allows the business to ‘breathe’ in line with variations in supply and demand, switching the focus to where the opportunities lie and avoiding being constrained by a high fixed investment and staff costs that can only be covered when markets are at their most benign.

As Steve Hopewell, Chair of Aures Holdings, the owner of AAA/Driverama in Central Europe told us in a recent interview, the used car business is fundamentally about “trading money” and you need to allocate that money to where it is going to produce the best return, getting out of ‘bad cars’ and into ‘good cars’ as needed based on where the profit opportunity lies.

As in any form of trading, flexibility is key, and maintaining a low fixed cost base is part of having that flexibility.  Huge investment in brand-building like Cazoo, or a network of ‘gin palace’ standard showrooms all add to the fixed cost base, without delivering a matching benefit to the customer.

Used car buyers will put more effort into their buying journey than a new car buyer in order to find the right car, and trust evidenced by customer ratings and reviews are probably more important than the brand above the door and the quality of the showroom fittings.

Steve Young is managing director of ICDP

Share This Article
Leave a comment

Leave a Reply

Your email address will not be published. Required fields are marked *