How reduced new car earnings can improve used car PPU

Latest figures from the SMMT revealed that private purchases of new cars in August 2023 was the lowest number in any August for a decade.

In this column, we have often discussed how growing confusion between EV and ICE vehicles causes buyers to wait and see in terms of their new car purchase. The purchase price of EVs is generally often higher that an ICE equivalent, which in these challenging financial times is bound to lead to suppressed demand from private buyers.

Some of the slack has been taken up by fleet deals. However, if new car sales figures are to increase towards the heady days of 2.4 million per annum, there now needs to be a concerted effort to win back those private new car buyers.

Such new car challenges will inevitably put increasing pressure on used car availability, resulting in continued and overall upward pressure on used car acquisition prices.

However, a slightly different operating model towards new car sales could, by association, assist with used car supply.

Lower margin volumes can increase overall profitability

We are already seeing 0% finance and zero deposit offers on EVs in order to enhance demand. These offers have been around for years on ICE cars, and it seems appropriate to introduce them into the EV sector. They can offer the win–win scenario of selling a new car and, perhaps of even greater value, create a used car part-exchange.

As such, the nil- or low-margin new car sale should not cloud the issue of feeding the used car supply chain, when the latter is of greater concern to the sector.

What’s more, if your franchise is subject to an agency agreement, then the new car profit per unit (PPU) is technically of no concern to your business, as you will be on a fixed fee arrangement irrespective of the PPU to the OEM.

If your franchise is not subject to an agency agreement, then you may still wish to focus on the volume of new car sales at a low margin, as the volume of new car sales will be reflected in your volume bonus from your respective franchise OEM.

Traditionally, part exchange vehicles are the best source of used car supply, just one reason being that you can road test the car prior to transaction, unlike auctions or online purchases, which offer no such facility.

Building your aftersales revenue and customer database

As most private new car buyers make a purchase within a 45-minute drive time of their home address, there is a distinct possibility that those same customers will have their new car serviced at the supplying dealer, especially whilst the car is under manufacturer warranty.

As such, although initial PPU on sales might be lower, the additional service, aftersales and warranty work will be incremental to your business. At the same time, it will increase your customer database for future new and indeed used car sales opportunities.

YOUR ACTION PLAN

• View the overall opportunity, not just new car sales figures
• An agency model agreement removes PPU concerns as it’s a fixed fee
• Consider the volume bonus opportunity
• Increasing new car sales volumes will increase workshop activity and revenue
• Part exchanges are traditionally the best conduit for profitability