During the last decade, there has been a consistent increase in the volume and proportion of cars supplied to the rental industry through manufacturers' buy-back programmes.
Recent world events and the uncertain economic outlook are likely to exacerbate this trend as the major rental companies seek to minimise their exposure to risk. .
Buy-back contracts give comfort by providing fixed levels of depreciation to rental operators and, in theory, these deals produce a win-win situation. .
Rental companies can set their rates in the knowledge that there will be no unpleasant shocks in their depreciation charges, and manufacturers can maximise control over the residual values and distribution of nearly-new cars. .
The downside for rental companies is that the return standards demanded by manufacturers are far higher than those for cars sold in the open market. .
Manufacturers argue that reconditioning cars to a high standard enhances brand image and encourages their franchised networks to buy ex-rental cars 'blind' via IT links. Reconditioning costs are an 'investment' which delivers optimum residuals. .
In order to support the growth of these deals, manufacturers have set up a network of defleet centres. .
Following preparation, the cars are then remarketed primarily through the manufacturers' dealers backed up by auctions and other wholesale activity. Ultimately, of course, every used car has to find a buyer. .
Resale values as a percentage of cost new have declined on most volume cars — the only variable being the rate of decline. .
Over-supply and tactical discounting of new cars have undermined manufacturers' efforts to maintain resale values. Despite this trend, manufacturers continue to insist on restoring ex-rental cars to a far higher standard than that normally applied to other volume products. .
Today's used car retail buyers have a vast array of choice and information. .
They are also highly cost conscious and will not hesitate to play off one dealer against another. .
Value for money is paramount, and against this background I am not convinced that buyers are prepared to pay a premium for highly prepared cars. .
Surely, it must be time for all manufacturers to review their approach to see if their investment in logistics and the (unwilling) investment by rental companies in preparation have produced a tangible dividend. .
The first step would be an objective assessment of costs v benefits based on factual historic data rather than future projections. .
How much has been invested in facilities and reconditioning by both manufacturers and rental companies? How does the ultimate used car retail price achieved compare with similar products from other sources? .
How long are cars in stock awaiting preparation and resale? How much is it costing to fund stock? .
I believe the effect of less stringent reconditioning standards would be: .
- Rental costs would decline.
- The time between defleet and retail sale would reduce, which should cut inventory funding charges.
- Franchised dealers might try to buy the cars more cheaply, although I doubt that their appetite for volume would diminish.
Dealers might selectively undertake additional reconditioning on some cars. .
Perhaps most important of all for, rental companies would no longer need to attempt to charge wear and tear as 'damage'.