Manufacturers need to subsidise used car finance to fight superstores
Car makers may need to subsidise used car finance as well new car deals to enable their franchise networks to compete more effectively with the rising number of used car superstores. This is one of the findings from Trend Tracker’s analysis of the used car market in its latest, 2006 MFBI research study The Future of the UK Used Car Market 2006-2011, which shows that as car quality has improved, consumers are less willing to pay a premium for cars bought from franchise networks’ approved used car programmes.
One reason for this increased reluctance is identified in the report as being the rise in the number - and profile - of used car superstores which have increased in number by 33% from 90 in mid-2002 to 120 in mid-2006. The report says that although the quality of pre-sale preparation may differ markedly between different superstores, consumers believe there is little risk in purchasing comparatively young used cars from them.
Trend Tracker’s director of published research Robert Macnab said, “Thanks to cars’ increasing quality and reliability, used cars are becoming more of a commodity, to which dealers’ current programmes scarcely add enough value to justify a premium price.”
“Car makers therefore need to re-invigorate their almost identical approved used car schemes to defend volume from the superstores’ competition and maintain the higher prices and margins needed for their used car operations, which are relatively small compared to superstores, to maintain their profit contributions.”
Discounted Used Car Finance
To achieve this, the report says that car manufacturers need to provide a similar level of support to used car sales as they give to new. One radical solution identified in the report would be for the car manufacturers to support used car sales with discounted finance from their own finance companies – though the report acknowledges that manufacturers may be reluctant to do so, as their priority is after all to maximise new car sales to reduce unit production costs.
However, with many dealers’ profitability falling to unsustainable levels, helping them to sell more used cars while maintaining premium prices would directly benefit manufacturers as well as their dealers. Although discounted used car finance would represent a significant cost, it might allow vehicle manufacturers to reduce their direct financial support to dealers in other forms, such as through reduced bonus payments which the MFBI study shows accounts for 24% of total dealer income.
Trend Tracker’s research shows that with margins on both new and used cars falling, dealers have become more reliant on point-of-sale finance as a profit centre in its own right. However, Trend Tracker’s data shows that point-of-sale finance penetration on franchised dealers’ used car sales is much lower (at around 30%) than the 45% they achieve on new cars, mainly because almost 25% of the finance offered with new cars is discounted by the manufacturers’ captive finance companies. Consequently, dealers try and achieve higher margins on their used car finance rates, but often at the cost of becoming uncompetitive with direct lenders’ headline rates.
The analysis concludes that the perceived high cost of dealer finance, when combined with premium pricing on the used cars themselves, is affecting the overall volume of used cars sold by franchised dealers. Independent dealers and used car superstores in particular are generally perceived to offer lower prices than franchised dealers, yet the MFBI study shows that independent garages generally achieve higher gross profits per used unit than franchised dealers, through a combination of keen purchasing and lower reconditioning costs.
Manufacturer-subsidised finance rates on their approved used cars could give franchised dealers a strategic advantage over larger independent dealers which, like their franchised counterparts, depend on the margin available both on the vehicle itself and on finance commission. Some independent dealers have been advertising reduced rate or even 0% finance on used cars, but this must be financed by a higher margin on the vehicle itself. Only the vehicle manufacturers’ captive finance companies are in a position to provide discounted rate finance on used cars as a long-term competitive strategy.