Why you must focus on stock turn to manage falls in demand

There are some early signs that used car volumes are beginning to soften. The causes of this are clear to see; inflation is rising, and there are increases in both interest rates and the general cost of living. Both CAP and Auto Trader have already reported modest decreases in used car values. Similarly, BCA and Cox have reported a softening of prices and demand in used cars for March and April.

For the last two years, used car stock control and turn has not been a major concern as high demand and turnover has negated the need for excessive management focus. However, while there will be no sudden downward pressure on used car performance, we need to remind ourselves of the disciplines required to maintain volume and margin levels.

Prestige vs volume brands

There are exceptions to the current reduction in used car volumes. Premium brands are least affected as there is still strong demand for these used cars, which is coupled with restricted supply. The manufacturers of these cars have already stated that semiconductors will firstly go to their higher-end models, as these have the greater profit per unit. As such, the more mid-range, executive management versions of these cars are in short supply and high demand on the used market.

Volume brands is where depreciation will be felt the most. Brands that supply the car rental, Motability and other leasing companies are seeing an increasing number of cars for disposal as new stock becomes available. From a used car disposal perspective, these cars are a family car purchase and families are directly adversely affected by inflationary and cost of living pressures.

Depending on available funding, it may well be worth volume retailers expanding their used car offering by actively sourcing and stocking prestige brand models, while being mindful of the need to remain screen price competitive versus your local prestige brand franchisees. Avoid the trap of putting too great a margin in a prestige car just because it has a larger wholesale purchase cost. If you can turn a section of prestige stock competitively alongside your volume used cars, this will significantly help your overall profitability.

Stock turn versus PPU

As most retailers are aware, a minimum stock turn requirement is a factor of eight. In other words, 200 cars in stock requires an annual sales figure of 1600 units. For the last two years, most auto retailers have exceeded this figure comfortably.

However, as we see the market softening, there will be a requirement to address stock turn, which may initially put downward pressure on profit per unit (PPU). But this PPU pressure should not be a huge cause for concern, as you should be able to combat this with increased volumes accompanied by consumer-centric (and largely OEM-backed) finance incentives which are now beginning to surface.

YOUR ACTION PLAN

1. Volume brand franchisees need to plan now for a gradual downturn
2. Nearly-new cars are always adversely affected first – watch levels
3. 3-5 year old sector may assist challenged nearly-new PPU
4. Return to traditional stock turn disciplines
5. Premium brands will be least affected