Older Car Trends

Facing the Financial Future

Start Date: 2/5/2008

Extensive media coverage of the economic outlook has left many of us feeling slightly overwhelmed and perhaps a little depressed. Dealers would love the press headlines detailing declining house prices and a rapidly increasing cost of living to go away but, as that is not possible, they must evolve new strategies to deal with the ever-changing concerns of the buying public.

Experts assure us that we are still nowhere near the eye of the impending recessionary storm, so now is not the time to ignore the headlines and snort derisively about what some are already calling the “so-called credit crunch”. It’s real, it’s happening, but is it ultimately going to be bad news for business?

The cheap money that has now all but disappeared had its pros and cons, and we are all familiar with what happened to house prices while money was cheap: prices went through the roof. Consumers began to feel more affluent in their increasingly valuable properties and wanted to spend more of this newly arrived wealth. This spending fuelled further house prices rises, and increased personal borrowing secured against property on both sides of the Atlantic.

Eventually, however, the basic cost of borrowing money between banks had to rise, as it is doing now. This has returned an air of reality to the housing market and prices are cooling. However, the increased inter-bank rates have pushed increased borrowing costs through to the public, and household budgets are tightening. Factor in increasingly expensive energy, affecting prices for everything from gas to bananas, and it is easy to see how people are becoming slightly bewildered by the tidal wave of negative information engulfing them.

As customer concerns change, so too must the focus of any business intent on survival in a trading landscape which is changing on an almost daily basis. Many dealers have been implementing change with encouraging results. Stock profiles are changing to meet customer demand, and cheap retail stock, in itself, is no longer enough to make dealers buy; it’s no good having the best example of a big petrol off-roader, purchased at a low price, if nobody wants to buy it. Dealers need to work hard to identify the strong sellers in their area and chase the best examples at reasonable prices.

Having made the effort and got the right stock, it stands to reason that cars must be presented and marketed as effectively as possible. Glass’s Stock Profile Intelligence product is of great benefit in understanding how dealer stock stacks up against local competition, but marketing is not just about advertising. A key facet of marketing is sales, and good salesmanship should forever be the focal point within the dealership strategy.

What drives car sales is consumer confidence. Confident consumers will spend money, and lots of it. Less confident consumers find it more comfortable to sit on their hands and consider their position, rather than sign on the dotted line. In the emerging economic climate, the major challenge for dealerships will be to lift consumer confidence to the point where buyers will part with their carefully guarded cash, and here, dealers have a range of options open to them.

The obvious first step is to be confident oneself, and the key to confidence is education. An effective seller will be very aware of the importance of qualifying the needs of their consumer, and using the information gained in qualification to quickly identify the optimum combination of product and approach to secure a sale. Confidence allows sellers to communicate easily and effectively, supplying accurate, honest answers to questions from buyers. Dealers must keep abreast of market conditions, and offer useful solutions to buyer concerns.

The principal factor that will drive retail car sales in the next 12 to 18 months is the mortgage market, and dealers should keep closely in touch with how house buyers are funding the roof over their heads. All car prices come from remaining disposable income after the mortgage and household bills are paid, so without an understanding of concerns in this area, effective communication is lost. Financial status is now an increasingly important factor in customer qualification, as lenders concentrate on low-risk borrowing, so an early conversation aimed at understanding a buyer’s financial position is important in the sales process.

As banks tighten their lending, and consumer borrowing against household equity declines, dealer finance has a good opportunity to win business back from other funding sources. Therefore, it is imperative that dealers ensure they are fully aware of the lending options open to their customers, and that these options are presented effectively as part of the sales process. Similarly, lenders should ensure that they are offering dealers the maximum level of support at point of sale, and providing as much training as is required to ensure that dealers are presenting their ownership packages in the best possible light.

There is no doubt that the next two years will prove challenging for dealers of both older and newer cars, but there is also no doubt that what we are looking at is an opportunity to develop business in areas other than straight cash sales. F&I income will be an increasingly important constituent of bottom line earnings in the months ahead, and dealers should ensure they are fully conversant with what their lending partners have on offer. The key message is to seize every sales opportunity, as they are bound to become fewer in the months ahead.

Market Trend

Auction audiences have been steadily building since the start of April, more because of the improving weather than any defiance of the economic jitters; as the weather gets better so more people attend the general sales. It is increasingly noticeable that many of those active at auction are foreign nationals now resident in the UK. Not only is it impressive that the fast-paced patter of the auctioneer is no deterrent to those whose first language is not English, it is also impressive just how many cars some of these buyers can get through in the course of a week. Much of this uptake represents undesirable stock for many independent dealers, such as average condition older BMW 3 and 5-series. These buyers therefore form part of a useful disposal channel for otherwise hard to sell main dealer part exchanges.

Most independent dealers report average retail traffic for the time of year, with levels broadly similar to last year. Some seem slightly surprised at this, given the talk of an economic slowdown, but then older cars represent good value for money, as they are being viewed in a more positive light. Some dealers report surprisingly high prices for very low-mileage examples of older cars: £1200 for a 29k mile 1998 Rover 416i for example, with plenty of phone calls coming via Auto Trader about such cars. While such results are quite a bit higher than some would expect, £1200 is not a lot of money in the great scheme of things.

Reports from the trade suggest that exaggerated descriptions remain rife at the older end of the market, with some dealers failing to honestly describe a vehicle. Not only does this alienate customers, it also leaves the dealer open to prosecution, so sellers should be very careful about how they advertise cars in average condition. Sellers should also keep their ads up to date, as nothing aggravates buyers more than turning up to view a vehicle which has either been sold or perhaps never existed in the first place – the old trade tactic of advertising what everyone wants but no one has wins no friends.

What does win friends and deals is buying the right stock and selling it at the right price. Plenty of cars are sold for the full asking price every day, and deservedly so. Customers know what they like, and how they like to be treated, and if dealers can supply the right combination of both, then they richly deserve a healthy profit.

Buying patterns at auction have met expectations, with small efficient cars sought after, and large gas-guzzlers suffering from an almost total absence of demand. VW Polo and Toyota Starlet remain the pick of the small car buyer, and prices for both have been into Guide. Fiat Punto is another car that has enjoyed selling prices into Guide, while Ford Fiesta, though still a great retail prospect, has been a little cheaper than expected over the last few weeks.

The benchmark for the lower medium sector remains VW Golf and Toyota Corolla territory, and both cars are always great sellers when presented in ready to retail condition. Corolla is rarely seen at auction, as many owners will sell the cars on to friends and family when the time comes to change, but when a Corolla is seen at open sale it is viewed as a very desirable buy.

Upper medium cars, whilst not in huge demand, still constitute quite a busy section of the market, and the high numbers of Renault Laguna, Peugeot 406 and Rover 75 seen at auction in the past few weeks have all found buyers, though often behind Guide prices. Skoda Octavia is a much rarer auction vehicle, and when that is seen in good condition, the prices are usually impressive.

There is no nice way to say that sales of large and prestige cars are suffering. As smaller cars have become better equipped, their appeal has been enhanced at the expense of larger prestige cars, and prices have closed accordingly. Whilst the recent budget increase in road tax does not directly affect older prestige cars registered before 1st March 2001, it does make them less attractive in the eyes of many buyers, with prices for Lexus, Mercedes and BMW product all in decline as a result, a situation compounded by rising fuel prices.

Similarly, large MPVs and 4x4s are fetching less money than some might have expected, with Nissan Terrano one of those taking a surprising dip in fortune over the last few weeks. One saving grace is that many Irish trade buyers, keen to take advantage of the strong euro exchange rate, have been busy snapping up large diesel off-roaders at some sales, particularly when these sales are close to the west coast. Toyota Landcruiser remains the pick of the bunch, though Isuzu Trooper is also popular at the right price, and Land Rover Discovery is experiencing a slight resurgence in demand. Quite how long this will last is anyone’s guess.

Sports and convertibles have yet to burst forth from their winter slumber, but the strong expectation is that they will not see any major lift in fortunes this year. Such cars are mainly leisure purchases, and with much big consumer spending curtailed until mortgage rates and remortgage deals have stabilised, dealers expect prices to remain somewhat subdued.

Prospects for the coming months remain patchy, but small, fuel-efficient vehicles are expected to continue their current success, particularly when marketed at affordable price points or with innovative 0% finance offers. Dealers would be well advised to liaise with their finance representative to talk about such promotions, as financial incentives should not be confined to new or late-plate cars. There is plenty of excellent condition older stock out there that would sell for very strong prices if underpinned with irresistible finance. These options must be the way forward where profit is concerned.

John Glynn
Car Editor
May 2008