The UK motor retail sector is mid-way through the traditionally quieter months of July and August, and ahead of the ’68 new plate peak in September, stock funding software experts Sword Apak anticipate a slight softening in demand for used stock. Dealers will begin to manage the remarketing cycle and look to reduce the number of stocking days and improve their ‘time to cash’.
It is a move that Executive Vice President James Powell sees as a logical approach to improving margins, noting; “The frequent use of the expression ‘unfavourable headwinds’ connected to the broader economy cannot be ignored, but the greater value in used cars perceived by consumers will, we believe, continue to see demand maintained. What we are seeing are signs that dealers are working to reduce stocking days by bringing product to market quicker with a greater focus on stock turn to help improve margins.”
Economic and Social Drivers
As the Brexit negotiations continue and the deadline of ‘Brexit Day’ draws nearer, there have been signs of nervousness to whether an appropriate trade agreement will be made. Reactions from the motor manufacturing sector have made prominent headlines in this regard. Nevertheless, UK consumers have continued to demonstrate resilience. Consumer confidence rose in May according to the latest GfK index, albeit demand for major purchases fell slightly.
Following the latest Monetary Policy Committee (MPC) meeting, the Bank of England signalled that an August rate rise is now more likely than previously thought, reporting that the poor economic growth figures of the first three months of the year were likely to prove "temporary" and that the speed of growth would pick up.
What is evident is that lenders are tightening their approach to credit and perhaps this, alongside a rate increase could take some of the edge off consumer demand, even if the steady wage growth continues.
One area that we expected to see impact the automotive retailing landscape, will be with the Financial Conduct Authority’s (FCA) review of motor finance. Their report was scheduled for the end of September, with potential implications on finance commission, due to it being amongst the areas under review. It is now widely believed that this review is likely to be delayed until the end of the year. However, concerns for dealers on finance income moving forward may, and arguably should, linger.
Used Car Activity Trends YTD
A clear theme in the year to date has been the move by major dealer groups into the used car market. It is a move that has seen strong demand for stock, especially in the younger used stock sector. There can be little question that this activity has squeezed some smaller independent retailers, who have had to adjust their stocking mix towards older stock.
Any moderation of buying demand by the major retailers will invariably be back-filled by the independents and this, in turn, is likely to see older, or less desirable stock becoming harder to move.
The Impact of Clean Air Regulation
To date, falls in new diesel sales has had a self-regulating impact upon values and demand. While there can be no question that more Clean Air initiatives across major UK cities will emerge, they are not here yet and for many car users, diesel continues to make sense. It seems the UK’s capacity to establish the necessary infrastructure for EVs and concerns about ‘range anxiety’ will see a long tail for diesel vehicles, especially in more rural communities.
Residual Values (RV) and Guaranteed Minimum Future Values (GMFV)
There has been a softening in RVs and GMFVs and the move by OEMs to embrace Personal Contract Hire (PCH) finance has helped to mitigate some of the risks engrained into the setting of future values, in what has been a slowing market.
In combination with the tightening of credit, the outlook for RVs appears to be softening, something that may hamper sales and potentially increase monthly consumer payments. This short-term impact must be seen in context because it will assist in supporting a positive equity position for consumers and thereby facilitate the change cycle in the future. However, in a classically short-term industry, this benefit may seem to be a shallow one.
Powell summarises the outlook for the used market as being ‘intriguing’, concluding:
“The Brexit dialogue continues to take us into uncharted waters. Overlay this with the wider disruption of increasing digitisation and potentially more consumer credit regulation change, interest rises and tighter credit conditions and it would be easy to be negative. For me, the outlook of Q3 is one of cautious optimism that the market will remain broadly stable.
“UK consumers continue to demonstrate resolve, finance remains affordable and the upholding of steady wage growth, along with the Bank of England’s expectation that the economy overall will pick up.
“We do expect some subtle changes in the market; dealer margins are continuing to come under pressure. Consequently, we anticipate that dealers will exercise a closer review of cost control with stock funding as a clear area for action; we also think that vehicle prices might move slowly upwards in a move to improve margins and offset any potential declines in finance commission that may emerge in the months ahead. It is a move that could be balanced for the consumer by lower interest rate charges.
“So overall, all staying fairly steady for used car sales in Q3, with the likelihood of a modest softening in activity and an ongoing review of possible negative headwinds. However, there are huge areas of interest and entrepreneurialism becoming evident as the industry ramps up its readiness to react.”