Used car retailing: Independents fight back against franchised dealers

Think back a decade and for most used car buyers, there was a clear distinction in the market. If their budget was rather limited they wouldn’t even consider a visit to a main dealer’s forecourt. Instead, they would be resigned to scanning the classified adverts of their region’s independent traders.

But the pressures of the recent recession on consumer spending power, and four years of a subdued new car market, have led the franchised sector to take the fight much closer to the independent dealer’s forecourt.Some, such as JCT600 in Yorkshire with its PriceRight concept and Pendragon with its seven Quicks businesses across the north of England, set up their own all-makes dealerships retailing higher mileage vehicles that would have been ignored previously. Others, such as CEM Day in South Wales, have added a few older, lower-priced cars to their existing forecourt mix to signal that they cater for buyers with a smaller budget.

Now that the new car market is enjoying a period of sustained growth, franchised dealers must take care not to let such opportunities slip as their focus shifts to higher new car targets. This is because the signs suggest that the independent motor trader is in a weakened position.

A trend highlighted by analysts at Trend Tracker shows a steeper fall in the number of VAT-registered independent used car retailers than that of franchised dealers. In the past 10 years, these non-franchised used car sites have declined by 22%, to 4,445 locations. Franchised dealer locations, by comparison, have reduced by 17%, to 3,970, much of which has been through consolidation of individual franchises into larger, multi-branded sites.

Independents' numbers look set to fall

The independents, unlike franchised dealers supported by carmakers keen to maintain their sales representation, have come under even more pressure since the 2008 recession. Based on an average annual decline of 2.62% from the past five years, it is likely that the number of independents could fall to 4,000 in five years, if the trend continues.

Supply issues and low levels of used car transactions may account for part of the independent motor trader’s decline. Annual disposals of company cars aged three to five years old, a crucial source of quality used cars, remained above the 500,000 mark until the end of 2010 but the effect of low new car sales since 2009 is now being felt.

Motorpoint managing director David Shelton, left, and chairman Mark Morris. Read their case study at the bottom of the page

The University of Buckingham’s Centre for Automotive Management forecast that disposals will remain below 435,000 until 2015. It also expects a 900,000-unit reduction in the number of cars in the 6-8-year-old sector, the smaller independent trader’s heartland, in the same period. Those traders have already endured considerable pain – the Scrappage Incentive Scheme took almost 400,000 ageing used cars out of the market in 2009/10 as owners took their £2,000 new car discount.

Professor Peter Cooke, the expert behind the forecast and author of BCA report “The Broad View,” said: “Every used car retailer has a range of local market conditions. The challenge is to identify how such local economic conditions impact on its market area and how it might best react ahead of competition.

“The used car market is multidimensional, fickle, and subject to frequent change; it is important used car dealers regularly review the developing market in their trading territory.” Many of those independents who have survived the recession are already doing this, believes Kevin Watson, operations director at dealer-to-dealer trade portal Autotrade-mail. As part of the process for gaining a free trial of its system, dealers undergo a vetting process to determine the stability and quality of their used car operation, and Autotrade-mail has seen a 40% decline in ‘bad’ applications in the past two years.

Watson said: “The general professionalism across the independent sector has improved significantly. The two most notable improvements we have seen have been tighter stock control and effective marketing.

“They cannot afford to get these costly items wrong – both have such a huge impact on a used car business. These improvements have been necessary to survive in a challenging market in recent years and those that have changed are now much better placed to compete with the best.”

Used car experts at CAP Automotive recently reported that independent used car specialists have been enjoying their best summer in several years, thanks in part to franchised dealers’ refocusing their energies into new car sales.

Every month, CAP questions a panel of about 100 independents and its most recent results found that 77% achieved an increase in sales month-on-month and only 4% suffered a decline in performance.

CAP spokesman Mike Hind said independents had been constantly frustrated by a lack of used car stock during the first half of 2013, when two in three reported their forecourts were understocked.

At the start of the second half of the year, this had reduced to one in five due to not having such strong competition in the trade market for quality stock.

Hind added: “When everybody is clamouring for limited stock, neither dealers not motorists win because prices are forced up and dealers then suffer reduced margins and motorists are forced to pay more too. Instead, at the moment we’re seeing a market that is good for everybody.”

Approved used schemes

Just as franchised dealers have encroached onto the independents’ turf with older car sales, the independents are fighting back by adopting some of the practices and benefits most associated with franchised approved used schemes.

Initiatives launched recently, such as RAC BuySure, are expected to raise the perception of some non-franchised used car retailers by putting an acknowledged brand above the door and a comprehensive warranty into the offer.

“The almost unrivalled strength of the RAC brand is based on consumer trust and potential used car customers instinctively know that we won’t put our name to anything that isn’t extremely credible. The dealers becoming involved in RAC BuySure recognise this central fact and want to work to meet the very high standards that we are setting,” said RAC head of dealer propositions Mario Dolcezza.

But is the brand above the door really that important for second-hand car buyers? The findings of the BCA Used Car Market Report 2013 suggest consumers still value the ‘right car at the right price’ as the strongest influence on their purchasing decision, and ‘whether the dealer is reliable and trustworthy’ was fourth.  Fewer than one in 10 said they were influenced by recommendation. Yet conversely one in two said they would buy their next used car from a franchised dealer.

It’s largely a level playing field in an era when many consumers search nationally online for a used car and almost one in three is prepared to travel more than 60 miles, according to Auto Trader data.

Guy Ainsley, a former director at AM100 dealer groups Inchcape Retail and Caffyns and now founder of automotive consultancy FFDL, believes the standards demanded by a brand’s used car programme can have disadvantages as well as advantages.

He said: “What started out as ‘prep’, to ensure cosmetic appeal and vehicle safety, has turned into re-manufacturing. Manufacturer used car programmes used to be good for differentiation, but now they can be self-defeating. The prep standards and control of warranty providers means that to get a car to the standard required without spending a small fortune results in the profile of car on many franchise forecourts being limited – i.e. late plate, low mileage. Add in pre-registered stock and ex-demonstrators and there is no longer any differentiation.”

Ainsley said approved programmes can create a false customer perception and with it the risk that many will expect the used car to be presented to the same standard as a new vehicle.

In comparison, an independent used car retailer has more scope to be entrepreneurial with stock, he said. Franchised dealers are increasingly set targets and incentives against the volume of manufacturer-approved used cars acquired. Coupled with restrictive manufacturer preparation standards, the franchised networks have enabled the independent trader to successfully step into the three to five-year-old car market.

However, Ainsley believes the independent will face greater resistance to purchase if the customer doesn’t see a brand they can trust.

Perhaps those restrictive approved programmes have driven dealer groups such as JCT600 and Pendragon to set up their own all-makes forecourts focused on recapturing that lost business.

Case study: Motorpoint

The larger, established independent motor traders recognise that failure to adapt to consumer demands would be a death knell for their business.  

Motorpoint, the national car supermarket chain, which opened its seventh site last month in Birmingham, sells a vehicle every seven minutes on average. It has some 4,000 cars for sale every day across its network, and prospective buyers looking online at its website are able to reserve any vehicle prior to visiting for a physical viewing.

Motorpoint was set up in 1998 to directly challenge franchised dealers. Its marketing focuses on demonstrating perceived value to customers, often comparing the discounted price of its low mileage, nearly-new cars against the list price demanded when new.

The £300 million turnover group has also rolled out its own customer satisfaction index (CSI) survey using Net Promoter Score methodology.

Motorpoint chairman Mark Morris, a former managing director of franchised dealer group Sytner, said a priority for the group has been to improve its customer experience and build more repeat sales.

Its hope is that its happy customers will recommend the business or refer their friends and family. Morris said nearly half of all used car buyers in the franchised dealer sector have no further contact from the selling dealer, which is a huge missed opportunity for the industry.

“Since 2010 we’ve stepped away from ‘stack them high and sell them cheap’ to build in more value with an exceptional customer experience designed to promote repeat business. We’re focused on not just selling a car today but looking for a customer for life. This refocus will achieve growth in a virtuous circle,” Morris said.

New recruits are now selected by attitude, not experience, and undertake a proper induction and training programme before going anywhere near prospective customers. Employee’s bonus bands are also linked to the Net Promoter Score performance. Motorpoint operates its own training academy, providing one-to-one and team-based courses in aspects such as sales skills and management development. Every six months staff are surveyed on their opinion of the business and their role within it. These measures have reduced staff churn from 46% to 27% in two years. Morris added: “Happy staff deliver a great experience to customers.”