Residuals, recession and razors at dawn?
Wasn’t it the late Sir Compton MacKenzie who claimed that the
sign of a true lover is one who can end an affair and still be
friends? Is there a hidden message there for the used car player
working in times of recession?
Residuals have been shot to bits
over the last eighteen months and there are large numbers of leased
cars that may most politely be described as ‘toxic’. They represent
a potentially significant loss; taken in leasing company
quantities, they almost represent order of magnitude figures the
Chancellor might recognise in relation to his current big spending
There appears to be some movement within the leasing industry to
extend leases, driven by both parties to the deal. The drop
in residuals must surely lead over time to a rise in lease rates to
compensate from the lower residual values being achieved, even if
one is now looking three years ahead for new units coming to lease,
and even given the expectations of lower interest rates.
At the same time, reports would suggest the used car market –
expressed in volumes through auctions – are holding pretty well –
but prices are down compared with previous years.
On the other side of the equation, financing, one reads that
point of sale finance has risen from 46.2 per cent to 50.9 per
cent, supporting the anecdotal rumour that buyers are
increasingly looking to dealers to help finance their acquisitions
as traditional sources dry up. Similarly, there has been growth in
dealer-based leasing and PCPs, while hire purchase has dropped.
So what is the interpretation of these different messages in the
market? One might claim it’s cut your losses and start again. Easy
for me to say that, but think of the market for used cars in
particular. A market only exists when there is a willing buyer and
a willing seller – and in the case of a car, the necessary
lubrication in terms of finance to support the deal.
If the dealer is stuck with used units on the books at
unrealistic values which nonetheless still cost perhaps ten pounds
a day to finance and retain on the forecourt, the decision must be
made to cut the losses and get business moving again.
Is a ‘recession used car stock’ the same as a ‘boom economy used
car stock?’ Probably not. In terms of the recession buyer demand
may be for smaller or more economic cars, particularly in the light
of apparent continuing indecision regarding changes in
Is now the time to re-examine, again, the used car stock: grit
teeth, grin and bear it, get rid of everything that is sticking,
and restock to meet changing market conditions?
Before you finally kiss goodbye to the toxic 4x4s that were
traded a few months ago, take one last look at a very tight niche
market for them: the aspirational 4×4 buyer (very low mileage,
fashion-conscious users) – one sees them at school gates. One might
just have a market niche there of aspirational low mileage buyers
who can offset higher VED against amazing bargain prices.
Elsewhere on the used car lot, maybe recession demands
aggressive, smaller but even more attractive and tightly-focused
stocks than has been the historical case. Read the market every
more closely and intelligently than before; maybe focus on
Present those targeted cars in the best possible light, have all
the documentation regarding their history available, go for
sensible pricing and be ready to take ‘losses’ if necessary to
balance the book and shift the unit. Equally, be ruthless with
regard to the length of time a unit stays on the forecourt by
applying aggressive price adjustment – or sending it back to
auction. If used car prices are slipping, so will the potential
margins. Go for the stock that moves rather than the occasional
Recession is here, residuals have dropped but put the past
behind and start to trade under current conditions without looking
back. New finance sources appear to be thriving.
To paraphrase Sir MacKenzie, how about: the sign of a true
dealer is one who can look back on past good times with affection,
but wake up and handle the new business conditions. Maybe we will
not need razors at dawn after all?
Professor Peter Cooke, KPMG Professor of Automotive
Management, University of Buckingham