More than consumer demand needed to spur UK automotive market’s recovery

Posted by George Augustaitis on June 29, 2020

As the UK reopens and pent-up demand floods the market, June car sales are likely seeing a lift. This type of spike tends to be short term, but rumors of an economic stimulus programme or vehicle scrappage scheme could result in a lift that carries into July or August. It’s the possible lack of supply that could temper car sales in the near future.

Recovery begins as showrooms reopen in June

Many UK dealers continued to receive leads while their showrooms were closed during lockdown, though consumers were not able to purchase vehicles. Dealers would take the online activity and continue the consumers down their purchase path with the hope of converting these leads into sales once they were able to reopen.

Fortunately, that’s exactly what many dealers were able to do. Since the government permitted the reopening of showrooms, total UK lead submissions on CarGurus have increased—and dealers have reported an increase in sales. One such example of this is Penske Automotive Group. They reported a sales increase of 50% during the first week of June as compared to the same time last year.

Though there was a slight pullback in total UK leads in early June, leads have remained higher than they were in May when showrooms were closed. While this paints the picture of a rebound for car dealers, the lift in leads is most likely the result of deferred demand and consumers renewing their PCPs after they expired during the shutdown.

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Scrappage or stimulus programme to provide relief

Though sales in June may be better than expected, the reality of the economic situation in the UK is still far worse. Triggered by COVID-19, the nation is facing what some are forecasting will be its worst recession in history. As the UK reopens and the government removes its benefits offered during furlough – including covering the wages of more than nine million workers – it will need to do something to boost the economy. This could come as a vehicle scrappage scheme that would bolster UK car sales and/or a stimulus programme that encourages spending.

The last time the UK had a scrappage scheme was in 2009 when the government offered £1,000 towards the purchase of a new vehicle, matched by a £1,000 contribution from car-makers.

While the sales increase from scrappage schemes often depends on the length of the program, the 2009 scheme was particularly successful because it was beneficial for both consumers and automotive companies. If the UK announces a scrappage scheme that is only available towards the purchase of an electric vehicle (EV), it will still help lift sales in the industry, but the dealers and manufacturers with the highest levels of new EV inventory will benefit the most.

Similar to a scrappage scheme, a stimulus programme could also benefit the automotive sector, but it will depend on its structure. For example, a programme that includes a VAT cut or direct payments to consumers would benefit the automotive sector.

Low supply could temper growth

Though June’s jump in sales and the possibility of a scrappage or stimulus programme would help strengthen the automotive market, months’ worth of pent-up demand will likely affect supply in the near term. Auction lanes remain closed and production is still ramping up, which means the UK market may not have the necessary level of supply across all vehicles to meet consumer demand. Across the country, less popular models might be easy to locate, while more popular models could become scarce.

Dealers are likely to see several months of ups and downs in used and new vehicle sales as a result of the changes in the supply and demand curves. And, the overall recovery of the automotive industry won’t take place until after the general market recovery.

Short-term challenges for dealers

Dealers should expect to face new challenges as the UK reopens. The new vehicle market will face supply headwinds until production levels return to normal, while used vehicle prices will rise as dealers find it difficult to acquire inventory with the auction lanes operating at reduced levels. Plus, consumer demand will continue to fluctuate until prices and inventory supply become more predictable and a scrappage scheme or stimulus package is implemented.

In the short-term, dealers should be smart about the inventory they acquire. There might be a vehicle that has sold well in your showroom in the past, but if buyers are not searching for it now, don’t stock it. Additionally, stay up to date on any government scrappage programmes, and be prepared to explain them to buyers when needed. Though the economic recovery from COVID-19 could get off to a bumpy start, it’s not all doom and gloom for the automotive industry.

Topics: covid-19, economic analysis, recovery, scrappage scheme, stimulus programme