Join our community of smart investors

Signs of stabilisation in the used car market

Supply chain problems sent prices to new heights, but the tide could be beginning to turn
Signs of stabilisation in the used car market
  • Car registrations are down this year
  • Higher living costs could hit demand

The continuing shortage of semiconductors and pent-up demand from cashed up pandemic savers has led to record selling prices and soaring revenues for used car retailers. But there are signs that the cost of living crisis and the demand for electric vehicles (EVs) could be beginning to relieve some of the pressure, as a major US car business unveiled mass layoffs and retailers warn on the outlook for the sector. 

Carvana (US:CVNA) has let over 10 per cent of its staff go after posting a $260mn (£213mn) net loss for its first quarter. The online used car retailer said high prices led “some buyers to forgo or delay their purchases” and that fulfilled volumes were lower than expected.

In the UK, data from the Society of Motor Manufacturers and Traders (SMMT) shows that used car sales were up overall in the first quarter of 2022 but did fall back in March. Sales rose by almost a fifth in January and by 7.4 per cent in February, before declining by 6.8 per cent in March. Against the same quarter in pre-pandemic 2019, sales are down by over 12 per cent.   

Meanwhile UK car registration numbers have fallen this year, with a steep drop in April. This indicates both the impact of supply chain issues that are limiting vehicle availability and the cost pressures that are influencing consumer behaviour. Total registrations fell by 16 per cent in April against the 2021 comparative and by over 5 per cent year-to-date. Registrations of petrol vehicles, which comprise around half of the market, collapsed by almost a quarter year on year amidst challenging prices at the pumps.

Operators who have recently reported results have also cautioned the demand outlook, despite posting soaring revenue and profits on the back of higher selling prices, referencing the increased costs that consumers are facing in economies buffeted by inflation.   

Vertu Motors (VTU) confirmed in its full-year results that supply constraints helped the top line. The average selling price for used retail vehicles was up by 19 per cent to £17,376 in the year to 28 February, pushing up used vehicle revenue by almost 60 per cent, demonstrating the impact of global supply chain issues on the second-hand market.

But management said that sentiment would be vital to future success. “Consumer confidence in the face of rising domestic costs is a critical determinant to continuing success in terms of demand,” said chief executive Robert Forrester.

There have been other indications in recent months that the used car market is beginning to normalise, Forrester recently told Investors’ Chronicle. He said that used car prices have fallen back by around 2 per cent over each of the last three months.

Auto1 Group (DE:AG1), the Berlin-based online platform for buying and selling cars, recently released first-quarter results to 31 March which revealed that revenue was up 82 per cent and gross profit by 44 per cent. But it too was wary on the outlook. 

“The EU used car market is in a period of uncertainty with historically high car prices and petrol prices weighing on sentiment,” chief financial officer Markus Boser told an investor call.  

And it is not just higher prices and costs at play. The rise in popularity of EVs has introduced another dynamic into the market. Liberum analysts noted in a research note on Vertu’s results that used car demand is being impacted by “consumers increasing their focus on electric vehicles, which are still mainly available in the new car channel”.  

The SMMT’s data shows that vehicle registrations in key EV categories have risen, as traditional vehicle numbers struggled. On a year-to-date basis battery EV registrations were up by 88 per cent, hybrid EV registrations by 43 per cent, and mild hybrid EV registrations by 19 per cent.

Volatility in the sector is also being caused by the big rental car players sourcing their vehicles from the used car market. In the US, Avis (US:CAR) increased its rental units by 50 per cent year on year and Hertz (US:HTZ) by 26 per cent in their respective first quarters.  

Analysts are now looking ahead to 26 May, when FTSE 100 company Auto Trader (AUTO) will release its accounts for the 12 months to the end of March. Numis analysts forecast revenue of £412mn and a pre-tax profit of £289mn, up 57 per cent and 79 per cent, respectively, on the comparatives. The car marketplace company noted in its half-year results that semiconductor shortages hitting the supply of new cars is having a knock-on impact on used car availability as there are “fewer part-exchanges and a lower volume of cars sent to auction from wholesalers”.

Auto Trader's updated outlook next week will provide more clarity, but it does appear as if the traffic light for the used car dealers is turning from green to amber as the economic situation continues to worsen.