The six factors that will guide the used car market in 2022 and beyond

Used cars have been the driving force behind the frankly amazing profitability from franchised motor retailers during 2021. Whilst we were in the depths of the first lockdown in 2020 I predicted that used cars would have a very strong rebound once people resumed movement, based on the experience I had witnessed from China. The strength of used vehicle performance has, frankly, massively surpassed my expectations.

When we exit the Covid pandemic the used car industry will emerge a very different business compared to how it was when we entered it. It is worth just reviewing the factors that have driven the current profitability as we assess which will prove permanent shifts.

1. Shortage of supply

Used car supply has historically come from a number of areas. There are the “practically brand new” used cars, which are registered by retailers or brands in order to hit targets or meet aspirations. Even prior to the current chip shortage this source of used cars had significantly reduced, with very low levels of month-end tactical registrations and nearly new used cars. This has been exacerbated by current new car shortages to lead to a situation where currently, of the 415,000 cars currently advertised on Auto Trader, less than 14,000 are sub-100 miles. In previous years, with September having just passed, this figure could have been 10 times larger.

The new car shortage has also had a knock-on effect on other sources of used car supply. Customers have been extending their leases as they have not been able to source a suitable replacement vehicle and the number of vehicles being remarketed by lease and daily rental companies has massively decreased as a result.

A key factor as to where the used car market will settle post-pandemic, will be whether the supply of vehicles into the used car market reverts back to historic levels, or whether the new car manufacturers can limit production to maintain this profitability sweet-spot for both new and used cars.

2. Strengthened demand

Compounding the restricted supply has been an increase in demand from consumers. We are not only seeing a demand for used cars as a result of customers not being able to buy new cars, but we have seen a wider demand increase resulting from a desire to move away from public to private transport to limit Covid risk. Whilst all motor vehicle use is at 96% of pre-pandemic levels, with private car use at 91%, bus use is around 80%, train use around 70% and tube use is around 60% of their comparative levels in March 2020.

Demand has further been strengthened by customers having boosted their savings through a lack of spending on hospitality and holidays since the start of 2020. In addition, we have seen strong residual values feeding through to personal leasing calculations, resulting in marginal consumer monthly payment increases in spite of the car price increases.

3. Enhanced retailer margin

Despite used car cost price rises, retailers have been able to increase their profit margins since the start of 2020 with the average profit margin, including finance commission, now well over £2,000 per unit. For some brands, where their used car performance has traditionally been sabotaged by new car overtrading, this has produced a huge increase in retailer used car profitability.

4. New competitors

The pandemic has seen the significant growth in ‘disruptive’ competitors to the sector, particularly through the emergence and growth of Cazoo and Cinch.

Whilst the vast majority of customers still want to touch and drive the vehicle prior to driving it, and most importantly have the security of somewhere physical to take it should anything go wrong, we have seen an increase in online-only transactions and the online research and interaction from all customers.

The emergence of the competitors has exposed the attractiveness of used car retailing to a wider portfolio of investors, which will bring benefits to the entire sector.

5. Omnichannel

Prior to the pandemic the industry was undoubtedly lagging behind the wider retail industry when it came to conducting the entire used car purchase online, with many retailers trying to convert all customer interactions into a physical appointment.

The crisis has forced the industry to leap forward digitally, with all transactions having to take place ending with click and collect or home delivery. The ability of each customer to choose the parts of the transaction they want to conduct physically and the amount they want to do online is a huge advance and I expect to see further advances in the way vehicles are presented as we move through the coming years.

6. EV interest

As a result of the volume of product now available, in addition to the publicity generated by COP26, there has been a surge in consumer interest in electric vehicles. This was given a massive boost when we experienced widespread petrol shortages in September. As electric vehicles become cheaper and the charging infrastructure improves, this trend will only accelerate.

It is clear that some of these massive shifts will endure the current pandemic and chip shortage. The largest queries would be around new vehicle supply, and the resulting direct impact on used car demand and supply. If the brands, as indicated, look to restrict supply moving forwards, then the current sweet spot may well endure. I think it is more likely that we will somewhat of a return to normal with regards to new car volume aspirations, albeit with the brands potentially taking more of the resulting losses as they increase their direct sales. One thing is for sure; under the agency model retailers will need a strongly performing used car department to continue the current strong profitability levels.

By Mike Jones