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Running a used car dealership

Michael Nile explains the benefits of buying a used car dealership and why the industry is recession-resistant.

The used car industry has transformed from a bumpy ride, to a smooth drive and the languorous but steady shift in fortune is a national and even global phenomenon.

Most analysts would have predicted far harsher times for both the independents and chains that supply second hand cars to families and corporate bodies alike, labelling them as inevitable victims of the treacherous game of fiscal tag that travels insanely through any recession.

But a closer examination of data suggests that better times are here for used-car sale businesses, and despite differing opinions, things are likely to improve further.

Two main factors have influenced the new-found popularity of used car dealers. The first is the collective effect of the car manufacture incentive schemes, introduced by various governments around the globe. The second is the relative-scarcity effect of the recession itself.

Scrappage schemes

​Vehicle scrappage programmes have been introduced in a number of countries, including Canada, USA, Italy, Portugal, France and Germany. The idea behind such initiatives is to encourage the replacement of older, less efficient and emissions-rampant cars with new and modern substitutes, stimulating car manufacture in the process.

Environmental benefits are often cited as the principal motivation, but during recession the more pressing objectives are linked to kick-starting the economy, and the UK government was quite open about this when it launched its own scheme during the 2009 Budget.

What consumers are encouraged to do is scrap an old car (at least 10 years old) in exchange for a £2,000 payoff (half-funded by the government). The programme has been allocated £300m, which allows for about 300,000 customers to benefit. The scrappage scheme has been so successful in the UK that the government's contribution to the fund is due to dry up around October 2009.

A similar scheme in the US cost $3b, $2b more than originally anticipated and just less than 700,000 dealer transactions were submitted for rebate.

Scrappage schemes have their critics, but they have undoubtedly helped to ease national economies away from their wretched penance. As The Economist stated in August 2009: "The boost in demand that the rebates have brought about is exactly the sort of stimulus that is urgently needed to escape what John Maynard Keynes called a 'liquidity trap'.

"According to his theory, consumers may become so worried about the economy that they cling to as much liquid wealth as possible, cutting their spending sharply and thereby triggering precisely the slump they feared."

The scrappage scheme in the UK has probably turned out to be one of the most significant developments to have affected the used car sector

The scrappage scheme in the UK has probably turned out to be one of the most significant developments to have affected the used car sector. The Northern Echo reported in August 2009 that Pendragon, one of Britain's biggest (and largely new car) dealership groups, "is guardedly optimistic that the worst of the downturn may be behind the industry after the Government's scrappage scheme played a surprising role in boosting used car sales."

The Nottingham-based company reported pre-tax profits of over £11m in six months. The Echo article went on to state "the company would be investing more in used cars as demand outstripping supply had seen average used car prices recover to levels last seen at the start of last year."

Boosted sales

The chief executive of Pendragon, Trevor Finn, says: "While cars under the scrappage scheme are definitely scrapped, the fact that they are not coming onto the used car stocks has helped to boost second-hand prices."

That's a markedly different picture to that of 2008, where unsold used cars were starting to clog up British auction halls, their values having dipped by an average of £500.

The global credit information group Experian reports in the first quarter of 2009 (1st January - 31st March), used car sales statistics were 5% lower than in the same period in 2008, but up 17% on the final quarter of 2008. This is the widest fourth quarter to first quarter increase since 2003/04. The biggest sales increases appear to have come for Citroen, Renault and Nissan.

Kirk Fletcher, managing director of Experian's Business Information and Automotive Businesses is quoted on the company's website saying: "This is the clearest indication so far that consumers are slowly beginning to spend again in the used car market, and it also reflects the anecdotal feedback we are getting from dealers…. The decline was not as severe as many in the industry had been expecting."

It's not only in the UK that sales are continuing to defy the plangent voices of doom. USA Today's Chris Woodyard recently reported, "Used car salesmen are becoming the kings of the lot as demand for such vehicles is starting to rise."

He quotes one dealer as saying, "People are trying to be a bit more responsible in their major purchases," and while new car sales slid 41% in February compared with 2008, used cars sold through dealerships rose 3%.

In fact, the trend appears to be global, with Qatar's Mannai Trading Company, for instance, reporting a 200% rise in sales of certified and uncertified pre-owned cars in recent months. In Britain, reports the BBC, the average family vehicle has gone up in value by about £600. In a September 2009 web bulletin, it quotes Tim Naylor of British Car Auctions as saying: "Nearly everything that comes in is being sold at the moment and that is very, very unusual." It's good news if you're selling a car, of course, but not fantastic news if you're a buyer.

Formidable advantages

Nevertheless, buying used cars is the way the trend is going to go for a while yet. Used cars will never go out of fashion because they present a formidable list of advantages to the consumer.

Michelle Krebs writes in an article at Cars.com, saying "the decision to buy new or used vehicles boils down to what you can afford and what will give you peace of mind." On the latter score, the ever-improving reliability of 'older' cars does put one in mind of some PC users' preference for Windows XP over Vista. Vista and its coming successor might have a thousand desirable little tweaks built in, but the established solidity and ease of use that is offered by XP cannot lightly be dismissed by its devotees.

In the world of used cars, for a modest sum-a healthy fraction, even of what you would spend on a new car- you get a whole lot more of somebody else's seconds. And it'll be reliable, too. Used car dealerships can make accessible to those consumers on even indifferent salaries status-symbol cars with luxury features; for what you would normally spend on an average new car with bare bones accessories, you could as easily acquire the near-latest in sturdy build, snazzy design and up-to-date motoring conveniences.

New cars start depreciating the minute you drive them off the garage forecourt, but when you buy second hand, the biggest loss will have been incurred by the first owner.

A used car, which in some cases can be just a few weeks older than something just manufactured, is an economical godsend if you need a second car for the family, or a possible alternative to an ailing existing car.

More companies, many attached in some way or other to the dealership itself, are now willing to offer loans for certified used vehicles and to applicants with 'tainted' credit records. Used cars don't usually have the same standard of warranty as new vehicles, but increasingly buyers of certified second-hand cars are buying late-model cars from authorised dealers and then adding to the original warranty, which is usually transferable to a second owner.

And you certainly have more legal protection than buying from an individual dealer, via the internet or through an ad in the newspaper. Those routes are potentially the cheapest, but also the riskiest. Your rights in law are not as clear-cut or as easy to pursue if the car is a figurative and literal non-starter.

For those individuals and businesses wishing to acquire used car dealerships, the signals have rarely been better in recent years. Current market conditions are of course constrictive and the recession has impacted the optimum worth of many businesses. But with car rental agencies hanging on to their fleets for longer than ever in order to save money, and lacklustre new car sales also cutting supply, the reality is that on a month by month basis, used car prices have been rising by more than 3%. Used car dealerships may not have proven to be recession-proof, but they are proving to be recession-resilient, with car values now rising for the ninth month in succession. It is hard to think of another retail business type whose stock has risen by 3.5% month by month.

At this point in time, the danger faced by any purchaser of a used car dealership is also that facing the prospective owners of most other businesses: that economic stimulus schemes of all descriptions put into operation by various governments around the world will be abandoned prematurely, and that public spending confidence will again dissipate, causing us all to slide once more into the gloom of a deeper recession.

Perfect business

If you can keep trusting governments to continue doing the work that we have put them there to do, then used car dealerships are a perfect business pursuit for mechanics with a good history of working for others in related fields, or for those with a strong interest in cars and making money. A love of cars and decent technical knowledge are invaluable when you are building up stock.

You can become part of an automotive franchise group, or you can be an independent. As an independent, it is down to you to see how the competition is faring, and whether you are up to matching and surpassing it.

Location is important, but an internet presence more important still. Be prepared to spend in excess of £10,000 for a tailor-made website that expresses you and your stock well. Dealers need buy only those used car models that they know are selling well, whereas with new cars they are compelled to have the newest purchases, but not necessarily the best. Remember your local target market if you're not too dependent on the internet. A pickup will probably sell better than a convertible in a rural area.

Although evaluating a car's condition and worth is more subjective than objective, researching vehicle history is a foregone conclusion for any used car dealer. Auditing firms provide services in countries such as the UK, Italy, Ireland, the US and Brazil, but it must be remembered their reports will only contain the information to which they have access. Consumers are also advised to check any given dealership is registered with the Retail Motor Industry Federation.

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Michael Nile

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