UK new car market being “force fed” by the manufacturers

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As the numbers keep telling us the new car market in the UK is seemingly in robust health and on the up and up, but is the story underneath as rosy as the headlines suggest? Whilst I would be the last one to do-down any worthwhile signs of economic recovery it is worth pointing out that the overriding reason that the UK new car market is showing growth is that the rest of Europe is in a sorry state, and as a result of this the manufacturers are literally force feeding the UK to make up for the declines in Europe.

Growth in the UK was up nearly 6% last year whilst showing a near on double digit decline in many European countries. Even the normally stronger economies like Germany have seen growth fall sharply.

The effect this has had on the UK is twofold; for the franchised dealers – who have been heavily incentivised financially to pre or self-register – this has seen great new car numbers but a significant fall in used car volumes and margins as a result. For the consumer (and most importantly how buyers fund a purchase in the UK) the deals on new cars – with assisted deposits and low rate finance – has meant that many drivers who hitherto could not have dreamed of buying a new car, can now do so.

On the face of it this is good news but like when the recession first bit and many dealers folded as a result, forcing registrations for short term gain in some cases will eventually lead to lots of unsold cars with the knock on being lower residuals and the possibility of buyers being trapped in negative equity or having higher monthly payments.

As we have often explained many franchised dealers, whose first loyalty is to the badge above the door, only play at selling used cars but as the difference in price between nearly new/ex demo and pre-reg is so close most buyers will opt for the newer option every time. This in turn means dealers are forced to lower prices on late plate used cars and therefore can no longer hit the margin targets they have been set.

From a buyers perspective until the sick puppies in Europe start to see growth again and some sort of recovery there will continue to be some fantastic deals to be had on new cars, and dealers will need to become far more expert in selling genuine used cars with which they can make a decent margin. If not all growth in new car volumes and profitability will be at the expense of declines in used cars and the bubble will well and truly burst.

Further reading: Is there something seriously wrong with the UK new car market?