Margins under pressure from stock shortages and prep costs

Posted by CarGurus Admin on April 30, 2019

The savage supply and demand issues at play in the used car market have increased pressure on margins, and we’ve talked before about just how hot the competition is for good quality second-hand vehicles.

It’s no surprise, then, the research we conducted as part of our One Voice report revealed 43.8% of used car retailers were seeing their margins decrease – significantly more than the 25% reporting an uptick – and there is a number of reasons for the squeeze.

Preparation is the biggest expense

Retailers cited vehicle preparation as their single biggest cost pressure in 2019, with 13% of respondents claiming it was eating into their profitability. The lack of the ‘right kind’ of stock means used cars are generally hard to come by, which, in turn, has rendered the best examples even more sought after. As a result, retailers are having to work harder and spend more cash in order to get their vehicles shipshape, and many do not believe consumers are willing to pay the high prices dictated both by the market and by the subsequent spit and polish costs.

One dealer who shared their experience with us said, “I have been in the motor trade for 26 years and I have [always] been having to adapt in a very changing market, but I can no longer make my vehicles look as perfect as years ago because [if I do] I will price myself out of the market completely. The biggest challenge ahead is still maintaining good sales figures while retaining good margins so that I can continue my business in a profitable manner.”

Nathan Quayle, Group Marketing Manager at used car retailer Fords of Winsford, added that cherry picking by franchised dealers had amplified the problem, “They are keeping all the good part exchanges, leaving supermarkets and independents with the rest. Lower grade stock means prep times have gone up as well, which has obviously eroded margins even further.”

Tech toughens prep

What’s more, the increasing level of technology fitted to new vehicles has added to the expense of sharpening them up for sale, as preparation techniques are pricier and more involved.

“The specification of the cars is increasing. We spend a fortune on refurbishing diamond-cut alloy wheels; if you go back a number of years, there was not the same sort of issue,” said Alex Jones, head of marketing and digital at Carbase. “Replacing a set of wheel trims, for example, has a very different cost to a full diamond-cut refurb. Also, if you look at things like the volume of panoramic roofs with issues on electric blinds or big-screen multimedia systems, the repair or replacement cost of those units is extremely high,” he said.

Advertising and Brexit also add cost

In addition to rising preparation costs, dealers quizzed for our One Voice report also told us that advertising rates and Brexit were adding to the squeeze on margins. The ever-increasing cost of the former was cited as a contributor by 11.3% of respondents, rendering it the second-largest profitability pressure, while Brexit was the third-biggest at 8.5%.

“The Brexit situation in the UK has created instability and, in turn, will raise inflation,” one retailer told us. However, they added that the upside to the political upheaval was that it could cause buyers to look to the second-hand car market instead of the new one.

Outlook for margins in 2019

While the pressure on margins is unlikely to lift, dealers are more optimistic about it than you might think. Almost exactly half of those surveyed in the One Voice Report (50.9%) expect pressures to remain at the current level throughout 2019, while 26.1% believe they will fall. That leaves just under a quarter of retailers – 23% – who think the squeeze will tighten as the year progresses.

Topics: CarGurus research, industry news, trends