While dealer groups lost focus on used cars over the past 30 years with all their attention on their new car franchises, we are finding that used cars now act as the platform for the best-practice dealer groups because used cars offer four distinct traits the new car department lacks.

Bigger opportunity – The used car retail market is almost 2.5 times the size of the new car market and 3.6 times when you include wholesales (chart 1);

More control – Used cars allow dealers more control over the business (chart 2), choosing where to invest, when to invest and the payback period of the investment. Dealers get to choose the cars that sell. They are not limited to a brand or to stocking unpopular vehicles. 

Better verticals – Used cars come with a significant opportunity to sell insurance products, aftermarket, ICE servicing and finance; and

Building brand value – failing to act now to build a brand, existing traditional dealer groups risks deteriorating existing shareholder value.

Chart 1

The total used car market is about 3.6 million vehicles a year, some 2.5 million more than the new car market. The holy grail for car retailers is carving into the share of the private-to-private used car market which is about 1.8 million vehicle sales a year alone.

Chart 2

Chart 2 shows the parts of the business over which used car retailers have control over their operations compared with the hold OEMs have over them in the new car trade.

A business focused on used cars is:

• Free to brand its own business and create its own reputation via the quality and type of vehicles it selects for stock
• Free to choose the vehicles that are selling and popular in the market at the time
• Free to decide advertising spend, media to use returns as well as themes 
• Free to balance stock turns through pricing/margins

So if used cars are the best opportunity for dealers … what are the next steps?

Like any other business opportunity, you must approach it with a plan that is well thought through and supported by data and facts. 

Build a business plan with financial models, marketing plans, used car supply security, demographic and sales data to determine stock holding, physical site locations, staffing, DMS, CRM and timelines to execute everything. 

Take the time to set it up properly, build your own brand and tap into the infrastructure and skills that already exist within your business.

For examples to emulate, look to international used vehicle concepts that are successful at translating high volumes to profitability.  It’s a long road, the first CarMax used car super store was opened 30 years ago in Richmond, Virginia in the USA in September 1993.

Remember, you are no longer competing against other dealers. You are competing against the P2P (private-to-private) market. The plan should be to take a small share of the huge market.  

As the saying goes, how do you eat an elephant? One bite at a time.

Example: used car P&L (chart 3):

Looking at CarMax and Echo Park in the USA as two successful but very different models to execute a used car only brand/concept, the below can be used as a guide as to how the best operators perform.

Chart 3

Notes:
CarMax – Year ended February 2020 utilised to exclude the pandemic used car trading anomaly
Echo Park – Year ended December 2020 utilised to exclude the pandemic used car trading anomaly
Target 0.5% market share of total used car market of 3.5m umits, or 17,500 units

The above sample Example AU motors, is an Australian used car concept which makes the following assumptions:

• $22,500 average vehicle retail price – this would be variable based upon localised
• circumstances; however, the transaction price needs to be in the volume sweet spot for used cars.
• Transactional gross profit at $1,500 per unit is lower than the industry standard and benchmark used car grosses to encourage volume sales and high stock turns to drive the velocity ROI model.
• F&I is pegged at 40-50 per cent penetration rates at $2000 per contract
• Wholesale gross and volume is assumed to be at 80/20 retail to wholesale ratio
• Expenses include all operating expenses and interest
• 17,500 units would be spread over up to 10 sites delivering 150 units

Before you leap into your own used car brand, consider all the traps that can be encountered. 

But remember you are building your own brand (again) and you know the intricacies of your lock PMS’s better than international executives from multinational organisations. 

If you need help in developing an example used car concept P&L and a sustainable used car model, Pitcher Partners will be able to support you during this business development phase.

How did we get here?

Recently the Pitcher Partners Motor Industry Services team released the top 10 challenges dealers are facing starting in 2024. 

In the report published in GoAutoNews Premium over the past three weeks, we detailed how the industry was shaped by the cost reduction focus of the OEMs and how the industry will be shaped going forward.

The dealer landscape has been shaped by a number of global drivers over the past decade. 

The focus has been to reduce the retail & distribution costs of the operations of the OEMs and to reduce the cost of ownership to the customer.

It is these factors detailed below which have led us to the conclusion that used cars will play a major role in the future financial success of vehicle retailers.

Consistently delivering approximately 1.0 to 1.1m new cars, Australia’s automotive retail industry is set for unprecedented change driven by changes in drivetrain, distribution models and the usage/ownership model.

The Australian retail automotive market currently consists of 3,381 franchise rooftops with approximately 663 owners (chart 4), over 70 OEM brands with the top 10 brands by volume contributing about 75 per cent of the market sales by volume.Chart 4

COVID 19 impacted the new and used car markets significantly with extreme sales declines in April/May 2020 followed by lower-than-average new car volumes throughout 2020 until early 2023 due to supply constraints.  

This drove transaction prices higher by as much as 35-45 per cent for new cars. Used car prices increased in parallel to new car prices or even higher in some cases.

The next ten years – new car department revolution

Four key drivers are shaping the new car department (and the industry) over the next decade.  Simplified, they are product, distribution, usage, and supply.

Product

The historic dominance of the Internal Combustion Engine (“ICE”) vehicle sales will cede to Electric Vehicle’s (“EV”’s) which by the end of the decade will make up more than half of new cars sold. 

The simplification of the product (car) will cause significant disruption to future aftersales revenues and open the industry to new competitors. 

Fortunately, existing ICE vehicles represent a considerable very long tail which will support aftersales revenues (at a lower rate) for up to three decades.

Distribution

There will be continued competition and cost pressures globally, pushing OEMs into reducing retail footprints and their associated margins. 

Supported by shifts in product to EVs, OEMs are moving their retailers from Franchisees to Agents looking to unlock perceived distribution cost synergies and opening the door for online sales and further vertical integration opportunities via connected vehicles.  

Usage

An increasing share of new car purchasing is occurring via Fleet Management Organisation’s (FMO) and leasing companies to access tax benefits for consumers. This along with the emergence of new entrants including subscription and utility companies looking to disrupt the ownership model through bundling with existing services with the device (the car).

What is clear is that the average consumer will not jump head-first into BEVs until the technology improves and the resale value of the vehicle is more established for change-over. Sharing and subscription usage models will grow driven by environmental issues, underutilisation of the asset and potential cost savings.  

Despite the disruption caused by the pandemic, there has been a continued shift in consumer mindset from private usage to sharing models.

Supply

The Australian market is currently over-saturated with over 72 OEM brands, facing continued competition and product/distribution changes some OEMs will shift from National Sales Centre’s (“NSC”’s) to independent importers.

In order to create a seamless omni-channel delivery and service process some OEMs are considering the move to direct sales.

Subject to likely legislative changes, Australia may open the door to parallel imports and new to market vehicles.

Steve Bragg

By Steve Bragg