Used car buyers are becoming fussier and want something more distinctive outside their homes than a fading D-sector former repmobile. Rising demand in premium and niche sectors, and pressure for ex-fleet vehicles to be clean, is set to increase competition for the right stock in 2004.

The first quarter ends with high dealer optimism in the used car market. Retail buyers took February's quarter percentage point interest rate increase in their stride, and anticipated further rises are unlikely to cause a market wobble, unless they are steeper.

The CAP used car performance index, one of the sector's most influential indicators, found that used car dealers “are enjoying good times in Britain, reporting better performance last year than in 2002, and overwhelmingly predicting an even better 2004”.

Two out of three told CAP that last year's used car business was better or at least as good as in 2002, with almost nine in 10 expecting “better or similar performance” this year.

There is evidence to support that forecast. Ken Savage, chairman of Perrys, says: “Last year, we sold 16,500 used cars, and 2004 is shaping up even better – January/February was 3% up on volume, with profits running 15% higher year-on-year. Interest base rates going up to 4% made no difference to demand at our used car sales sites.”

Car People, the used car specialist based in Wakefield, West Yorkshire, is finding business even better. “We sold close to 6,000 vehicles in 2003, and experienced a 36% year-on-year increase during the first two months of this year. It is easier than ever for us to get cars, as the market becomes more open,” says Car People director Jonathan Allbones. “When fleets like Motability destock, they are now more likely to use a remarketing company, which makes more cars available to non-franchised dealers.”

Allbones believes one of the most important shifts in the market this year will be a continuing decline in the appeal – and therefore value – of mainstream D-sector cars like the Ford Mondeo. “The Mondeo sector is dying,” says Allbones. “People either want to downsize to a Focus or Peugeot 307, or switch to a compact MPV like the Citroen Picasso. Niche cars like the Vauxhall Signum and Renault Avantime may struggle when new, but they are in demand as used models.”

Some retail buyers are seizing the chance to buy these cheap nearly-new D-sector cars, with Scots displaying a familiar grasp of good value. Scott Willis, sales director of Arnold Clark, which sold 100,000 used cars last year, says: “The used car market is certainly diversifying but the affordability of D-sector models continues to appeal. Retail buyers see they can get a nearly-new Mondeo or Vectra with a six-speed gearbox, CD player and aircon at a price they can afford, which appeals to customers who at one time looked only for what was cheap.

“We are seeing a strong movement towards people thinking of the '£150 a month' used car, as opposed to a '£10,000 model' that, though lacking the flexibility of an MPV, will still look after most of a family's needs.” Glass's Information Services detects plenty of optimism among used car dealers, boosted by 2003's 2.5% increase in year-on-year residuals for three-year-old cars. “There is a widely held view that household spending will increase by 2% this year, and there is plenty of momentum to drive sales forward,” says Adrian Rushmore, Glass's managing editor.

Rising sales of premium brand models, MPVs, four-wheel drives, sports coupes and convertibles, will not necessarily mean higher residuals. In 2001, sales of new compact MPVs rose by more than 60%, and premium upper-medium cars, like BMW 3-series and Audi A4, by nearly 30%.

The three-year buying cycle means this additional supply will put three-year residuals under pressure in 2004. “This could well mean their residuals will fall by at least 2% while the rest of the market is showing little or no change from 2003,” says Rushmore. Pressure on fleets, when destocking, to prepare cars properly for auction will continue to increase. Alan Cureton, dealer sales director at Manheim Auctions, says this applies particularly to cars from 2003 leasing company contract extensions – a year older, and with another 20,000 miles on the clock. “Clean cars are seeing good bids and prices, but tattier cars that have not been refurbished are often struggling,” says Cureton. “Repaired dents, clean bodywork and shiny alloys guarantee an extra £200.”

The online auction battleground will get more competitive in 2004. Manheim reports that more than a quarter of the winning bids at a recent Mercedes auction came from offsite buyers using its new web-based interactive Simulcast system.

Since 2000, BCA has staged more than 100 Live Online auctions and now also finds that e-bidders typically account for more than a quarter of purchases. Live Online purchases at an auction in January totalled close to £1m, the highest in a single day.