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Dealers failing to meet their full profit potential on used car salesBack

Glass'sIt’s a competitive world in the used car sector, but despite the more positive news that the industry is predicted to grow this coming year, many dealers are still too focused on used car margins and aren’t paying enough attention to stock turn, so hampering their overall profitability.

Richard Parkin explains: “In order to maximise profitability, dealers should be focused on the profit made per forecourt space each week rather than on the margin made on a vehicle.

“Glass’s studied a basket of vehicles over the course of 2013, monitoring the trade and retail prices in each month for a three year old 36k mile example, along with the average selling days. Astonishingly the typical difference between trade and retail prices in any given month varied by as much as 25%, or around £500 for a typical “B” segment car. However, once the average time elapsed between trade purchase and retail sale was allowed for, the actual achieved gross margin showed a more consistent picture.

“Such findings reinforce our view that trade and retail guide prices need to be derived from independently moving sources of data, otherwise this true behaviour is not captured.”

A consistent margin picture across 2013 suggests that dealers are thinking about the gross margin that can be made on a vehicle acquired at trade, and adjusting their bids accordingly. However, Parkin believes that dealers are not getting the full picture.

“The gross profit realised by dealers did not appear to be influenced by the change in selling days, and so the profit a dealer could make from each forecourt space in a week was left at the mercy of the length of time it took to sell any given vehicle.

“It is clear that many dealers have not focused on selling days, possibly as a consequence of trying to hold on too long for too high a price. Not going in at the right price wastes time on the forecourt and reduces profitability; judging what the price and the hold period should be in a given locality is almost impossible without the right data.”

The chart below shows the trend in both the actual achieved gross margin and the profit per forecourt space per week for typical “B” and “D” segment cars. Notably, despite a broadly flat gross margin, the financial return on the “B” segment car to the dealer appears to have declined by around 40% over the course of 2013, from a rate of over £500 to just under £300 per forecourt space per week for a Ford Fiesta Zetec petrol as a consequence of a steady lengthening in the time needed to secure a buyer for such a car, most likely caused by the plethora of great new car deals for private buyers in that segment. By contrast and despite greater volatility, a typical “D” segment vehicle did not show the same level of decline, with a gross margin potential for a Vauxhall Insignia Exclusiv remaining around £600-£700 per week throughout 2013. However, “hidden discounting” through retail PCP deals has been less aggressive in this segment.

Blue – Ford Fiesta Zetec petrol

Green – Vauxhall Insignia Exclusiv petrol

Parkin comments: “It appears that dealers are unaware that the level of profits from certain vehicle segments has been in decline, and many have not adapted.

“This really brings into question what a dealer should be stocking; however, it will be necessary to stay ahead of the game as once enough dealers make the connection, prices and selling days will become less attractive as retail supply increases and consumer demand shifts elsewhere. Without the right data and systems, there is a real chance that the less informed dealer will be left with only the weaker opportunities.”

By Richard Parkin, Director, Valuations & Analysis, Glass’s

Posted by Sue Robinson on 06/06/2014