Showrooms' reopening gives market a much-needed boost
In this section, we provide context around recent used car market trends and news and our latest Q2 and 2021 forecasts.
The global automotive market continues to be gripped by the Covid-19 pandemic, with restrictions causing widespread disruption to retail activity and supply chains. The impact on global new car supply and registrations is having a knock-on effect on the used car sector and means we will see used car supply constraints in the coming months and years.
Disruption to overseas travel and tourism has had a huge impact on the used car industry. As a result, we’ve seen a decline in activity across the rental sector which is unsurprisingly causing financial concerns for many rental companies and forcing them to re-evaluate their business strategies. Fleets are also holding onto vehicles for longer as annual mileages plummeted for millions of company and lease car drivers. This has subsequently triggered a shortage of valuable nearly-new vehicles entering the market.
On a more positive note, Q1 2021 used car stock levels are broadly above 2020 levels. The well-documented new car supply issues, on top of changing consumer needs and behaviours, are causing retailers to prioritise their used car sales activities. However, the variance in restrictions and lockdowns across international markets makes it difficult to confidently and accurately compare Q1 2021 retail performance against 2020.
The UK used car market
The used car market has never been so important in the UK. With changing commuting habits meaning public transport has fallen out of favour, coupled with increased disposable income for some households, used cars have been able to weather the storm better than new ones.
However, used car supply and retail activity remain down, and the latest lockdown in the UK during Q1 and early April has caused further headaches for retailers. Supply constraints are not likely to improve soon and we anticipate they could last through the remainder of H1.
Optimistically, we expect a release of rental and fleet vehicles into the market at some point shortly, but this is likely to skew prices just as the market had adjusted to the post-pandemic world. With these lower mileage vehicles entering the market, the normal three-year/60k car will no longer be the standard, and we anticipate that there could be another period of price realignment as the market starts to correct and rebalance itself to account for these less well travelled vehicles.
Unsurprisingly, unit sales in Q1 are down compared to 2020 due to the latest lockdown keeping physical showrooms closed. Click-and-collect models have enabled many retailers to keep selling online throughout lockdown, but consumer uptake for this type of service has not been enough to account for the difference in lost footfall.
The reopening of showrooms in April will provide a much-needed boost for the sector and we will see an increase in activity due to some pent-up demand. But stock supply shortages will continue to affect retailers throughout Q2 until the aforementioned lower mileage supply hits the market, and therefore we do not anticipate April 2021 numbers to recover to 2019 levels.
While we know the supply will come back, the question is when will it be, and how much will be available? We assume rental companies will not flood the market with all their product at once and we hope for a situation where there is not an over-supply. The one case where this would happen would be if a large rental company goes under.
2021 used car forecasts
As with our new car forecasts, several scenarios have been outlined for this year. There are best, mid and worst-case scenarios, with the middle ground representing the most likely outcome. As ever, there are significant, multiple, and complex variables at play, so dealers are advised to prepare for all possible contingencies.
Used car forecast - quarter focus 2020-2021
Source: Cox Automotive & Grant Thornton
Best-case scenario (unlikely)
In our best-case scenario, we see the UK market end 2021 with 7.27 million used car transactions. This represents a 2.7% (189,130) increase on our November 2020 forecast in our most recent Insight Report. In this scenario, we forecast 1.82 million used car transactions in Q1 2021 (down -2.8% on 2001-2019 pre-pandemic levels), and 1.89 million in Q2 2021 (down -1.5% on 2001-2019 pre-pandemic levels).
While unlikely, this scenario assumes that the post-lockdown market recovers to around 2001-2019 average levels of activity with significant consumer demand. This demand would be supported by a healthy new car market and the return of end-of-contract vehicles from the rental and leasing sector.
Mid-case scenario (most likely)
The most likely scenario, given everything we know at the time of writing, sees the year end on 6.81 million used car transactions, a 2.3% (151,428) increase on our November 2020 forecast. In this scenario, we forecast 1.70 million used car transactions in Q1 2021 (down -9.3% on 2001-2019 pre-pandemic levels), and 1.75 million in Q2 2021 (down -8.7% on 2001-2019 pre-pandemic levels).
In this scenario, we see the fleet and rental sectors recover well providing much needed nearly-new product into the market. This will be a clear sign of the motor retail sector’s resilience through the adoption of omnichannel and digital retailing.
Worst-case scenario (unlikely)
Our worst case-scenario, although unlikely, sees the year-end on 6.50 million used car transactions, a 1.4% (91,097) increase on our November 2020 forecast. In this scenario, we forecast 1.58 million used car transactions in Q1 2021 (down -15.6% on 2001-2019 pre-pandemic levels), and 1.70 million in Q2 2021 (down -11.4% on 2001-2019 pre-pandemic levels).
For this scenario to play out, we would need to see a weak economy and increased debt and unemployment following the lifting of lockdown restrictions. There would be no significant pent-up demand in April and May leading to weak retail activity. We would also see a considerable supply shortage through the remarketing, defleet, and part-exchange channels.
Used car annual forecast
Source: Cox Automotive & Grant Thornton
Covid has undoubtedly had a huge impact on the UK used car market, with a -1,182,146 shortfall in used car transactions in 2020 compared to 2019. Thankfully the sector adapted to new ways of working remarkably quickly and was able to recover somewhat by the end of the year. The fact that the first national lockdown accounted for 93% of the deficit proves the sector’s resilience. While we await final Q1 2021 figures, it’s clear that the latest lockdown measures have caused another blow to the sector.
We do expect some pent-up demand to boost the sector in April as physical showrooms reopen, but not to the same extent as we saw on the back of the first lockdown last summer. In addition new car supply constraints will continue to impact the used sector for the coming months and years.
The Government’s financial support has enabled businesses to stay afloat during tough lockdown periods, but it is now potentially masking the financial exposure much of the sector is facing. The short and long-term economic and social impact of the EU exit deal is yet to be seen as the situation was masked in Q1 with lockdown and the relaxation of some arrangements.
What remains clear is that the used car market will be incredibly competitive over the remainder of the year. Whether that is enticing consumers back to the physical showrooms, sourcing stock, or setting prices, retailers will be required to adapt quickly.
Stock management and ROI utilisation will be fundamental to maximise profitability, particularly for independent dealers where margins are so tight. As larger disruptors and consolidated businesses continue to secure what little stock is out there, independent dealers will need to review stock purchasing strategies and spread supply routes. These disruptors have benefitted from the Covid market, but the competition will be intense as the market fully reopens.
Dealer predictions for 2021
A January 2021 Cox Automotive dealer sentiment survey revealed that dealers are now less optimistic about the outlook for 2021 than previously reported in the 2020 Insight Report, but over half (54%) still expect used car transactions to increase, in-line with our forecasts. Compared to a similar survey in Q3 2020 where 64% of dealers surveyed said they expected transactions to increase, it shows expectations have cooled slightly due to the latest lockdown measures, but overall confidence remains that the year will end stronger than 2020.
Although a majority anticipate an increase in used car transactions, 82% felt supply would either remain the same as 2020 or decline further. With reduced supply and increased transactions, it could be anticipated that used car values would rise, and indeed a third (33%) of dealers surveyed expect wholesale values to rise in the remainder of 2021, putting additional pressures on both retail prices and margins.
The US perspective
“The second quarter, which is typically the biggest volume quarter of the year, is poised for extraordinary demand fuelled by stimulus and improving consumer sentiment, which is buoyed by the vaccination rollout. The principal challenge to sales growth in the quarter is limited supply across new, used, and wholesale inventories. As a result, we are expecting to see record used vehicle values for the quarter.”
Jonathan Smoke, Chief Economist, Cox Automotive US