How dealers are adapting to a changing used car market

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.

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.

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.

Best-case scenario 

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.

Worst-case scenario

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.

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.