Challenges in Stocking Used Car Superstores
It's a sellers’ market. The covid-pandemic and silicon chip shortage has hugely curtailed new car supply. As a result, buyers look to the nearly-new and used markets forcing un-precedented price rises in both markets. Constrained supply should persist for at least the intermediate term. The longer it persists, the fewer used cars will be available.
At the same time, we're enjoying a revolution in used car marketing. Used car superstores (e.g. Motorpoint, CarShop, etc.) and virtual dealerships like Cazoo, Cinch and Carzam hugely improve the customers buying experience by enhancing the on-line and on-forecourt presentation of:
A large selection of "in-demand" cars
In reliably "retail ready" condition
At attractive pricing with available finance.
While superstores excel at cost-efficiently attracting motivated buyers, they must equally demonstrate their ability to effectively buy stock. Buying stock at the scale required by superstores isn't easy and with growth, the largely auction-based market mechanism may not be sufficient. For those exciting growth models of used car retail, a closer and more pragmatic relationship with volume sellers may become a critical resource.
A Simplified Stocking Model
Demand - The largest 200 franchised dealers, superstores and independent used car dealers represent nearly 25% of total used car transactions in the UK and nearly all of the market for cars under 5-years-old. By considering daily stock level and estimating stock turns, the total stocking demand of these 200 dealers is something less than 2 million cars.
Supply - Recent new-car sales drive supply of used-cars under 5-years old (i.e. the sort of used cars in which superstores and franchised dealers specialise). Prior to the pandemic-stricken 2020, the UK bought roughly 2.5 million new-cars/year. By estimating the rates by which consumers and fleet customers sell the cars they've bought from new, those new-car sales return about 2 million <5yr used-cars to the market annually.
Distribution - As sketched on the following page, retailers access supply via one of two channels:
Private sellers generally offer used cars as part-exchange against the purchase of a new car. Accepting dealers
retain those meeting their stock criteria in used-car inventory and
wholesale the rest to market.
Fleet sellers either
return cars to franchised dealers under manufacturers’ “buy-back” programs or
take their “risk” fleet directly to market.
Therefore (and as shown below), franchised dealers enjoy “first crack” at the estimated 700 thousand or so cars offered in part-exchange (and meeting the accepting dealers' stocking criteria) or through manufacturers' programs. Thereafter, franchised dealers, superstores and independent used car dealers must source their remaining stock requirement of about 1.0 million cars from a market supply of about 1.2 million cars.
Conclusion - Procurement at the scale targeted by superstores isn't easy. Independent superstores already miss out on that first batch of part-exchange and "program" cars that naturally flow to franchised dealers. To secure their supply requirement of about 1 million cars, franchised dealers, superstores and independent used car dealers must compete in an open market of only about 1.2 million cars.
Furthermore, in a used car market squeezed by under-production in the new car market (recall the supply problems brought about by Covid shutdowns and a dearth of silicone chips), scarcity pushes pricing up beyond anything wholesale buyers and sellers have experienced before.
Estimating the annual stock demand of a few selected used car dealers and superstores helps illustrate the challenge. Exciting growth models like Cinch, Motorpoint, Cazoo and Carzam must compete in the open market to satisfy their demand for tens of thousands of good used cars.
For independents, relying on the largely auction focussed market to satisfy volume, specification and condition requirements may not be sufficient. For those exciting growth models of used car retail, a closer and more pragmatic relationship with volume sellers may become a critical resource.