Despite widely reported shortages of ready-to-retail used cars, in May last year UK dealers were stocking 15% more vehicles than they had the year before, according to Motors.co.uk. The average time to sell also rose from 38 to 40 days, so what is going on? Chris Farnell reports.
When Pendragon released its half-year results for 2019, the company had to announce a 57.3% reduction in like-for-like gross profit – a pretty shocking hit for any firm.
In its financial reports, the company stated that this was due to the excess stock levels that company had endured in the financial year ending 2019, particularly the losses incurred from selling that stock, combined with falling national used car values during that time.
The issue was not one that uniquely affected Pendragon, however. Even though there had been widely reported shortages of ready-to-retail used cars, in May last year UK dealers were stocking 15% more vehicles than they had been 12 months previous, according to Market View data from Motors.co.uk.
Stock was not just growing, it was staying around for longer. On average, cars during this period took two days longer to sell than in the previous year, moving from an average of 38 to 40 days. One of the drivers behind this growth is an equivalent slowdown in the new car sector, according to Kris Turner, president of sales EMEA at the Apak Group.
“On the whole, we have seen a rise in stock levels over the past 12 months,” Turner says. “With the new car market slowing, dealers have focused more energies on their used car sales activity.”
However this has not been the only factor driving stock levels.
“Franchised dealers have become more active in the used car market over the last 18 months, which has increased demand and with it, raised prices.
“The situation was exacerbated by reduced supply levels until the second quarter of last year. While supply levels have broadly returned to industry norms, many dealers are concerned by rising stock prices at auction,” explains Karl Werner, deputy chief executive of MotoNovo Finance.
“The result is that many have been happy to hold onto stock run with a larger parc of vehicles. An area that has come in for more attention is the average time on stock KPI; it has been growing, becoming longer over the last year. We expect greater attention to be paid to this number in the coming months.”
Recent figures have been more promising, as Ian Plummer, commercial director, at AutoTrader.co.uk, points out: “Just now we’ve seen a return to a better level of stock and a bit more optimism. What we saw at the back end of last year was a slowdown in transactions at a seasonably low time of year anyway.
“The added uncertainty around Brexit and elections caused a slowdown of used car volumes overall, and declining levels of stock with retailers. After the election, we’ve seen customer confidence increase with a strong correlation to used car sales returning to the positive part of the cycle. Used cars are strong in January, and we’re seeing good levels of optimism. The challenge now is to find affordable stock while prices are high.”
It is somewhat paradoxical that high stock levels can be a problem for dealerships, given that this stock is essential to the business’s survival.
“On its own, higher stock levels are not a problem, but stock-turn can be because it creates costs and, at the same time, older stock is typically less profitable because it is a depreciating asset,” Turner explains.
“Against a benchmark stock turn of 45 days, in the year to 30 November, stocking days rose to 59.2 days, up from 57.2 days in the UK, according to ASE Global data.
“This equates to higher operating costs for dealers. The impacts of higher used stock for finance providers are generally positive. More stock over a longer period of time creates more income, but this is not the whole picture. Typically, this stock is owned by the lender and they need to manage all and any risks associated with it.”
The truth is that once a dealer acquires a used car, it becomes something of a hot potato, incurring costs to hold the vehicle even as its value falls.
“As soon as a car is registered its value perpetually declines, and slows at seven, eight, nine years of age, but because it’s declining you want to hold the car for as little time as possible,” Plummer says.
“More stock can make it tough to maintain a firm grip on where stock is within the preparation cycle. It is a risk that has increased with the advent of remote digital stock purchasing,” Werner agrees.
“Notwithstanding this, the most significant consequence is cost. If a dealer’s stock levels increase, so do its operating and funding costs. If stocking days increase, which they did in 2019, at over 59 days, then dealers have more money tied up in what are depreciating assets for longer.”
“This is where our market-leading software comes into play, and has done for over 40 years,” Turner adds. “More stock and a slower stock-turn could indicate a distressed position for lenders. It needs to be considered alongside other operational indicators for the dealer concerned. It is also worth noting that this stock needs to be audited, so more stock, more auditing costs.”
The Ticking Stock
An old phrase often applied to used cars is: ‘it is not the age, it is the mileage’; in a similar way, you might point out that it is not the stock, it is how long you have held it.
“It is not stock but stocking days that dealers will be working to reduce,” explains Turner. “Getting stock to market more quickly, and better visibility of where stock is in the transport and preparation process, and in aging terms, all help to create greater attention on stock that may need pricing or marketing activities.”
It is also important to have an in-depth understanding of the market you are trying to sell to, especially as the clock is ticking.
“The real focus is on reducing stocking days,” says Werner. “‘Just-in-time stock purchase, from purchase to online marketing, faster preparation cycles and greater visibility of stock status are all areas we see dealers working to enhance. Nevertheless, the mass buying from some larger retailers and the demand-led impact on prices make reducing stock more challenging.”
“The key is to source the right deals for your target market area,” Plummer says. “If you can sell a car in 30 days by pricing it to market and getting a lot of views in a digital showroom, then three sales like that on 30 days each is more valuable than one sale over 90 days. In the past, stock was managed to a 90-day maximum; that needs to be revisited, while keeping in mind all the costs of holding a car in stock, which can amount to £25 a day. So after 40 days, you’re in a negative position on that vehicle.”
Plummer points out that as well as understanding the market and demographics you are selling to, it is also important to have a firm grasp of the vehicles that you are stocking, especially when it comes to purchasing them in the first place.
“To get the right stock in the first place, you have to understand your market area, work on a retail rating for each item of stock, and take into account local demand for that model that you could be buying in an auction or part exchanging and matching it to local levels of supply as well,” he explains. “Buy the right car; focus on selling it fast.”
Reviewing the Options
Financiers can play a role in helping to combat stock-bloat, but Turner believes the relationship with dealers needs to be collaborative in order to be productive.
“Financers can limit funding, but this may be self-defeating unless the dealer is believed to be in distress,” he says. “Our view is that the smart route is for lenders and dealers to collaborate to see how they can reduce stock turn.”
Plummer points to what price vehicles are being sold, and more importantly, how those vehicles are being sold as possible problem points for dealers to look into in the case of rising stock.
“We would suggest to retailers in that position to revisit the pricing of their cars and make sure they’re not missing out on visibility by being overpriced. If a car is overpriced, customers will see that.
“Sometimes it’s justified because it has an approved warranty or other added value, but it’s not to a great degree and not across all cars,” Plummer adds.
“For example, in the showroom business, people don’t go shopping forecourt to forecourt looking at cars they’ve not seen before. They look at digital showrooms and then will turn up at the retailer, often without even making a prior call.
“The retailer won’t necessarily know if someone is about to turn up, but they will generate that sort of business if customers are seeing their cars online, not only at the right prices, but with the right quantity of photos, specifications, and the vehicle clearly described so buyers can understand the car they’re looking at. Revisit the basics rather than doing anything more drastic.”
“We work closely with dealers to help them get their stock marketed more quickly and we are,” Werner adds.
“Our focus is on providing the best-in-class products, such as findandfundmycar.com, and the development of new customer-centric pricing models to ensure our dealers stock is presented in the best way online, supported by products and services that turn the sale around quickly.”
A Finance Solution
Although both Plummer and Turner warn against drastic solutions, at the same time they acknowledge that the market is constantly changing, and trends that have been taking over the new car sector are starting to see ripples in the used car sector – and motor finance is where those changes are happening.
“Some emerging businesses have highlighted the potential for dealers to ‘hire out’ their used car stock to gain an income,” Turner says. “The industry has recognised some challenges with this model; lender concern that their asset is ‘off stock’ from a security perspective; the fact that the car is not available to sell, transport and refurbishment costs.
“With more organisations looking at a wholesale fleet model and the wider car-as-a-service mobility-subscription options, nobody should be closed to the possibilities, but right now there are a number of entry barriers.”
Some are sceptical about the potential of these kinds of model in the new market, as Werner points out: “It is part of our innovation-driven DNA to look at this type of initiative. Right now, the feedback from the dealer community has been negative. Having stock off site can act as a barrier to a sale – ‘out of sight out of mind’ – and there are the inevitable preparation and refurbishment costs that will eat into any income.
“As a stock funder, we would need to consider the risks that off-site use of a vehicle ‘on-stock’ would create. There are some digital tracking options available, which we are assessing to establish their potential.”
The most important thing about lease and subscription models of car ownership, according to Plummer, is that it can open up new markets to the used car sector, in terms allowing them to sell more, and faster.
“I think it’s extremely useful to imagine different forms of finance. Typically, used car deals were hire-purchase; now there’s a growing focus on PCP,” he acknowledges.
“It’s very hard to do PCP on an eight-year-old used car because the guaranteed value at the end is a hard thing to calculate. But PCP is useful to many people. It’s a more affordable way to access a better car and the risk isn’t with the consumer.
“So, from a dealer perspective, it opens up a new kind of customer. Millennials are very into the monthly subscription journey. They like flexibility. Equally, subscriptions from the examples I’ve seen so far have been for people with lower ratings.
“If you’ve moved house recently, arrived in the UK a few months ago, or had a large commission earning instead of higher basic income, those people are much more able to prove they can pay a monthly payment on a single monthly basis, unlocking new profiles and helping us grow.”
It is a shift that Plummer believes could have as big an impact on the used car market as it has on the new car market.
“Finance is a particularly key leader for car buyers,” he explains. “Nine out of 10 customers are generally financing their car. The numbers are harder to gauge precisely in used car sales.
“The opportunity regarding subscription and so on is that it is a driver of market growth, as it has been already for new cars. What’s more, and more relevant, is that customers think of the vehicle in terms of a monthly payment, like Netflix, TV, household goods and holidays.
“Monthly is a process they understand, so we’re trying to promote that journey, and since we started in 2018, we have a toggle that will let you search a car by monthly payment instead of total cost. You can then play with those criteria to tailor a deal to each customer’s own situation and make the car come to life in a way that is relevant.”