Confidence grows in used car sales

The Bank of England's unexpected interest rate rise in January to 5.25 per cent, and the prospect of a further rise 5.5 per cent over the coming months, has done little to dampen dealers' confidence according to the results of the latest Motor Trader Used Car Barometer, sponsored by HPI. Against this backdrop of a rise in dealer confidence there are signs that consumers are currently considering making major purchases. Nationwide Building Society's consumer confidence survey, published earlier this month, showed a slight increase in buyers expecting to make big-ticket purchases. Its consumer confidence index rose one point in February to 85. Although this is a move in the right direction it is still only two points ahead of its lowest rating of 83. The Nationwide's spending index, which monitors consumers' thoughts on making a major purchase, rose four points in February to 90, indicating higher spending confidence, but this may be due to an expectation of lower prices for major product purchases as the economy slows. This is reflected in the Motor Trader survey which shows that most dealers thought transaction prices fell during the past quarter. If lower transaction prices are the key to maintaining sales volume in the shadow of higher interest rates, then this will have an impact on dealer used car margins and profits, unless dealers can obtain correspondingly lower wholesale purchase prices. Bright prospects Compared with the previous survey, the balance of retailers who are more optimistic about their business prospects has risen to a positive 26 compared with a positive 14 balance last quarter. Respondents to the survey comprised a cross-section of single-site franchised dealers, dealer groups, independent dealers and used car supermarkets. Once again it is the dealer groups that are far more confident about their used car prospects than anyone else. Non-franchised dealers are more confident about their prospects than single-outlet franchised dealerships. Significance of F&I The confidence gap could be attributed the important contribution made by F&I to dealer profitability on used car operations. Those taking part in the survey were asked what proportion of their used car customers buy F&I products. Overall, F&I penetration across the whole sample stood at 31 per cent and 17 per cent respectively, but it was significantly higher among dealer group respondents at 40 per cent and 26 per cent respectively. Single-outlet franchised dealerships achieve higher levels of finance and insurance penetration at 30 per cent and 17 per cent respectively than non-franchised independent dealers who achieve only 23 per cent finance and 7 per cent insurance penetration on their used car sales. Research carried out last year into the used car market by Trend Tracker's MFBI unit revealed that independent dealers generally achieved higher gross profits per unit than franchised dealers despite lower finance penetration. The study attributed this to both the lower reconditioning costs and wholesale purchasing prices achieved by independents. Respondents to the Motor Trader survey were also asked whether they expected sales of F&I products to increase in 2007 over 2006. The results were fairly evenly split with 49 per cent saying they expected sales of finance to increase and 52 per cent expected sales of insurance products to increase. Once again there is a noticeable difference between single site franchised dealers, dealer groups and independents in terms of their finance and insurance expectations. Among dealer group respondents, the largest proportion – at 55 per cent – believed that finance sales would increase this year whereas a higher proportion of single outlet franchised dealerships – at 56 per cent – thought that finance sales would not. Independent dealers, though, were more optimistic than single-site outlets with 44 per cent expecting finance sales to increase this year. Sales of insurance products showed the greatest differences between franchised and independent dealers with 77 per cent of dealer groups expecting insurance sales to increase in 2007 and 50 per cent of single outlets also anticipating a rise. However, as a result of fewer independent dealers having registered with the FSA to sell insurance products, only 17 per cent expected insurance sales to rise this year compared with 59 per cent who did not. Warranty opportunities We also asked dealers if they now include a one-year warranty within the sale price of the car and 61 per cent said they did. However, they were also asked what proportion of their customers also bought an extended warranty and only 13 per cent did. Clearly there is a significant opportunity for dealers to up-sell and add value to their used car transactions by increasing the penetration of extended warranties. Independent dealers proved the most successful at selling extended warranties with 16 per cent of their customers buying them. This compared with 14 per cent for dealer groups and just 9 per cent for single outlet franchised dealerships. Clearly franchised dealers and single outlet dealerships in particular are missing out on a key profit opportunity.