UK wage growth improves so do car sales.
However, confidence is a fragile commodity and, with many of the world’s emerging economies faltering, even growth economies such as the UK, US and much of Europe are not immune from the negative head winds elsewhere in the world.
Then throw in the reputational risk issues faced by VW and the motor retail sector is facing some all-new dynamic issues.
The latest quarterly outlook from Sword Apak, is forecasting the latest challenges to be faced in the UK.
The bi-annual new vehicle registration peak saw the UK market hit new highs with registrations up 8.6% to 462,517 units in September according to the Society of Motor Manufacturers and Traders (SMMT). It was the 43rd month of consecutive growth, but in October sales fell back before rising once again in November.
It seems likely that 2015 registrations will represent a new record. It is clear that this growth is increasingly being driven by fleet sales, with retail sales up just 3% year on year. Most worryingly for retailers, there has been significant pre-registration activity, many of which are now appearing on dealer forecourts.
The car parc for franchised dealers in the UK is getting dramatically younger as a result of the sustained influx of pre-registration vehicles. This in turn is enabling independent dealers to dominate the 3+ category.
There is a risk that with the volume of younger cars now available the market could become commoditized and inevitably at the very young end such cars could find themselves competing with new car offers. Dealers will need to increase their focus on income from added value services, which themselves are sometimes facing change from regulation to sustain overall income.
The global outlook
The International Monetary Fund (IMF) has recently warned that the risk of recession in the US, eurozone and Japan over the next year had increased over the past three months, as emerging markets face a fifth year of slowing growth and Latin America contracts this year.
This hard truth is not being lost on CFOs at some of the UK’s largest companies interviewed by Deloittes in September. 73% of the CFOs thought that uncertainty was either 'above normal', 'high' or 'very high'. This is up from the June figure of 55%.
On a positive note, the UK deficit dropped to its lowest level in seven years in June as tax receipts rose and encouragingly, in spite of the strong pound, the UK's current account deficit narrowed much faster than expected in the second quarter of the year, from 5.2% of GDP in Q1 to 3.6% in Q2, according to the Office for National Statistics.
Global demand is softening and for car manufacturers this means taking product to market hot spots. The UK has been a hotspot for an extended period and there is little sign that this trend will diminish, although thankfully the EU is now proving itself to be better positioned to provide a wider outlet for sales than it was a few years ago.We see the pressure remaining on UK retailers to hit what will be ‘stretched targets’ and the likelihood of pre-registration activity continuing.
Emissions testing
This really is a unique situation. Volkswagen has announced the suspension of the sale of 4,000 vehicles in the UK, which the business believes may be equipped with the device that affected emissions test results in the US. VW, Audi, Skoda and Seat brands are all affected.
On a positive note, the government has announced that owners of VW diesel cars fitted with the falsifying emissions software will not have to pay higher Vehicle Excise Duty.
VW is one of the world’s most trusted brands, often held in huge affection by its customers. Its capacity to manage its current difficulties will clearly be a challenge and at the very least in the short term sales will be damaged and residual values may need to be adjusted.
The silver lining for the wider market is that other brands may enjoy a modest boost. In terms of used cars specifically, a slight fall in values apart, the demand for VW product remains strong in the early weeks following the US announcement.
We expect VW to act quickly and decisively to try and bring this crisis to an early conclusion, taking the ‘pain’ needed and supporting their dealers as necessary.
What does it all mean for the UK used market?
This high level snap shot of some of the key external factors cannot ignore the risk of over-supply into the used vehicle market in the UK. Overall, we see the return of confidence to the financial sector as being central to averting anything but a modest decline in residual values as the remarketing cycle comes to terms with the influx of used stock from fleets and personal contract purchase plans. Dealers once again have access to stock funding and they are using it to increase stock levels on forecourts across the country.
The market challenge will be sentiment-led as we head into 2016. The broad outlook for the UK is positive and in spite of the external environmental factors raised, increasing wage packets, continuing low inflation and interest rates are a positive formula for a UK consumer audience, which has spent its time focused upon austerity. The return of spending power signals a cautiously positive outlook for used car retailing.
James Powell is Sales Director at Sword Apak
