One Voice Report - CarGurus

[Pages:8]One Voice Report

An examination of the key issues affecting the used car market in 2019, according to dealers.

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Foreword by Sam Zales, Chief Operating Officer, CarGurus

Rising overheads, increased competition, sourcing the right stock, Government policy and, of course, Brexit are all set to impact car dealers' operations in 2019. However, dealers are turning to the digital world to help counteract these business pressures. Shaped from the hot topics identified by our Dealer Council, which consists of an influential and broad mix of UK car retailers, this first CarGurus One Voice Report brings together the opinions of more than 400 dealers, including franchises, independents, and supermarkets. In it, we examine the key issues you and your peers are facing in the used car and van market as we enter 2019. At CarGurus we look forward to helping car and van dealers adapt to these challenges and continue growing their businesses.

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Competition for stock intensifying

Finding and acquiring used vehicles in the right condition at the right price proved more difficult in 2018 for the vast majority (80.8%) of dealers.

Of those that found it more difficult to source stock, almost half found it very or extremely difficult.

With lower new car sales in 2018, fewer part exchanges came in to the market to be sold as used cars and the knock-on effect rippled all the way through the industry.

"You have a lot of dealer groups that are expanding. You have more people who want more cars. There are only so many cars to go around, so, therefore, cars are getting more expensive. Dealer margins are getting lower."

Kim Chodha, Owner, Berkshire-based dealer Sascron

Looking to 2019, the majority of dealers were either unsure how the year ahead would perform for stock availability or believed it would be the same as 2018.

However, a third of those who found sourcing to be "a bit, very, or extremely" difficult in 2018 expect the problems to worsen in 2019, and more than a quarter of all dealers expect sourcing to be more difficult in 2019 compared to 2018.

Many influences on stocking requirements are out of dealers' hands. When asked about 2019, dealers cited the uncertainty over Brexit and its potential impact on the economy.

Another fear is that interest rates will rise. If this happens, the cost of interest for stocking loan rates will rise, and with margins already under pressure, some think this could trigger closures and even bankruptcies.

How Difficult Has It Been Acquiring Stock Compared to 2017?

However, the motor trade is always resilient and several dealers listed ways they would combat the difficulty of getting hold of stock. Increased use of part exchanges, trying new things, simply working harder, and buying direct from private customers were all ideas in play for 2019. Some even saw an opportunity to be had with diesels as more people switch to petrols and hybrids in and around the raft of upcoming clean air zones.

An overall increase in competition was also cited as the reason stock has been difficult to track down.

28.0%

42.2%

Kim Chodha, owner of Berkshire-based dealer Sascron, said: "You have a lot of dealer groups that are expanding. You have more people who want more cars. There are only so many cars to go around, so, therefore, cars are getting more expensive. Dealer margins are getting lower."

19.2% 10.6%

Not at all

A bit

Very

Extremely

Imperial Car Supermarkets operations director Neil Smith added: "What we have seen is more used cars are being retained now in the manufacturer networks, so supply for us is reducing. Leasing companies have had to extend their terms primarily down to the impact of Worldwide Harmonised Light Vehicle Test Procedure (WLTP) and the lack of new cars available from certain manufacturers. As a result there is less supply in the market for two to three-year-old lease cars, which is what we are looking for. That does push the cost up, especially in January, which inevitably means margins are under further pressure."

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Car preparation costs and stock shortages putting pressure on margins

With most used car dealers finding it difficult to source the right stock, it's unsurprising that the number seeing margins decrease (43.8%) is higher than those expecting an increase (25.0%). The decrease in margins is also larger (-19.4%) for those experiencing a fall than the increase (14.3%) is for those who said their margins were expanding.

Profitability for used car dealers looks likely to level out in 2019, rather than keep falling, as the number who expect a fall in margins next year drops to 26.1% compared to the 43.8% who saw margins fall this year. The number expecting a rise in margins remains broadly flat, but the number expecting the same results next year as they've achieved this year, rises to just more than half (50.9%).

Top 6 Profitability Pressures in 2019

2019 Margin Expectations

Brexit

(unspecific)

(from used car supermarkets and large groups)

Increasing overheads

13%

11.3% 8.5%

26.1%

5.9% 4.8%

4.8%

23.0%

Down

Level

Up

50.9%

One retailer summed it up: "I have been in the motor trade for 26 years and I have [always] been having to adapt in a very changing market, but I can no longer make my vehicles look as perfect as years ago because [if I do] I will price myself out of the market completely. The biggest challenge ahead is still maintaining good sales figures while retaining good margins so that I can continue my business in a profitable manner."

Basic economics say that when there's a shortage of stock and enough demand in the market, prices should rise. However, many dealers feel the market isn't reacting in this way. Instead, the amount of competition in the market and what dealers see as consumer unwillingness to pay

more means retailers are keeping sticker prices level and absorbing costs, which eats into margins.

Nathan Quayle, Group Marketing Manager at Fords of Winsford, pointed out that manufacturers and their franchised networks are getting better at holding on to the most desirable stock: "They are keeping all the good part exchanges, leaving supermarkets and independents with the rest. Lower grade stock means prep times have gone up as well which has obviously eroded margins even further."

Not only has ready to retail, higher quality stock been more difficult to get hold of, but cars are needing more preparation time because they have more equipment,

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according to Alex Jones, head of marketing and digital at Carbase.

"The specification of the cars is increasing. We spend a fortune on refurbishing diamond-cut alloy wheels, which if you go back a number of years there was not the same sort of issue."

"Replacing a set of wheel trims, for example, has a very different cost to a full diamond-cut refurb. Also if you look at things like the volume of panoramic roofs with issues on electric blinds or big screen multimedia systems, the repair or replacement cost of those units is extremely high," he said.

On top of increased costs (particularly vehicle prep and advertising) and competition, economic uncertainty due to the challenges of Brexit means that consumers are reticent to pay more.

As one used car dealer put it: "The Brexit situation in the UK has created instability and in return will raise inflation." However, they add that this may push more people out of the new car market and into the used car space.

"They are keeping all the good part exchanges, leaving supermarkets and independents with the rest. Lower grade stock means prep times have gone up as well which has obviously eroded margins even further."

Nathan Quayle, Group Marketing Manager, Fords of Winsford

Dealers turning to digital for financing, trade-in evaluations, marketing, and more

In a bid to improve their performance, almost three quarters (73.2%) of used car dealers have already adopted advanced digital practices.

With the importance of finance in the used car market it's perhaps unsurprising that online finance completion tops the list of advanced digital services offered by dealers.

Offering online finance speeds up the buying process when customers reach the showroom. It also means buyers don't have to leave a retailer's site to organise financing, so they're less likely to switch retailers when they've found the car they want.

with increasingly specific and longer terms, it isn't a shock that SEM is rapidly gaining ground. Again, retailers recognise where the majority of buyers start their car buying journey: online.

Looking to the trends of 2019, by the end of the year almost all of the retailers surveyed will have adopted the ability to offer online trade-in valuations, with more than 60% already offering it and nearly 30% planning to offer it in 2019.

On a similar note, online finance completion should be at or near 100% saturation by the end of next year.

With retailers looking to counter market pressures such as competition and buyer fears over Brexit, it's not surprising to see that search engine marketing (SEM) has developed strongly with 45.5% of used car dealers already including it in their marketing mix. With a high proportion of buyers knowing what they're looking for and searching accordingly

A surge in video is also likely in 2019, with nearly 40% of retailers looking to add it to their marketing mix as more and more car buyers expect to see a video of the car they are considering before they visit the showroom.

In a more general look at digital and automation in the

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used car market, retailers expect there to be more "sofa purchasing" with full, end-to-end online car buying, and even same-day delivery emerging as one possibility.

Automation could bring greater customer satisfaction as well as business efficiencies, according to Kish Vaja, head of digital at Perrys.

One retailer pointed out that online services have led to a more efficient business model: "Nowadays customers know what they are looking for... customers do their research before [coming to the showroom] and there is hardly any wasted time."

Several saw the level of online activity increasing in all areas and pointed to the restaurant business as an example: "Customers don't want to actually talk to anyone. People don't even want to talk to their local takeaway anymore ? they use Just Eat." Retailers in our survey and within the CarGurus Dealer Council drew parallels between wider online retailing trends and car sales.

"One of the big trends over the past few years has been the increased use of self-service ... especially outside of automotive," Vaja says. "You can order a pizza now quicker on mobile apps and voice assistants quicker than having to call and possibly wait on the phone. ... It is only a matter of time that this comes to automotive, for example booking a service."

Speculating about how far automation could go, Sascron owner Kim Chodha added: "Eventually people are going to trust [online buying] and think, `I am going to click it and if it is no good, I can send it back', instead of going to the dealership and having that experience.

Efficiency gains were also expected from the introduction of chatbots. "I think people might start using them instead of having dedicated personnel to reply to chats," said Catherine Oldfield, digital marketing specialist at Mike Brewer Motors. "It is automated messaging: instead of answering live chats, ... our salespeople can be used on other things."

"We are going to try to implement that, but click-to-buy is probably a little bit down the road. When you do that and the car is all good it is going to take away a lot of the stress. You will just need compounds [where you can store a large number of vehicles]."

72.9% 28.2%

Online finance

Digital Now - Online trends used today in your business Digital Future - Online trends to be adopted in 2019

61.6% 29.0%

45.5% 27.8%

35.2% 39.6%

23.3% 17.1%

Trade-in

Search engine

Video

Chatbots

12.9% 11.4% Click-to-buy

Digital now

Digital future

"One of the big trends over the past few years has been the increased use of self-service ... especially outside of automotive."

Kish Vaja, Head of Digital, Perrys

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Changing fuel policies adding uncertainty

Indecision by the Government over how it intends to tax diesel and electric cars in future has had a marked impact on the used car market in the past year.

Change in Stock Mix

31.0% 30.2% 27.1%

A lack of guidance over which fuels will be favoured in tax regulations has fuelled national press speculation over what could happen in future, and nearly two thirds (69.9%) of dealers claim this question has had a negative impact on the market.

Mark Hannon, used car manager at Sandown Group, explained:

"The balance has been struck and certainly for high mileage users, diesel is there. In our brand [Mercedes], the range anxiety I think with regard to electric and hybrid cars is becoming better. People are actively swerving [EVs], and they would rather either buy a very good petrol or a very good diesel."

While 31.0% of used car dealers surveyed haven't changed their stock mix as a result of the demonisation of diesel, 57.3% have either increased the petrol mix or decreased the diesel mix on their forecourt. To this, it's possible to add the 7.0% that have stocked more hybrids and full electric vehicles, and the 3.9% that have taken on more smaller-engined cars to arrive at 68.2% of dealers that have adjusted their stock to reduce their reliance on diesels.

Retailers are reporting that fully electric vehicles are selling in the used car market, although there are hurdles to overcome.

Nathan Quayle of Fords of Winsford said: "We are selling a lot of electric cars. It is just the sales people are finding it a bit of a struggle to have that level of conversation. Usually the customer who comes in for an electric vehicle has done their homework. They are usually the early adopter. Our salespeople find it a challenge discussing things such as range, battery life and how you charge them. It is a big training piece that we are currently addressing."

Cambria's head of marketing Ian Godbold described how they are addressing that training issue: "We have had three or four day workshops delivered by our manufacturer partners at each site, so that the salespeople and the service advisors can all talk with a bit more intellect about electric and combat the consumer anxiety."

7.0% 3.9% 0.8%

No change More petrol Less diesel More hybrids Smaller More diesels

& EVs

engines

situation by saying: "The Government needs to get behind the industry and clarify the truth surrounding diesel emissions. Until that happens, and Brexit is dealt with, the next 18 months will be extremely challenging."

Godbold echoed that, saying: "The message needs to be more consistent, because actually the [Government incentive] grants are moving up and down all the time. If you bought a car in early October the grant on electric was up to ?4,500. If you came in in November it was at least ?1,000 less. A more consistent message would help."

Interestingly, 0.8% of dealers said they'd increased their diesel mix, with one dealer saying: "There is still a place for diesel in the market but we need a Government statement to clarify the Euro 6 compliance in larger cities that charge tariffs on these vehicles."

It is worth noting, that all dealers surveyed who answered `yes' to `Is the Government policy on diesel and alternative fuels negatively impacting used car sales?' also provided a written answer to explain how they had changed their stock mix. However, not one respondent who answered `no' about the impact of Government policy provided a written answer.

Hence, those who answered that they were definitely changing their stock, are dealers who said the Government's diesel policy is negatively affecting the used market.

"A lot of the time the consumers come in and they are quite well-researched, but they are still quite unsure. The second you go, `Ah well...', you have lost all credibility."

"It is quite a big training piece that our manufacturer has carried out. It is starting to pay off, but it is only ever as good as your sales force," concluded Godbold.

One dealer questioned by CarGurus summed up the

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Conclusion

by Wendy Harris, Vice President, European Sales, CarGurus

It's clear that the challenges dealers are facing are split into two main categories. First, there are factors which are out of their control, such as Brexit and the ensuing wider economic uncertainty. Second, there are elements where they have direct control and can adapt their business strategies and operations accordingly.

Used car dealers indicate that stock will continue to be a major pressure point in 2019. This relates to availability, quality, and the right mix of powertrains, with EVs playing an increased role. This will be even more pronounced amongst independents as OEMs look to keep even tighter control on stock.

In addition, the continued uncertainty of Brexit and the fears of interest rate rises remains the background noise to the market in 2019. The net effect is a continued squeeze on margins. As a result, investments from stock mix to new digital tools or products will all need to stand up to greater scrutiny and ROI analysis.

What is clear is that progressively-minded dealers are both resilient to the challenges and open to embracing change by adapting to consumer buying habits.

Thank you to our CarGurus Dealer Council members and all of the dealers who contributed to our first One Voice report, without whom this level of insight would not have been possible.

About the CarGurus One Voice Report

20 dealers across franchise, independents, and supermarkets gathered for the annual CarGurus Dealer Executive Council in the Corinthia Hotel in London.

To summarise how the report was created:

A Q&A session was held at the CarGurus Dealer Council meeting in November 2018 to explore the key challenges and opportunities facing the used car and van market.

The CarGurus Dealer Council comprises 20 members of the UK used car and van market. The council takes place in the fourth quarter every year.

Following the Dealer Council, a survey was shaped around the feedback and shared with the CarGurus dealer community of over 7,000 dealers. The survey was open for 14 days to complete.

423 used car retailers responded to the survey. 11.8% franchised 85.8% independent 2.4% used car supermarket

The inaugural CarGurus One Voice report analyses the feedback from the Dealer Council meeting and the survey results.

CarGurus | One Voice Report 2019 | dealercentre.cargurus.co.uk | 8 ? 2019 CarGurus, Inc., All Rights Reserved

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