Thirty years ago the idea of shopping at a superstore was an alien experience to the British public. In the days before the huge out of town supermarkets, all shopping was done in town. A so-called ‘supermarket’ was laughably small in comparison to today’s leviathans of retail. You might be lucky and live near to a Cash & Carry, which was about the biggest form of shopping you could experience.
Once the concept of the out of town shopping and superstore’s arrived there was no going back. To return to how things used to be would be as difficult as trying to go back to the future.
The interesting development in large retail development is the inexorable growth of used car superstores (UCS) which have increased in number by 33% from 90 in mid-2002 to 120 in mid-2006. It wasn’t so long ago that I remember friends having to drive over 200 miles to visit their nearest UCS. Now most of us are never more than a 40-minute drive from a UCS and despite some reports about the quality of service, some of them offer and the cost of finance, they are becoming increasingly popular as a one-stop shop for a huge proportion of purchasers in the used car sector.
This is having a detrimental effect on the carmakers who 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.
The recent Trend Tracker’s analysis of the used car market ‘The Future of the UK Used Car Market 2006-2011’, reveals that as car quality has improved, consumers are less willing to pay a premium for cars bought from franchise networks’ approved used car programmes.
Advertisement
One of the reasons the report identifies for this increasing reluctance is the rise in the number – and profile – of used car superstores. 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.”
To achieve this, the report says that car manufacturers need to provide a similar level of support to used car sales as they provide to new car sales. It is pointed out 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.
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.
Advertisement
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.
One thing is for sure – with used car superstores flourishing, the clock is ticking for the franchised dealers and their used car sales. A solution is required, and quickly.