Second Hand Cars: A Nice Little Earner

Each month I’m looking at how trends manifest themselves in the real world.

The Road Rat is an example of the new model of magazine publishing. It’s sold directly to the consumer by the publisher. It carries very little display advertising and has very high production values. The magazine likes to take an oblique view of motoring and what might be referred to as; ‘car culture’ (if it wasn’t such a ghastly term). In Issue 11 they dispatch an intrepid reporter to the NADA conference in the United States. This is the annual convention of American car dealers (a thought that may prompt you to reach for a perfumed handkerchief).

Its 2022 event took place in Las Vegas – a town famed for glitzy vulgarity and bad financial decisions and therefore a perfect venue for a general assembly of car dealers.

The mood was decidedly upbeat this year as supply shortages of new cars have shifted the balance of power away from consumers and towards the dealers. The article quotes David Rosenberg, President of the DSR Motor Group, as saying: “My perspective is dealers are making a lot of money. An average Toyota dealer in the Boston region in the best years made between $2 million and $2.2 million. Last year [2021] the average net profit was $6 million.” I’m sure you’ll be as pleased for the car dealers of America as I am.

In the UK, Robert Forrester, the Chief Executive of the car dealership group Vertu Motors plc, was quoted last week as saying that margins on new cars are higher than usual and that; “used-car prices are a lot more robust and resilient than they used to be.”

His view is corroborated by AutoTrader through their Retail Price Index.

This is an authoritative source of data which will be used by the ONS from 2023 to inform the Consumer Price Index. AutoTrader reported last month that; “the average value of a used car is continuing to increase.” In the last twelve months average values are up 15.6% on a like-for-like basis and there have been 29 months of continuous growth. It’s enough to make you look twice at your Ford Focus as you put the bins out.

Most of this value gain is due to the shortage of new cars but how can the automotive market be so buoyant when consumers are reining in big-ticket spending? It all seems counter to our Rising Cost of Living trend.

Since the Road Rat article appeared, there have been signs that the cost of living crisis has begun to cast a somber shadow over US showrooms. Secondhand car values are on the slide as consumers become wary of big-ticket purchases. Car Max is a used car dealer with 220 stores in 41 states. They have noted a depreciation in the value of secondhand cars of $2,500 per vehicle in the second quarter of this year; a fall that’s on a par with 2008/09. The decline in vehicle values was enough to slash the company’s market capitalisation by $3 billion.

How can the American experience be so different to the British experience?

In a word, finance. In the United States, most new car purchases are funded by loans. In the UK, consumers have the seductive option of a Personal Contract Plan (the fantastical financial alchemy that funds 80% of new car purchases). As The Car Expert wryly notes; “The key feature of PCP car finance is that it consists of low monthly payments followed by a massive final balloon payment.” Many consumers don’t have the funds available for the final payment and so end up taking out a new PCP deal on another car – a form of enforced loyalty. As day follows night, a Focus follows a Fiesta.

Britain’s car market is booming because of a financial product rather than genuine consumer demand. PCP works well when consumers are feeling confident about the next two or three years. It works less well when consumers become pessimistic about the near-term future and want greater flexibility with more room for manoeuvre.

In the months ahead, some consumers may find that PCP is like junction 14 of the M25; a difficult exit.