Consumers – changing for desire or necessity?

Philip Nothard – Retail & Consumer Price Editor, CAP

Key points:

·         4 to 7-year old vehicle disposals up over 40% in the 5-year period.

·         Increase in customers paying off PCP GFV and keeping vehicle.

·         Preparation costs on the increase.

·         3 to 4-year old stock decreasing.

Following our exploration last month of the pressure on  margins  this time we turn to a less frequently discussed issue; the consumer change cycle.

Are significant numbers of consumers now holding on to cars for longer than they used to? According to our own research, the answer is yes. But perhaps the really interesting thing here is that a large number of dealers also report that their customers are on a shorter change cycle.

This is perhaps counter-intuitive. It is easy to imagine why consumers would keep their vehicle for longer, during an extended recession when finances were clearly restricted and motoring costs showed no sign of easing. After all, we are constantly told that low consumer confidence means putting off major purchase decisions. The notion that consumers would hold onto their cars for longer would also fit neatly with the fact that fleets have also been extending contracts. So, there are no surprises in the fact that more than half of the dealers we have researched say their customers are changing less frequently.

What this behaviour represents is a shift, for many people, into changing when they need to, rather than the ‘good old days’ of changing when they simply fancied a different car.  For that sizeable minority of dealers who say their customers are changing more frequently the reasons behind the shift are less clear. It may be that many consumers decided to ‘downsize’ in terms of engine size during the last few years when money was tighter, in an attempt to mitigate their motoring costs. If this decision – also brought on by necessity rather than free choice – was a direct response to the new economic conditions since 2008 it may not represent a trend. In other words, the most recent change of car was a defensive action and now they will keep hold of it for as long as possible.

For dealers a shorter change cycle would be good news, especially in contrast with a longer change cycle which brings more challenges than simply less frequent profit opportunities.

These days a frequent observation by dealers is that they are seeing more cars that are past their MOT due date, with gappy service histories and generally more wear and tear. One dealer told us that  on part exchanges their average preparation cost had increased from £300 to £500 per unit on cars between 4 and 6-years and they had even seen a small increase from £200 to £250 on their 1 to 3-year old cars.  These are quite typical increases and, of course, can be substantially more depending on the brands in question.

Also interesting is the dynamic around PCP. One dealer representing manufacturer which is very successful in using 3 year PCP deals to gain market share told us that prospecting past customers reveals that more are changing 6 to 12 months later than they used to.  Furthermore there is also evidence that many people are choosing to settle the GFV at the end of the term, rather than change their car. This is certainly not what was originally intended when the push for PCP began.  One of the major significances of this dynamic of extended change cycle is the impact it inevitably has on the volume of ‘prime’ used stock in the marketplace. As the chart shows, the all-important 3-4 year old bracket is diminishing in volume – as we would expect after the collapse in registrations over recent years. Meanwhile the proportion of older cars is steadily increasing. With consumers keeping their cars for longer this situation will only continue.

In summary, the data and market intelligence clearly demonstrates that consumers are holding on to their cars for longer with ‘purse strings tightening’, money tougher to borrow and vehicles improving in terms of both technology and the whole cost of ownership.  The industry can’t continue if the fall-out of 3 to 4-year old cars continues to decrease at this rate.  The activity within the dealers currently is all about the ‘sales process’ and how we can make it easier and more transparent for the customer to buy a car.  With this we also need to adapt to the current economy and understand what the customers are buying and when.  Many dealers are already diversifying and reviewing their own particular stock profiles, stream lining the sales process from the initial internet enquiring through to the showroom.  We should not forget that buying a car will always be an emotive decision, whether it’s through a desire to change or purely down to necessity.   With the recently revised forecast of over 2 million new registrations for 2012, there needs to be some serious consideration to how the consumers are going to be enticed to change their cars.

It is clear from this research that the landscape is changing for dealers. Stock profiles will have to change to take account of the evolving mix of age bands but it will take more than that to survive and prosper in these new conditions. With the SMMT forecasting over 2m registrations for 2012, supply is bound to increase at the nearly new end – unless tens of thousands of new car customers appear out of the woodwork. At a time when more customers are keeping their cars for longer the biggest challenge will be to persuade them to change more quickly or we will see a return to the old days of serious supply imbalance.

 ends.