The Office for National Statistics (ONS) announced on July 14th that the UK inflation rate hit 2.5% in the year to June. It is the highest for nearly three years. The most significant contributor was transport, with the ONS pointing to strong growth in used car prices and fuel.
According to the ONS, the May to June period has seen car prices dip in recent years, but this year prices in June rose 4.4%, the most since records began in 1988. The causes of this rise, according to the ONS, have been well signposted elsewhere; consumers are buying used cars to avoid public transport, a shortage of new cars and a slowdown in the normal remarketing channel as a result of COVID and the fall in new car sales.
It has been a perfect storm, and there are no indications that these conditions will change rapidly, with consumer demand the most likely to fall back. However, as we know, this is not an example of dealers profiteering. Retailers are experiencing price inflation as they seek out inventory; prices are rising across the distribution chain.
The situation for used cars is not just a UK phenomenon; it is a global trend. In the United States, used vehicles represented over a third of the increase in inflation figures and used cars in Germany and Japan are trading at decade highs.
Running contrary to the ONS data, earlier In July, eBay Motors published data suggesting that average prices for the top 50 leading makes and models on Motors.co.uk dropped 1% from £12,149 to £12,024 – following the 1.9% sector-wide drop reported in May, despite the continued rise in wholesale prices. I have to wonder if this may be a trend that reflects a move by dealers to older, less expensive stock as stock levels decline. With pressure on other profits centres, I certainly hope so because it will be increasingly crucial to build chassis profit in the months and years ahead.
Electric cars will require less aftersales support; the FCA has been clear that it expects the ban on discretionary commission finance to deliver customer savings of £165m per year on finance plans, and the emerging OEM agency models has the potential to mean profit from used cars will become increasingly important.
I suspect many of us in the industry recognise that used car prices may have been artificially low for some time. A realistic realignment is probably overdue; for example, a higher car price and lower finance rate could well deliver broadly similar outcomes for all parties. Stock is king; running a leaner operation with a faster stock turn is important, but realistic pricing is essential for the longer-term health of the used car dealer market.
Debbie McKay, Head of Motor Major Accounts