The high profile collapse of Car Shock last month, preceded by the failure of the finance company-owned Karma Cars and the decision by Mark Kass to sell his Mage Cars business after less than a year, has led some to question whether the era of the car supermarket is drawing to a close.

Set up to compete with franchised dealers on choice and price, how could they contend with the cut-price offers from internet-only suppliers? And with their European sources drying up due to the price differentials disappearing, how could they continue to find cheap cars in sufficient quantities to fill their mammoth sites?

First, a definition: A used car supermarket is categorized as an operation with more than 250 cars on site. They vary in the age and price of cars stocked from the three years plus retailer, to the nearly new (six months) to three years bracket.

So why do some succeed where others fail? Success to many of the 175 UK used car supermarkets is simply finding cheap cars to sell at cheap price. Some customers, particularly younger buyers, are limited on choice by their disposable income; they are the obvious target.

The business model has changed from the late Nineties when substantial price differentials between the UK and mainland European markets meant a plentiful supply of cheap cars. As prices in the UK became more competitive, so the used car supermarkets had to look elsewhere. And here, the manufacturers unwittingly played a major role.

With global manufacturing plants pumping out a huge surplus of cars, franchised dealers are incentivized to take on extra cars. Inevitably, many of these find their way onto the forecourts of the supermarkets as delivery mileage nearly new models. With warranties intact and no previous owners, these cars have an obvious appeal.

Many supermarkets also find a ready stock of cars from the large fleets. By sourcing cars in huge numbers, these fleets are able to buy at a price far below that enjoyed by franchised dealers – often 30% or 40% below list price.

Insiders at some of the less scrupulous large fleet operators claim that these cars are often sold on within six months, which is prohibited but goes unnoticed by the authorities.

With fleet operators responsible for just over half of new car registrations according to SMMT figures, (although the reality is even higher), it means an ample supply of cars for the used car supermarket. At any one time there is an estimated 3.5m cars under the age of four in the market from business defleeting.

#AM_ART_SPLIT# According to Chris Oakham from Trend Tracker, the most successful companies do not pursue a policy of ‘pile ’em high, sell ’em cheap’. “The secret is to buy at the right price and pile high, but not sell cheap,” he says.

Other issues that can affect profits include cashflow, expanding too quickly, spending too much on advertising and having the wrong premises, adds Oakham.

Stock turn is essential, with the best operators managing a 30-day limit. However, a new system has launched in the UK this month, claiming to offer dealers an exact stocking period individualized for each car (AM March 23). Autovista says its BIRT product will calculate the optimum stocking period for the dealer to achieve the highest price.

The boss of one of the larger used car supermarket chains, who asked to remain anonymous, told AM: “The majority of our stock comes from European imports for new cars and a wide variety, including fleets and franchised dealers, for used.”

He adds: “Watch the finance. Don’t tie the customer in for too long. If they are tied for five years, they won’t come back after three.”

With some of the best companies like Available Cars achieving almost 4% return on sales, operating a used car supermarket remains an appealing proposition.

But there is a warning. “The UK has reached saturation point with used car supermarkets,” says Oakham. “Land is an issue and it is hard to identify any suitable places left. And some people still underestimate the efficiency of franchised dealers – they can still be competitive against the supermarkets.”

Location, location, location

The volume, variety and turnover of stock requires considerable premises, and to find a suitable location to trade is not an enviable task.

The land required to stock at least 250 cars is substantial, proven by the size of the current players in the car supermarket sector. The old Mega Car site in Peterborough acquired by Motorpoint occupies five acres, while Eddie Wright is finding six acres insufficient and is expanding further.

However, once extra factors are considered, such as increased noise and traffic to and from the premises, it is not surprising that planning can be tricky to obtain, especially as the business has to be located within a reasonable distance of customers.

Planning delays and obstacles at a former 1.2-acre Asda home delivery depot site forced Karma Cars to postpone the opening of its first site in Watford by eight months, despite the site being empty for two years previously. This contributed to its collapse a year later.

However, the Brownfield sites chosen are cheaper than traditional premium franchised dealer plots and, with more and more car supermarkets penetrating the market, fewer openings exist for expansion. In the south east, rising land prices for potential house building plots will limit business opportunities.