Motor Finance hosted its ninth round table recently, focusing on used cars. The following summary provides highlights from a wide-ranging discussion during which the current and future state of the used car market was debated.
What will happen to the used car market in 2012?
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Richard Hoggart: What is going to happen to any market, to any industry in 2012? Its all a bit of a mystery.
Even if consumer income hasnt necessarily changed, they are holding back a little on spending. If people are prepared to commit some of their budget you have to work hard to persuade them to spend it on a car, and if they are going to spend it on a car, there are a lot of other people who want that deal.
We have to be more imaginative. I dont see any reason why the market shouldnt be pretty solid, because the people who were holding off last year, panicking a bit about their job security, cant hold off forever and are getting even more bored of that car theyve decided to hold on to for another six months.
Hopefully, they will take the plunge. I am not feeling buoyant about everything, but I am not crying myself to sleep at night either. There is an opportunity coming and we have just got to be ready to compete.
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By GlobalDataSteve Reynolds: It comes down to getting back to basics. Get your controls back in place, dont be negative.
If a customer comes through the door theyre not there to look, they are there to buy a car thats the mindset you need. You just run your control process as you would at any other time. If youve got the right car, with the right advertisement to bring people in and the right process to sell it, you will sell cars.
What we are working on is stock management to reflect customer demand they want to buy a car but instead of paying £200 or £250 a month, they now can afford £150.
If you have got a car that is a bit obscure coming in, trade it now. Dont put it on the forecourt for 30 days and hope for the best, because you are better off taking that money and putting it into a Corsa.
Look at your top 10 marques: Peugeot, Ford, Vauxhall, etc, and concentrate on those. Everything is finance as far as we are concerned, irrespective of what the customers say when they walk through the door. There is a finance deal somewhere.
Lastly, know your bandings. Sure, the man who buys the Porsche still has the money. But we are more interested in the bread and butter people these are the people that make our business.
David Enright:Previously, I was the managing director of Welcome Car Finance. We had a stocking plan by region, for each of the 12 branches, driven by customer income.
The good example was the Liverpool catchment area. The average customers income was something like £1,250 and the average customer for London was £2,400. More subjectively, the average London customer desperately wanted automatic cars, while in Liverpool small economical hatchbacks were more in demand, so we stocked accordingly. Previously we didnt have a bespoke, coherent stocking plan.
Brian Scott: The reality we are facing is that the overall market this year is probably going to be about flat. There is no reason to suggest it will increase or deteriorate any further.
It is a big enough market to survive in, but what you have got to do is just do a better job, be a bit smarter. Getting the right stock for the right locations, with the right pricing, is critical. We dont have tyre-kickers any more; they have done all their research online, and they have come in to buy.
The conversion rate should be very high, all you should have to do is satisfy their needs, because you have done the hard work getting them there. The market is big enough for us all to do well.
In terms of car supermarkets, there is a perception that there is going to be a shortage of stock ahead, which clearly will put the pressure on prices. Using a part exchange is becoming a more apparent strategy, and is something we are considering. We already buy cars in a similar way to webuyanycar.
Its about thinking in a broader way.
Oliver Mackaness: As a finance company we have got slightly more cash this year, so that should increase sales. Quite a few other finance companies have more cash available too, which should help the sector.
We have only seriously been in cars for five years, and this is the first year we are actually marketing to our current customers. We want to touch base with people when they get three-quarters through their deal, so we are texting them to ask if they would consider part exchanging their car and coming into a new finance agreement with us.
Little things we hope will increase our repeat customer market.
Gary Hill: Similarly, the end-of-contract texts have been surprisingly successful. This is where you just send a text to someone when they have finished an agreement, asking if they would be interested in another. The amount of calls it generates is phenomenal. You are catching them before they think about changing.
We are subprime, but a lot of people will very much consider it. We can look at how they paid us and take that into consideration. If they have paid us spot-on for three years, we can then do some basic qualifications, find out their budget, what they are looking for at his time, and try to feed that lead back to the broker who supplied it in the first place.
Steve Reynolds: With the best will in the world, we train the salesmen, and we like to think we train them well, but there is always a sense of apathy. They would rather talk to someone on the floor, but the telephone lead is probably hotter than the guy wandering round the forecourt while his wife is in Morrisons.
What you (Billing) are doing is great, but it relies on being specific for success. If someone called you and said, "You can have this, you can have that", in the vaguest terms, it wouldnt have half the impact of, "You can have a five-door Punto, 61-plate, £5 a month cheaper than what you are paying at the moment. Whats the best time to make an appointment?"
That works because its real and tangible, not a possibility.
Ian Smith: We deal with a broad range of industries outside motor, and customer loyalty is quite a big part of what we are looking to focus on across the board in 2012.
The principles of marketing are quite simple it is about getting the right products at the right time at the right price, but there are things the motor industry can learn from the retail sector in terms of driving loyalty to their customers.
The biggest challenge the motor industry has is the infrequency of spend or visitation. Customers dont come back to car dealers often. As David said earlier, it is about finding ways and means of being able to keep in contact with customers, staying involved in their life.
When they are thinking about making that change, you have got the contact. Loyalty programmes can go across different marketplaces. We deal with furniture and electrical retailers the customers that buy these things buy cars as well.
There are a lot of reasons to write to a customer; youve got your winter checks, your part sales, wheels. There are ways and means to keep in touch.
From the marketing perspective you can get a bit more sophisticated by examining buying behaviours. It is very expensive to send out mail shots and the like, so you want to make sure you are getting the right offer to the right person.
The motor industry doesnt do a lot of marketing. For many motor dealers, marketing is advertising your stock and not a lot more.
David Enright: I was going to change car in November, and pretty much knew what I wanted. I emailed six companies. I got one phone call in return. This is typical of the industry, to the huge frustration of many marketing companies.
Brian Scott: We have changed our process for that reason. It was a bit hit-and-miss. We have moved all external contacts now into a centre where they can be managed more efficiently, professionally and consistently. If someone has made an effort to get in contact, you are mad not to follow up.
Paul Atkinson: I have spent a bit of time liaising with various dealerships, and those that seem to be more proactive in terms of marketing seem to be doing ok. They are holding their own, although not necessarily setting any records.
Customers that come in are there to buy a car, but wont do it unless you get the basics right. What seems to happen in far too many dealerships is that once it gets to the point of subprime no one really knows what to do.
Some dealerships are saying: "Im so sorry, youve actually been declined". They dont actually know how to take customers from the very price-led £150 a month payment to the £200 or £220 a month payment which customers probably can afford, but they need to understand why, all of a sudden, they cant get that £150 payment.
Brian Scott: There is nothing more frustrating than going through a process of getting a customer, qualifying them with a sales person, getting them in a car, going through finance and getting straight declines from everyone.
You could have spent two or three hours with this person and you end up saying: "Forget that dream car, look at this other thing."
It is very difficult and, because you sell the car first, you always end up with this issue. We are considering, as I am sure others at this table are, moving round the qualifications a little bit, or setting up expectations differently. There are tools out there we can use but how far you can push them?
David Enright: Our biggest frustration is book prices. They simply do not reflect the current market, by some margin.
In the third and fourth quarters of 2010, cars selling at auction were fetching circa 114% of trade, but the lenders have to use some guide to underwriting so can only use the book. This thus restricts the lend.
Is it fair to say that although unit sales will remain fairly flat this year, margins will rise?
Graham Hill: The most interesting thing about the report from British Car Auctions is the omission of finance which, although not many people take notice of it, is the most important factor.
The interesting thing in the survey were the statistics stating that under two years old and three-to-five year old car sales were dropping year-on-year but the six-to-eight year old cars were becoming more attractive.
Although new car sales were only 4% down from 2011 versus 2010, they are still very concerned about the flow of cars from the new car market into the used car market.
David Enright: I think one of the pressures for the used car market is the relatively keen pricing and finance packages offered on new cars. You have got Volkswagen saying: "Get
a brand new Polo, not a 2007 one." Great marketing, but is it cannibalising their own market?
Whats going to happen to finance pricing this year?
Oliver Mackaness: We have just finished a year-long renegotiation with our bank to get a good quantity of new funding. The rates that the banks are charging us are up 1.25% on what we paid last year, which will affect our margin.
I guess the rate we are lending now, all of our deals generally go out at 17% flat, and I feel fairly comfortable with that.
We wont be increasing our prices but we hope to be increasing our volumes and geographical spread; we have got more cash available.
Gary Hill: We do find it difficult to price-match on rate against some of the direct lenders Tesco, Sainsburys, etc. The customers that qualifies for that, you want to offer them the benefit of HP or PCP or another non-personal loan product, but in order to get better rates its quite difficult sometimes.
Richard Hoggart: From the prime perspective it has been exceedingly steady; I havent seen much movement. Over the years, lenders are becoming much better at sifting out those who cant pay.
Technology is helping, experience is helping, the ones youre left with you cant predict. A guy might be in his job with his company seven or eight years, but then that company goes under and now the guy cant afford his car. You cant underwrite for it, can you? That just happens. You just have to price for it.
Brian Scott: It goes back to the website. Before they go off and search, you have to give them a chance to take your finance.
We are trying to promote the home delivery service, which lends itself perfectly to that kind of business. We are looking at how far we push it, whether you complete a full application or just complete some basic details.
Although, we are worried about the fallout from customers who do not want to provide bank details. That could be a step too far in the journey for our company. Certainly, having an ability to get them into that cycle of finance discussion is what we are trying to do. Just to give them a chance.
Oliver Mackaness:Most of our brokers use search facilities so they are all channelling everyone into the right company. What really frustrates us is when we are getting so many declines.
We think: "Just use the search facility". Especially the brokers; if we can try and get them using some kind of search, then it can be filtered to the right place and please everybody. We dont like declining deals.
If there is less intense price competition from manufacturers, might used car finance specialists look to do a little more in the new sector?
Richard Hoggart: My opinion on captive finance houses is that the people that run them are put there by people whose job it is to sell cars, and thats what they are there for.
Those companies arent there to be finance companies in the same way as independents.
While there is intense competition to sell cars at the minute, especially new cars, the big manufacturer bosses are willing to chuck in as much money as they have to,
to sell their cars. I dont even think you can compare a captive finance house with an independent. They have got two totally different agendas. They dont necessarily care that a finance company doesnt make any money.
I look at how many new cars we finance now compared to five years ago and it is not even worth comparing, it is miniscule. We dont, from the retail perspective, see ourselves as new car finance players at all, because the captives are just too strong.
Ian Smith: Probably the biggest proponent of new car incentivisation last year was Vauxhall in the last quarter. And, of course, Vauxhall and GMAC are independent from each other now.
So GMAC is in this situation where they are the lender for Vauxhall; they have to make money in their own right. From their perspective they are charging a subsidy over to Vauxhall and probably making some decent money out of it.
The poor person in the middle of that triangle is the dealer. He is not making that much money on a new car and the used car business for him is looking pretty sick. Because customers are quite rightly asking why they should buy a used car when the new car salesman is saying, you can buy this for £20 a month less.
I suppose that presents an opportunity for the independent finance company to see what they can do to work with the used car side of those franchised dealers to help them sell more cars. I am sure they would welcome the opportunity.
Whenever there is adversity there is opportunity. For the multitude of Vauxhall dealers out there theyd welcome ideas on how to shift more used cars. That might lead to opportunities for PCP and so forth.
Paul Atkinson: I think the captive finance companies have always been there as a tool for selling the new car, and Vauxhall is obviously going quite strongly at the moment. The dealerships profit is from the used car and, if independent finance companies are looking outside the box, there is definitely opportunity for them to grow as the year
goes on.
Brian Scott: I dont see there being a risk. For about 18 months, I didnt talk about volume with any of our finance partners, but it feels like now they have got all the efficiencies and structures in place and are talking about volumes again.
The funds are there, even if some of them have been diluted over to the new sector. I dont think availability of funds will be an issue for the used car sector, so I am certainly getting more pressure than I have done for two years about hitting volume targets there.
Graham Hill: I think we have seen a shift, over the past couple of years, from brokers using independent funders to using dealers and using their captives.
Captives never used to be as competitive as those who would invariably undercut their rates and that was a problem for the dealers, who would be demonstrating cars. It has gone in the other direction now. Brokers are encouraged to work with dealer groups on the new car front.
On used cars, I think you will find a few more brokers who were very much involved in new car sales and leasing looking for opportunities in used cars. From a broker perspective, it is going to be a bit of a messy year.
Gary Hill: From our point of view, probably 95% of what we do is used cars, and it will continue to be that way.
Years ago when I was in a dealership, the finance arm for the manufacturer was purely there to move metal you would get the 0% deals to shift the metal. They are not singing off the same hymn sheet as a normal finance company, it is all about the numbers and the volume.
Steve Reynolds: We are a franchised dealer group. We would see the pressure we are put under by the manufacturer to sell cars and take it as read. They will pull the strings with the finance associated with them, they wont go away and they cant afford to go away.
There is always an opportunity for independents, but it will make it more difficult for independents. I think we are going to see more and more franchise-led offices.
Andy Shuter: I agree with Richard. Captive finance companies are created for new Vauxhall customers to buy new Vauxhall cars. Do they want to finance used Vauxhall customers through Vauxhall dealerships?
I have yet to meet a captive finance company bothered, with the exception of GMAC. You take the majority of the manufacturer-backed lenders and they dont really focus on used, so I think there will always be the lions share of the opportunity with independents, without a doubt.
Is it all doom and gloom?
Gary Hill: For a dealer, managing the state of the forecourt and the stock on it is crucial. We deal with a lot of local dealers, and you get the doom and gloom mongers on the phone: "We’re selling nothing". You drive past and their forecourt is an absolute shambles. Then you speak to the guy who religiously changes his forecourt twice a week, keeping it looking spotless. He’s selling cars. It’s totally due to attitude. We can all talk ourselves into doom and gloom if we want to.
Steve Reynolds: Absolutely. I mean, they’re not riding horses out there, they’re still buying cars!
Paul Atkinson: Customers are buying cars; they’re just taking a little bit longer. If they’re constantly being reminded of a car, it’s fresh, it keeps catching their eye and they’ve already got the mindset to want to do it. It’s just a question of grabbing them.
Steve Reynolds: Just look at customer profiles. If you take a man living in South Yorkshire who’s worked a job for 12 years on £22,000, he’s still in that job. He’s been earning £22,000 a year and he’s still earning it. Nothing’s gone downhill for him – it’s his mindset that needs changing.
Richard Hoggart: If you could block every transmission from the BBC that would help.
Ian Smith: You’ve hit the nail on the head, to a degree it’s consumer confidence. That’s the thing that we’re battling against. For all the good things going on in the industry you’ve got the media pumping the customer full of bad news.
Brian Scott: The difficult times we’re in and the lack of consumer confidence means that if you’re just getting by now, when it bounces back – and it will do – you’re going to get back everything and then some.
What are the dos and don’ts for successful expansion?
Graham Hill: You must have near and subprime funders now. Looking at credit scores and the way the market is trending, it’s going to be tougher for people to fall within the scope of prime finance.
Andy Shuter: Dealers and finance houses must work in partnership, one of the objectives being to place the customer with the fewest number of searches possible because I guarantee you the number of credit searches will be the next big thing.
David Enright: Communication strategy – if you say you’re going to do something, then do it. Life cycles are 35, 36 months, and you’ve got to keep customer relationships going.
You don’t want to be giving them birthday cards but you have got to think of some way to create touch points to keep you ‘front of mind’.
Richard Hoggart: To the finance provider side of the business, I’d say don’t make it all about price. Resist that temptation to slash your margins.
We know there are guys out there who are all about the money, but we try to demonstrate ways in which we can improve acceptance ratios, conversion ratios and therefore how many cars you’re selling. Loyalty is not in great supply in the motor industry, and we have to prioritise it.
Paul Atkinson: There are more established brokers out there, and if we go head-to-head over price, I’ll probably lose. But I have a unique set of skills, where I can offer something different to dealerships, small dealer groups that maybe want a more personal touch. This year is about service and what you can do to actually support dealerships other than just banging money in there.
Ian Smith: Remember that everything starts with the customer coming into a showroom to buy a car. We can only lend money to customers who want to buy a car in the first place. Really, the more we can do to help the dealers generate footfall and generate customers, the better off an industry we will be.
Sometimes we tend to lose sight of that. We complain about how slow business is, but what are we doing to help dealers generate the customers? I think there are things we can do to help, and I’m saying that as a lender and knowing that we aren’t particularly good at it.
