Price volatility in the used car market is a big challenge for dealers. Extended warranties can help smooth the way, according to QBE’s Chris Ullathorne
Last year, consumers faced big increases in the price of used cars as demand outstripped supply. According to the Auto Trader Retail Price Index, average used car prices increased 31% year-on-year in January, marking the 22nd consecutive month of price growth. More than one in five ‘nearly new’ cars are priced above their brand new equivalents.
Price volatility ahead
The pandemic has severely disrupted supply to the used car market, a problem that is likely to continue with the war in Ukraine. Despite strong demand for used cars, stock levels have been constrained by problems in the new car market, where a shortage of semiconductors has hit production and contributed to longer waiting periods for delivery. Drivers are also now more likely to hold on to cars longer and delay trade-in, which has had a negative knock-on effect on used car supply.
Supply is likely to be problematic for the remainder of this year, reflecting ongoing supply chain problems in the new car market and economic uncertainty. UK car industry output in 2021 was at its lowest level since 1956, while new car sales were still 29% below pre-Covid levels, the second worse year for annual vehicle registrations since 1992, according to SMMT. Despite a strong start to the year, the cost-of-living crisis and supply chain problems caused SMMT to recently cut its forecast for new car sales in 2022, with sales expected to be almost 18% lower than 2019.
With supply issues persisting, prices are likely to stay high. However, at some point, supply will begin to normalise, which could see prices tumble. KPMG warned prices of used cars could fall 20% to 30% as vehicle supply and demand achieves equilibrium in late 2022 and 2023.
Protecting residual values
Price volatility presents a number of challenges for dealerships, who need to maintain stock levels to attract buyers. Record price increases could mean dealers risk under-pricing stock, and missing out on crucial profits. On the flip side, a sudden downturn in pricing could see profits evaporate if dealers fail to shift stock quickly.
Used-car dealers will need to balance margin against volume, and use add-ons and aftersales to increase profit. Extended warranties are a great way to boost margins and provide an additional source of revenue. Warranties also help build customer loyalty and support aftersales, such as servicing and repairs. They can also help protect balance sheets against the rising cost of repairs and inflationary pressures.
QBE is a trusted partner in the extended warranty market, working with automotive manufacturers, distributors and dealerships for over 20 years. Our automotive warranty offering is delivered through a purpose-built digital platform, which dovetails our products with dealers’ own service offerings. The product is backed by a fast and customer friendly claims service, which is central to increasing customer loyalty, while our advanced analytics help clients optimise growth and profitability.