Car Market Trends - July 2010

The SMMT reported the eleventh successive monthly increase in sales with May recording an improvement of 13.5% from last year. This upbeat May figure was expected because it was the last month of cars delivered from the Scrappage Scheme, although the contribution made by the Scheme was far less than any previous month. The figures do underline that, when excluding the Scrappage registrations, the market is performing well relative to the depressed month in May 2009.

The acid test will come over the coming months when the headline figures will inevitably be down when compared to the equivalent months last year that had the artificial boost of the Scrappage Scheme.

Used car sales

Retail sales continued to step back between late May and mid June to an extent that caused some concern with dealers. Whilst there had been a widespread expectation that the market would adjust to the normal seasonal lull, some had not expected any further deterioration. In the event, dealers were either just about to meet their sales targets for June or were bracing themselves for a shortfall as high as 10%. Difficult trading conditions were blamed on customer hesitancy and uncertainty, as many awaited the outcome of the June budget.

Stock numbers continued to edge upwards as turnover slowed, and the issue of ageing stock became more of a concern. The natural response was to realign prices. This did have a positive effect, and proved that there were still plenty of potential customers prepared to seize on attractive offers.

Wholesale supply and demand

Not surprisingly, demand also slipped back in June, but there was still a very strong appetite to buy those cars that could be presented to customers with the minimum of refurbishment. This is a point that is particularly relevant when prices are in rapid retreat, which was the case in late May and June. Those cars purchased at the beginning of this period, and needing abnormal reconditioning, may not have been available for retail sale until the end of this period, during which time  trade prices may have fallen more than 5%. Furthermore, the selling environment would also be more challenging than it was in the previous month, so the chances are that it will also take longer to achieve that retail sale. Worse still, the sale price may also have been less than expected. This is still a central issue for dealers at the end of June given the general market uncertainties. However, the key question for trade buyers is “At what price do I need to buy this car to give me a sufficient hedge against falling prices?”

This is where buyers and vendors have been at loggerheads in recent weeks and this is best illustrated by events in the auctions. The battle lines are drawn when vendors set a reserve price without fully appreciating the condition of the car or the latest market trends. In recent weeks there have been a disproportionately higher number of entries requiring abnormal preparation. In the current trading climate it is not surprising that the best bids fall short of the published trade value, but they are also likely to fall short of this trade value minus the repair costs. This is because dealers are attempting to also build in a buffer against the delay in presenting these cars on the sales pitch. These delays amount to additional cost in terms of depreciation and finance costs. This is the reality of the market, and for some vendors in the corporate sector, it is a lesson that needs to be learned.

A similar situation exists for some ex-rental cars that have just completed an extended tour of duty. Not only do they bear the scars of greater age and higher mileage, but they may also have missed a service and may no longer benefit from the manufacturers’ warranty. Once again, these cars represent ‘extended time to market’.

The wholesale market, and the auctions in particular, is labouring under a slightly excessive used car supply aggravated by too many examples in sub standard condition. Whilst the first time entries may be getting fewer in number the re-entries have been increasing.

Used car prices

Between January and May prices for 3 year old cars were following the trend and degree of change that has typified the patterns of the last five years (see Editorial). May was the first month that suggested that the degree of downward movement may be accelerating with a fall of 3.6% from April. During the first two weeks of June prices continued to fall at a similar rate. However, it should be noted that the overall condition of the cars that have sold in this six week period may have been marginally worse which would account for a small element of this reduction.

Prospects

Over the next few weeks there is an expectation that the auctions will still be attempting to ‘wash-out’ of excess used car supply. This will only serve to perpetuate the falls in prices we have seen in June although the rate of fall is likely to be less. The extent to which this happens will be governed by retail demand. It is far from certain how customers will react to the latest austerity measures. We may see some intending buyers defer, some may review their budgets and reprioritise their requirements. Others may not be surprised by recent announcements and simply say “what the hell, life goes on”.

Guide values

Guide values are down by around 4% for July on the basis that prices have moved quite sharply and are not about to recover. Premium brand cars are affected to a lesser degree. The other generalisation is that late used cars have moved less than the headline figure.