4 Articles - An Evolving Used Car Market
Article three from our Linkedin Series "A Disrupted Future in Retail Automotive"
Retail Automotive is in a period of disruption arguably unlike any before. The transition of franchised dealers to "omni-channel" agents, the introduction of connected, autonomous, shared and electric technologies ("CASE") and evolution of alternative mobility-as-a-service ("MaaS") access models all obscure the future of manufacturers, dealers, service providers and their respective investors.
Used car superstores, virtual "on-line only" dealers and even franchised dealer groups are revolutionising the marketing of used cars (and particularly those of under 5-years).
Long gone is the negatively stereotyped used car "hustler" image. Instead, sellers take a much more professional approach focussed on customer journey and an enhanced on-line and on-forecourt experience.
To succeed in this new paradigm, successful retailers must hold two resources at the forefront:
Enhanced customer experience and
Secure access to in-demand stock at attractive stand-in values.
A Brief History of Used Car Retail
Used Car Superstores - Following the lead of Carmax in the US, the UK now presents a number of very successful independent superstores. Publicly-traded Motorpoint leads a pack of dedicated used car dealer groups with no new-car sales whatsoever.
In general, these superstores present large selections of in-demand cars at attractive "no haggle" pricing. Most feature networks of quite "bare bones" forecourts and simple on-line presentation of vehicles with clear pricing and available finance. As noted in an earlier article on "Investor Appetite for Retail Automotive", Motorpoint trades at double and even triple the revenue and EBITDA multiples of neighbouring franchised dealers.
Virtual Dealers - Recent valuation indications for newly-founded virtual dealers Cazoo and Cinch have stunned the industry. Following the lead of Carvana in the US, these virtual dealers offer used cars in an "on-line" only environment.
Both entities have spent significant sums in quickly building brand-recognition throughout the Covid pandemic. Both feature extensive broadcast advertising and significant professional sport sponsorships.
With an eye towards the stunning valuations generated for virtual dealer models, Cazoo and Cinch are now joined by Carzam in the UK and European Autohero and Driverama.
Used Car Sales at Franchised Dealers - Along with new car sales and after-sales service, used car sales are a key part of franchised dealer's business models. Taking note of the strong performance of independent superstores and virtual dealers, franchised dealers are starting to develop or acquire their own comparable operations.
While Arnold Clark is the perennial used car specialist selling well over 150,000 used cars/year, other franchised dealer groups like Sytner and Pendragon have invested in additional "branded" operations like CarShop and Car Store respectively.
Most recently, Stellantis, maker of Vauxhall, Citroen, Peugeot, DS, Fiat and Alfa Romeo has launched the SPOTiCAR platform on which consumers can view and buy their dealers' approved used inventory.
Simplified Stocking Model
While the revolution in used car marketing is often attributed to an enhanced eCommerce customer journey, old fashioned access to in-demand stock remains a critical resource.
Approximately 25% of the UK's 8 million annual used car sales are for vehicle of less-than-5-years. These roughly 2 million used cars come fairly equally from private and fleet owners. The top 135 franchised dealer groups retail about 60% of these with the rest going through superstores, virtual dealers and other independent used car sellers.
As shown at right, stock "falls" to franchised and independent dealers through two parallel channels. The first million or so go to franchised dealers through the "direct" route consisting of:
Part-exchange vehicles meeting the new car dealer's stock criteria and
Fleet vehicles repurchased under manufacture buy-back "programs".
To satisfy their outstanding requirement, franchised dealers must then compete with superstores, virtual dealers and others for generally older and slightly poorer condition cars in the largely auction-focused open "market".
Franchised dealers' used car operations therefore enjoy a stocking advantage from their franchise relationship with the OEM. To maintain supply in their scale operations, superstores and virtual dealers must work that much harder to develop proprietary relationships with trade suppliers outside of the auction route.
The introduction of used car superstores and virtual dealers has revolutionised used car sales & marketing. In enhancing stock presentation, pricing transparency and an enhanced customer journey, our new corps of used car retailers earn better trading results translating into higher valuations (quite clearly for pure-play Motorpoint).
To succeed, franchised and independent used car retailers will need to continue developing eCommerce and on-forecourt resources, but they key will remain access to large selections of in-demand stock.
Grace Automotive can help franchised dealers, independent superstores and virtual dealers evaluate their used car stocking resources and undertake the journey to success in a disrupted retail automotive sector.