By Philip Nothard, CAP retail & consumer prices editor

Where does the dealer network best focus its attention when the current market becomes economically tough?

Franchised dealers face relentless pressure from manufacturers to achieve new car objectives, but in a market in which total registrations were down by just over 19% in 2011 compared to 2007, businesses have no choice but to focus harder on the potential profit generated by used car sales.

But margins are under ever increasing pressure, on used as well as new.

Dealers hardly need reminding that smaller margins are an inevitable consequence of volume targets thanks to the incentives that are necessary to keep the metal moving.

We constantly see and hear of ‘discounts or allowances’ being offered up to £3k and more, combined with deposit contributions and low rate finance offers – and that’s before you add in cost saving exercises such as ‘free’ servicing and fuel payments etc.

In this feature we will examine the recent experience of dealers and their observations on the growing challenge to maintain a realistic and sustainable profit.

Given the pressure to attain volume targets, there is an inevitable abundance of nearly new vehicles and demonstrators.

Together with aging tactically registered stock, do these cars offer a strong base for retail business in the current climate? Not for every dealer we speak to.

Dealers are reporting the need to increase depreciation allocated to their ’dealer standard’ demonstrators even after increased support and the continued lost revenue thanks to heavy reductions in margin retention over the last three years led one dealer to reveal to us that almost 40% of the margin on his demonstrators has disappeared over that period.

Unsurprisingly he described this figure as “scary”.

We speak to all kinds of operator, from main franchisees to super-markets and independents and they are now almost all increasingly wary of the risk around stocking late-plate.

There is always a nagging feeling that any day an improved offer from the manufacturer will arrive that throws into question the price they paid and makes the stand-in value dangerously wrong.

Added to this is the competition they find themselves locked into over price-matching, loss-leading and general low-profit offers.

As a dealer you find yourself buying cars based on the retail price you need to ask; to be the one the customer chooses, cheaper than your competition up to 100 miles away or top of the search engine.

Then there is a decision over whether the difference between what you pay and what you can ask is a good enough profit.

This is perfectly summed up by one dealer, who said to me: “My customers can buy a new car online £1,800 cheaper than we could buy the vehicle from the manufacturer.”

But the challenges do not end there because the reduction in actual consumer demand for the new car also means that the nice part-exchange that has been carefully looked after by Mr and Mrs Jones is no longer coming into the dealership in anything like the numbers they formerly were.

So dealers are constantly forced out into the market to look for good used stock.

And, as we all well know, that increase in trade demand means an increase in price.