Several industry commentators have suggested recently that the used car market is heading for a valuation ‘crash’ prompted by oversupply as three-year-old cars bought on PCP are returned.
This situation will continue in the medium and even long term, they argue, as PCP penetration of the new car market continues. They point to FLA data showing continuing increases in new car PCP and the fact that, at some dealerships the targets for PCP products are as high as 70-80%. However, we don’t believe this doomsday scenario will occur for a wide variety of reasons. The biggest of these is the ongoing success of customer retention PCP renewal programmes, where the customer is renewed on a brand new vehicle before contract maturity at the point at which an agreement reaches the parity position. The benefits to those involved are:
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– Dealer: increased stock turn and associated profit opportunities;
– Funder: retains customer loyalty for longer terms;
– Manufacturer: facilitates increased new car sales;
– Customer: gets a new car every two to three years.
In terms of early renewals, we believe dealers are being targeted on an average of 40% and, as a result, more than one in three of every new finance PCP deals sold will not reach contract maturity.
This ongoing renewal activity removes one of the central tenets of the crash argument because, conversely to the assumption that all PCP deals are three-year terms, in fact many products are actually sold at two or four years, mitigating the impact on remarketing cycles. These vehicles will not all return to the market in one wave.
In fact, it’s arguable that PCPs are creating a new remarketing cycle. There will not be a deluge into the market but a redefining of certain vehicle availability cycles in a new market norm created and facilitated by PCP. There’s emerging evidence of this. Dealers are confirming changing stock profiles with an increase in the availability of younger vehicles. Will these impacts be at a market or segment level? Interestingly, we expect to see the main impact at brand level because of the effects of different strategies on customer retention, combined with differing typical parity crossover points driven by the varying strength of the residual values.
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By GlobalDataAnd what is the long-term situation for PCP? As manufacturers continue their focus on keeping factories operating at as close
to capacity as possible, we will probably
see penetration continue to increase for the foreseeable future, especially while the euro remains weak and the UK market maintains its importance. However, as and when recovery starts to take place in Europe, we will see 0% PCP offers start to become rarer.
On a wider level, customers will become increasingly accustomed to paying monthly for vehicles rather than owning them, bringing cars into line with a wide range of other goods and service. They will also appreciate not just the increased affordability of PCP but also the peace of mind that owning a new vehicle brings. For this reason, replacement cycles may well shorten.
Our sole reservation in overall market terms centres around the potentially adverse effect on the demand for older used cars as the first-time buyer changes from someone who would have bought an older used vehicle into someone who can probably afford a new one. However, this is a very different and more subtle dynamic compared to the mooted dramatic oversupply scenario.
In summary, we see few issues inherent in the success of new car PCP and expect to see the virtuous circle at the new end of the market continue without any significantly negative effects for the used car funding landscape.
Daniel Parnell is head of fleet and finance at Glass’s
