Rising used car trade values will increase the squeeze on dealer profitability in February and beyond, according to the independent benchmark used car pricing guide CAP Black Book.
Healthy dealer margins will be threatened by an anticipated reduction in stock availability, increasingly forcing them to buy cars requiring more investment in refurbishing to retail standard, warns CAP.
Despite slow retail sales, due to low consumer confidence, dealers are already being forced to pay higher prices for many cars in anticipation of an approaching shortage of used car stock.
This expected reduction in the number of cars available in the trade market stems from the catastrophic slowdown in new car registrations in 2009.
Black Book reports that the most successful dealers in the current market are those able to price as keenly as possible. But this price-led strategy sets the scene for possible business failures in a climate of tougher competition and rising overheads, CAP believes.
Black Book editor Mark Bulmer said: "After a spike in volume some major disposal sources are dramatically reducing their sale entry numbers and tell us they will continue to do so in February. Consequently, we expect to see significantly less volume as this month wears on.
"The response to this among dealers is likely to be a reluctant acceptance that they will have to ‘buy damage' and even purchase stock speculatively, rather than for order. One independent told us he is down on last year's retail sales but is still actively sourcing cars to create a buffer for the expected drying up of volume. Although not unheard of, it has also been noticeable that dealers within the same group are frequently bidding against each other to avoid being left short of forecourt offerings.
"This is throwing up the challenge - which we have long signalled for this year - of sourcing sufficient stock of the right quality. The story from another group buyer is instructive. He reported leaving one sale in the 3rd week of January ‘disgusted' at the ‘high' prices he was seeing and reluctant to buy anything at all there. The next day he travelled a considerable distance to acquire more reasonably priced stock, only to find prices even higher.
"None of this should detract from the fact that consumers are not banging on the doors to spend their money. We are simply seeing an ongoing uneasy balance of limited consumer demand with restricted supply. Perhaps one fact better than any other sums up the mood of the times and that is the increasing number of customers who are trading in 2 cars against 1 practical used car."