How dealers are adapting to a changing used car market
In this section we discuss the primary factors driving the current used car market and share our latest Q3 and 2021 forecasts.
The used car market has arguably never had a greater influence on the overall health of the automotive industry than now. Multiple factors have converged in the wake of the pandemic leading to record demand at almost every price point. The headlines are all about the parts shortages on new vehicle production and how this is pushing increasing numbers of buyers into the used market, but there are other factors too – from commuters switching away from public transport to those with money to splash after a largely inactive year. Dealers are enjoying an uplift in activity, their rapid adoption of omnichannel practices have increased the level and quality of enquiries and in certain instances, they’re more profitable thanks to the rising retail prices.
But this is a double-edged sword. Auto Trader has reported a 39.1% increase in demand compared to 2019 since showrooms reopened, and retail prices are rising as a result. But while the appetite to spend is certainly welcome, the supply simply isn’t there to cater for current levels. Many fleet users were already extending their agreements to reflect their reduced mileage over the last 18 months, stemming the usually reliable flow of quality used vehicles into the wholesale market.
Manufacturers didn't register enough of their own vehicles in 2020 to provide a good source or nearly new inventory and lack of business travel and visitors last year has reduced rental volumes into the market. This has now been compounded by the supply chain issues discussed elsewhere, hindering the volume of inbound used vehicles further still.
Until supply problems are fixed, this trend will likely continue.
New car market the cause for used supply shortages
Ultimately, the lack of supply in the used sector is a consequence of the struggles manufacturers are facing in producing new vehicles. The effects are being felt most by fleet and rental market companies who, in the face of very limited new product, are extending contracts and continuing to utilise the vehicles they already have rather than apply their typical vehicle replacement strategies. While some companies have received new vehicles, increased lead times and continual lack of supply has slowed their decisions to move older fleet vehicles on to remarketers, resulting in an all-time low supply of in-demand nearly new stock in the wholesale market.
There are also additional SMR (service, maintenance and repair) costs from stocking older vehicles that risk of further denting margins. However, despite higher maintenance and preparation costs with older vehicles, there are opportunities.
The impact on the wholesale market is clear to see. This lack of nearly new stock means volumes are lower overall, and those vehicles coming through are typically older and carrying more miles. Yet at the same time, average prices are rising as dealers compete for what little stock is available.
Inevitably this will squeeze dealer margins, particularly if retail prices don’t rise at the same fast rate as wholesale, and where remedial work is required to bring stock up to retail ready standards. The dealer network is reacting by reviewing its retail pricing position frequently – daily in many cases - to keep up with the wholesale market, but there’s only so far dealers can go before consumers push back.
It raises the question of how far can used prices rise? The jury is out, but cap hpi is reporting significant numbers of used vehicles with values above the cost of new. The situation is clearly unsustainable so realignments will need to happen at some point.
We don’t expect new car supply shortages to be resolved until H1 2022, so the knock-on effects in the used car market will be around for some time yet. While trade price realignments are expected, we are unlikely to see a flood of vehicles into the used market so the prospect of a significant drop in values is small. However, we must be careful that this doesn't turn into a bubble, and keep fingers crossed that as we go into the autumn we remain free of restrictions and that the economy bounces back as support programmes are removed.
Changing dealer habits
To navigate the current headwinds, used car dealers are having to lean on all their experience and knowledge, as well as the data that’s available to them. One consequence of the lack of ex-fleet volume is that dealers are holding onto more part-exchanges to help meet retail demand.
A recent Cox Automotive dealer sentiment survey revealed that 81% of dealers have increased the proportion of part-exchanges they retain for retail. This is further impacting wholesale supply and driving competition for the stock that’s available. Two-fifths (41%) expect this change to continue even when supply improves, suggesting that some dealers’ habits have changed permanently.
Our survey also revealed that 96% of dealers have changed their stock profile strategy as a direct result of the pandemic and supply constraints. Dealers are adapting their stock profiles, whether that’s by increasing the age and mileage of the stock they hold, or in some cases stocking brands they wouldn’t normally.
Despite the headwinds, used car dealers are proving to be agile and adaptable in an ever-changing situation. Days in stock for many are as low as 22 days compared to an average of 59.7 and a benchmark of 45 days, highlighting both the level of retail demand and dealers’ ability to meet it at all costs.
The used van market
“Throughout Q2, official and unofficial contract extensions continued to impact the corporate fleet sector. Defleet levels were down 19% versus the same period in 2019. Buyer activity was the strongest on record, with 60% more active buyers compared to the pre-pandemic marketplace. In recent months, the growing supply and demand crisis saw Manheim Auction Services post a new record quarterly average selling price in Q2, itself a 5% increase over a very strong first quarter. The outlook for Q3 suggests a constriction of new van supply will lead to a further 10% reduction in wholesale van volumes. Used van retailers will typically remain focused on cash flow as they encounter even more intense stock sourcing challenges. Summer seasonality was observed in Q2 and will be with us in this next quarter. Vendors must focus closely on all duplicate, damaged, and high mileage stock to ensure accurate sale pricing and leading sale performances”
Matthew Davock, Director of Commercial Vehicles, Manheim Auction Services
2021 used car forecasts
As with our new car forecasts, several scenarios have been outlined for this year. We give 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. As with new car, we see supply constraining the market with lack of choice and high retail prices pushing consumers to defer purchasers.
Used car forecast - quarter focus 2020-2021
Source: Cox Automotive & Grant Thornton
Our best-case scenario for Q3 sees the quarter end on 1,924,268 used car sales, in line with the 2000-2019 average. We’ve also adjusted our full-year 2021 forecast downwards to 7,136,985 used car sales, -1.9% (-137,017) versus our issue 1 forecast (April 2021) and -3.2% compared to the 2000-2019 average.
This scenario assumes that current levels of demand will continue throughout the summer, and crucially that used car supply into the wholesale market will improve following an increase in new car production and therefore greater volumes of fleet and rental stock entering the market.
Mid-case scenario (most likely)
Our mid-case scenario for Q3 sees the quarter end on 1,828,054 used car sales, down -5% on the 2000-2019 average. We’ve also adjusted our full-year 2021 forecast downwards to 6,766,250 used car sales, -0.6% (-40,414) versus our April forecast and -8.3% compared to the 2000-2019 average.
This scenario assumes a slight drop off in retail demand as is currently reported, but generally modest demand will remain throughout the summer. The current supply issues we are seeing will remain throughout the summer and likely for the remainder of the year.
Our worst-case scenario for Q3 sees the quarter end on 1,693,355 used car sales, down -12% on the 2000-2019 average. We’ve also adjusted our full-year 2021 forecast downwards to 6,501,445 used car sales, -0.1% (-3,451) versus our April forecast and -11.9% compared to the 2000-2019 average.
This scenario assumes that the current supply issues remain or worsen, and we see a dip in retail demand as consumer spending moves elsewhere during the summer months.
Used car annual forecast
Source: Cox Automotive & Grant Thornton
With over one million registrations already lost because of the pandemic, the UK used car market is facing a long road to recovery with no early end in sight to new car supply disruption.
Q4 will be the indicator as to whether the balance between supply and demand is stabilising. By then, the strength of the economy will be clearer as the furlough scheme comes to an end and consumer and business confidence are understood. But that means the industry faces a period of uncertainty over the coming months, and we can’t be complacent about the ongoing threat of Covid-19 and the potential for new restrictions as we head into winter.
If some restrictions remain, particularly around overseas travel, then this could help to maintain the current levels of used car demand throughout Q3 as those with the savings and income look to spend money elsewhere. All in all, dealers could see strong sales throughout the third quarter.
There is room for further price increases in the coming months, but concerns remain those values could see a decline and return to normal seasonality as the sector experienced mid-2019. However, the evidence demonstrates that with no floods of stock on the horizon, this is unlikely. Additionally, wholesale has seen a two-tier market with older vehicles not experiencing the same level of consumer demand and so prices haven’t risen here to the same degree.
The US perspective
“The used car market in the US saw record sales and pricing in the spring. The spring saw typical seasonal strength from the tax refund season, combined with stimulus and surging consumer spending related to vaccinations, reduced restrictions, travel, and other activity starting to return to normal. April set records for used vehicle sales in the retail market, and surging demand sent supply lower in retail and wholesale. Wholesale used vehicle values saw an unprecedented 21-week increase in prices that ended in June. As spring ended, the frenzied sales pace had slowed into a pattern like 2019, which was a record setting year for used retail sales. The summer should continue to see strength in the used market, but vehicle values should return to a more predictable depreciation pattern”
Jonathan Smoke, Chief Economist, Cox Automotive Inc