cap gemini- the anatomy of used car business

The Anatomy andPhysiology of the Used Car Business

A Global Analysis With Particular Reference to FourKey Markets: U.S., Canada, France, Germany

the way we see it

Contents

© 2007 Car Internet Research Program II and Capgemini. Reproduction in part or in whole is strictly prohibited.

Acknowledgments

The data contained in this report was collected by the Car Internet ResearchProgram II (CIRP II). All analysis and interpretation of the research and data hasbeen made by CIRP II in collaboration with Capgemini. The research and writingof this study was led by Professor Christian Navarre, together with Alina Kotov,Lihsin Hwang, Jean-Yves Barbier and Magdalena Jarvin. Translated from theoriginal French by Karen Twidle.

The Car Internet Research Program II is sponsored by: Capgemini, PSA PeugeotCitroën, Renault SA and The University of Ottawa.

Introduction 3

Executive Summary 4

Market Overview: Highly Contrasting National Markets 7

Global Trends Affecting the Used Car Business 12

Comparative Analysis of the Four Markets 15

Success Strategies in the Used Car Business 23

Conclusion: A New Approach to Used Car Sales 30

in it, and how they can be moresuccessful in taking advantage of the opportunities it offers.

Indeed, these opportunities are vast:Fueled by greater longevity, the usedcar market worldwide has grownsignificantly. In France, for instance,used car unit sales increased from4.7 million to 5.4 million between1990 and 2005, at the same time asnew vehicle sales declined from2.3 million to 2.07 million units.1

Franchised dealers’ used vehicleoperations now act as a hedge againstuncertainties in the new vehiclemarket and even support new vehiclesales. Moreover, the management ofused inventory can have a significantimpact on a brand’s image and residualvalues, making it more important thanever for manufacturers to take anactive role in their dealer network’sused vehicle management.

In short, the used car business is hereto stay. With declining margins in thenew car business and the aging ofvehicles on the road, it is likely to bea growing and increasingly importantcomponent of franchised dealers’sales, both in North America and in Europe.

This report provides a detailed pictureof the used car business and its role inthe global automotive industry.

Until recently, car manufacturers anddealers have tended to focus on theirnew vehicle business to the exclusionof used cars, often viewing the usedvehicle trade as an unwanted byproductof new car sales and a necessary costof doing business. It seemed obviousthat new cars, with their higher stickerprices and wealthier buyers, should bethe focus of dealers’ sales efforts.Incentives have beeen used to move thenew car inventory, which was tirelesslypromoted by both dealers and originalequipment manufacturers (OEMs).

Over time, however, competition inthe new car market has resulted in asurprising new state of affairs: usedcars have begun to add more todealers’ bottom lines than sales ofhigher-status new cars. Moreover, asthe quality and reliability of used carshave grown, consumer attitudes havealso evolved. As a result, manufacturershave begun paying greater attentionto the crucial role used vehiclemanagement plays in improvingresidual values, new car sales and thebuilding of manufacturers’ brands.This attention is likely to continue to grow; indeed, investing in used carmanagement is increasingly becominga necessity in a market characterizedby relentless competition, slimmingmargins and ever more demandingconsumers.

This report examines the used carbusiness worldwide, with a particularfocus on the United States, Canada,France and Germany, to find out whatdrives the used vehicle business, howand why OEMs and dealers compete

The Anatomy and Physiology of the Used Car Business 3

Introduction

Automotive the way we see it

1 Comité des Constructeurs Français d’Automobiles (CCFA).

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used vehicle sales in the U.S. aretoday more than twice as profitablefor dealers as new vehicle sales(roughly 2.7% profit margin,compared with 1.2%). Moreover,the used vehicle financing andinsurance segment is often themost profitable operational unit of afranchised dealership, posting 11.3%profitability in 2005 in the U.S.4

■ The key to growth will betransparency and symmetry ofinformation, as consumers continueto apply the same approach toresearch and collection of informationin their search for used vehicles asthey do in the new car buyingprocess. We expect to see greater useof the Internet, more savvy consumersand more product proliferation. Aswith new car sales, the relationshipbetween dealer and customer willneed to be based on respect andtrust, as well as ease of purchase.Such a symmetrical relationshipwill presume that buyers and sellerspossess the same information bywhich to determine a product’squality. For example, the growth ofCarMax has been partly attributedto this approach.

■ The Internet is increasinglybecoming the information sourceof choice for used vehicle buyers.Although consumers still use local

The four main countries were chosenfor this study for the following reasons:

■ The United States and Canada arepart of an integrated economicsystem, with the majority of thepopulation speaking the samelanguage and affected by similartrends, constraints and influences.The same brands are found in bothcountries, with competition aroundthe same models. Distribution is alsocarried out in both countries by thesame system of exclusive dealerships.

■ France and Germany both workwithin the same European regulatoryframework in terms of car distribution.The two countries have strongnational traditions in the automotiveindustry and develop brands thathave worldwide coverage. Distributionnetworks are well developed.3

Key FindingsOur research identified a number ofkey findings that characterize thedevelopment of the used car business:

■ The importance of the used carmarket is growing significantly.In both the U.S. and France, forexample, the used-to-new vehicleratio (which demonstrates thelevel of used market activity) hasincreased since 1999 from 2.4 to 2.6,showing a steady growth of usedvehicle sales by volume. In addition,

Buying a new car is the end point of a process that, on average, takes sixmonths2 and involves much researchand complex decision-making. In thepast, the power struggle betweencustomers and dealers generallyplayed out in favor of the latter.

The development of the Internet haschanged the power struggle betweendealers and consumers. Buyers cannow potentially gain the upper hand.Customers are increasingly knowl-edgeable about cars, their quality,residual value, prices applied,finance charges, availability, and,more and more frequently, the exactprofit margin that the dealer makes inclosing a deal. Dealerships have had toadapt. The most shrewd and dynamichave managed to turn customerintelligence to their advantage, byfocusing on what consumers reallywant, namely transparency andrespect. (For more on this, see “Insidethe Customer/Dealer Relationship,”published by CIRP and Capgemini,2006.)

Has the used car market changed inthe same way as the new car market?Although in some countries, used carsales represent two or three times thevolume of new car sales, there arevery few studies that fully explore the used car business.

Executive Summary

2 CNW Marketing Research, Inc., Purchase process Wave IX.3 In the case of Europe, and for a small number of variables, there are differences between data stemming

from two main sources: Datamonitor and the ICDP research program. These differences are explainedwhere necessary.

4 CNW Marketing Research, Inc., Document 925: Profit margins at dealerships.

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newspapers and word-of-mouth whenresearching used car purchases, theyare turning to the Web in increasingnumbers, highlighting the importanceof having a strong Internet strategyfor used vehicle programs. A recentstudy from J.D. Power points out thatmore than twice as many late-modelused vehicle buyers in the U.S. findthe vehicle they purchase throughthe Internet than through bothnewspaper and magazine classifiedads combined.5 Dealers that havefocused more attention on multi-channel communication strategiesare beginning to reap benefits, withan increasing number saying theirWeb activities have improved salesand extended their trading range.6

■ The maturity of the used car marketvaries considerably according tocountry, and geographic proximitydoes not necessarily result in similarused car markets. It was initiallyhypo-thesized that the markets in Canada and the United Stateswould be similar to each other and different from the French andGerman markets. However, in manycases these relationships did nothold and surprising patternsemerged. Each national market has its own peculiarities, which are a combination of socio-cultural,economic and historical circumstances.For example, the used-to-new ratio issimilar between France and the U.S,with Canada being surprisingly low.

■ The most important success strategyin the used car business may bethe development of trust-inducinginitiatives such as certified usedvehicle programs. These programsprovide the best protection againstchannel competition and allow dealersto improve margins significantlywhile offering an additional sourceof revenue for OEMs. In the U.S.,where the certified vehicle market is strongest, sales of manufacturer-certified vehicles have more thantripled between 1997 and 2006,totaling approximately 1.5 millionunits in 2005. Other countries aremoving in this direction as well.

■ Franchised dealers are in a strongposition to benefit from growth inthe used vehicle market, supportedby OEM involvement in marketingand certification programs, access to high-quality off-lease vehicles,online inventory pooling and a moreprofessional image in the mind ofthe consumer. In the United States,franchised dealers earned highergross profits on used vehicle salesthan independents,7 had the highestclosing ratio (with 44% of visitorsmaking a purchase, compared withjust 27% for independent dealers),8

and benefited from signif-icantlygreater customer loyalty,9 with morerepeat customers across all vehicleage groups.

5 J.D. Power and Associates, 2006, Used Autoshopper.com Study.6 Waller, Hwang and Navarre, “The 335 Kilometer Franchise,” CIRP (Car Internet Research Program),

November 2005, p. 32.7 CNW Marketing Research, Inc., Document 34: Gross profit: Used vehicles.8 CNW Marketing Research, Inc., Document 197: Shoppers who became buyers – new, used.9 CNW Marketing Research, Inc., Document 997: Used vehicle loyalty to dealership.

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■ Used and new vehicle sales areinterrelated and complementary;both are a function of dealerexcellence. Successful dealershipstend to have strong sales in both thenew and used vehicle departments.An American study found that newvehicle sales per dealer correlatedpositively with used vehicle sales,despite the counter-cyclical natureof the used car business.10

■ Management of new car incentivesis critical to ensure profitableused and new businesses. With theincrease in the quality and image ofused vehicles and the popularity ofcertified programs, late-model usedcars are increasingly becoming asubstitute for new vehicles and viceversa. As a result, incentives in thenew vehicle market act to depressused vehicle prices, loweringresidual values and new vehiclesales prices and reinforcing theincentive cycle. This impact isparticularly pronounced for late-model used vehicles and for moreexpensive (and image-conscious)market segments.11

■ Greater professionalism willincreasingly characterize theinternational used vehicle marketover time. Although less professionalplayers can survive in the used carbusiness when the sales cycle is longand purchase quantities are small,eventually the cream will rise to thetop. This presents a tremendousopportunity for automotivecompanies.

10 CNW Marketing Research, Inc., Document 116m: Same store new-used sales.11 CNW Marketing Research, Inc., Document 521: New prices impact on used prices.

Key Findings in Individual Markets

United States■ The United States has the most developed auction and wholesale market, resulting in

the highest share of independent dealers of the four countries studied. Dealer attitudestoward the used car business tend to be the most entrepreneurial and growth-oriented.

■ The American car market is also characterized by a more developed “car culture” thanthe others. As a result, emotional factors tend to play a bigger role in the used carbuying process.

■ The U.S. has the highest vehicle ownership per capita of all markets studied; moreover,multiple vehicle ownership is common and consumers change vehicles relatively often.

Canada■ Canadian consumers tend to be more risk averse than their counterparts in other markets.

They are also more cost-conscious, with monthly payments a major driving factor behindpurchase decisions.

■ They tend to keep vehicles longer than in the United States, resulting in a less active usedvehicle market.

■ Use of online channels, such as eBay, is less developed. It seems that Canadian dealersdisplay a risk-averse attitude toward investing in online distribution.

France■ The French used vehicle market has exhibited very strong growth in the past decade,

reaching a level of activity equal to the American market.

■ French dealers display the strongest aversion to selling “older” vehicles: Only 17% of thevehicles they retail are 4-plus years old; in contrast, 41% of vehicles sold by U.S. dealers(and 47% of those sold by Canadian dealers) are 6-plus years old.

■ Consumers in France show the greatest propensity to shop for certified vehicles, makingcertified programs an important differentiating factor in this market.

Germany■ Germany has the most advanced online used vehicle market, used heavily by both sellers

and buyers.

■ Used vehicles in Germany already have the longest warranty among all markets. As aresult, certified vehicles are not a strong differentiating factor in this market.

■ Since 2003, dealers’ share of the used vehicle market has been recovering from sixconsecutive years of decline.


Canadian dealers, in contrast to theentrepreneurial drive and taste forinnovation more characteristic of their American counterparts.

The drive to expand the used carmarket, the will to ensure transactiontransparency, the capacity to developlong-term competitive positioning,market intelligence and understandingdepend for the most part on dealersand manufacturers. These factors canchange far more quickly than thesocio-cultural elements involved inconsumer behavior. Furthermore, aslong as they have the necessary strategicwill, manufacturers have the power andwherewithal to weigh heavily on thestructure and development of markets.

Explaining Used Car Market PerformanceThe case of Japan is both specific andextreme. Due to a number of reasons,the market has the lowest used-to-newratio. The Japanese market is subject torigorous environmental and road testregulations, in addition to high disposalcosts, which makes it relatively expensiveto own older vehicles. The consequently

The accompanying table (Used Vehiclevs. New Vehicle Market Sales – ANational Comparison) looks at newcar and used car sales by unit volumefor eight countries. The ratio of usedcar sales to new car sales acts as anindicator for the expansion of theused car market.

The used car market is most active inthe United States, France and the UK.In these markets, the used car businessgenerates considerable economic income.In contrast, the used car market isweaker in Canada, Japan and Spain.

The case of Canada and the UnitedStates shows the extent to which twonational markets, strikingly similar whenit comes to new car sales (same brands,same cars, same distribution channels),can differ markedly in terms of their usedcar market. This notable difference canbe partially explained by Canadianconsumer habits and attitudes. Itwould seem Canadian consumers aremore cost-conscious, risk averse andinclined to keep their cars for longer.The difference is also due to thehigher degree of conservatism among

Market Overview: Highly Contrasting National Markets

high depreciation rates make Japaneseused vehicles far more suitable for theexport market. However, it is difficultto say whether the relatively high costof ownership is more or less importantthan the socio-cultural factors, which alsomake used car ownership less desirablein Japan than in other markets. Japaneseconsumers generally prefer to buy newproducts, viewing used goods as linkedto lower social status.

In fact, each national market is coloredby the socio-cultural setting. Beyondthe impact of culture, however, it isnecessary to examine the way marketswork in economic terms.

Market theory is based on the ideathat prices act as indicators of thequality of products bought and sold.In principle, the higher the price of a product, the higher its quality, andvice versa. Classical economic theoryalso posits that buyers and sellerspossess the same information by whichto determine the quality of a productunder transaction. This is defined as a symmetrical relationship betweenbuyers and sellers.

Used Vehicle vs. New Vehicle Market Sales – A National Comparison

UK U.S. France Germany Italy Canada Spain Japan

New Car Sales 2,567,000 16,995,000 2,070,000 3,320,000 2,262,383 1,583,000 1,517,490 5,852,067

Used Car Sales 7,701,308 44,138,000 5,400,000 6,650,000 4,586,894 2,300,000 2,080,754 5,984,800

Used Car/New Car Ratio 3.0 2.6 2.6 2.0 2.0 1.5 1.4 1.0

Source: CIRP, adapted from various sources, including CNW Marketing Research, Inc. (U.S.), DesRosiers (Canada), Japan Automobile Dealers Association (Japan) and Datamonitor (France, Germany, Italy, Spain,United Kingdom)Note: All sales in units. All data for CY2005, except Italy, Spain, and UK, which are CY2004.


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However, for some goods, includingused vehicles, sellers can decide notto reveal the real value (in terms ofquality) of what is being sold. Thismeans it becomes possible to put agood quality price on mediocre qualitygoods (“lemons”).12 Buyers are in noposition to determine the real qualityof what they are buying. Sellers, onthe other hand, are well aware of thequality of what they are selling. Thissituation is a typical one of asymmetrybetween buyers and sellers, which isto the latter’s advantage.

If price no longer functions as anindicator of quality, if there is asymmetrybetween buyers and sellers, and if thelatter are unscrupulous leading tobuyer caution, markets tend to under-perform as both prices and volumedecline. For the market to expand,sellers must ensure that they gainconsumer confidence by getting rid of, or at least minimizing,asymmetry of information.

Assessing the Purchase QualityBuyers have two main strategies bywhich to ascertain the real quality ofwhat they wish to buy.

1. Secure the transaction. Thisamounts to the consumerbuying goods only when theseller relinquishes his hold oninformation and agrees to reduceinformation asymmetry by givingthe buyer real quality guarantees.Note that this type of behavior is motivated by long-term, ratherthan short-term, gains. The solutionlies for the most part in the handsof the seller.

2. Secure the relationship. In theabsence of a transparent transaction,the buyer tries to gain informationabout the seller’s integrity. A sellerwho has a solid reputation forhonesty stands to lose much byveering away from the right path.The solution here lies essentiallywith the buyer, who will choose a potential seller among family,friends, acquaintances andnetworks.

Undoubtedly, buyers will try bothstrategies. However, it is clear that strategies based on securingthe transaction are the easiest toimplement for professionals(especially dealerships) if their starting point is long-term gain.

Securing the TransactionThe automotive industry has come upwith many ways to secure a used-vehicletransaction, including:

■ Incentives such as sizablewarranties, free car repairs,breakdown service or a “satisfied or reimbursed” policy. It isincreasingly prevalent for car dealersto include a warranty on a used car.Of course, these usually cover ashort time-span (9 to 12 months),compared with the longer guaranteeperiods provided by manufacturersfor new vehicles (two to threeyears, sometimes more). In thecase of cars that move more slowly,dealers might consider special pricingor a lower financing rate. In the caseof a “satisfied or reimbursed” policy,customers can change their decisionand return the car during a shorttime period after the purchase(usually around one week).

12 Akerlof, George A., Nobel Prize winner 2001, theorized the used car market in the 1970s. The foundingpublication, and savor the title, was: “The Market for ‘Lemons’: Quality Uncertainty and the MarketMechanism,” in The Quarterly Journal of Economics, Vol. 84, No. 3 (Aug. 1970), pp. 488-500.



■ Manufacturer vehicle certification,which is a more recent development.In theory, this means the dealer onlyputs vehicles up for sale when theyhave undergone extensive and in-depth inspection (generally morethan 100 inspection points). Anyrepairs deemed necessary after theinspection are carried out. Here, themanufacturer acts as a guarantor.

■ Transparency in sales. Somedealerships recommend andencourage prospects to have recourseto independent assessment toolsonsite. An increasing number of thirdparties are making the most of thisdevelopment to offer consumers toolsto help them assess the quality ofwhat they buy (these are usually paidservices, but they are increasinglybeing offered free of charge). Examplesinclude the Kelley Blue Book in theU.S., Black/Red Book in Canada andArgus in France. In addition, wehave found that in some marketsOEMs are providing dealers withdata on previous vehicle owner and service history.

The impact of these provisions, when they are offered by the dealer, is to reassure the customer by makingprices once again act as quality markers.This in turn pushes prices and salesup over the long term. Of course, thismeans that the cost of the transactionis higher for the dealer, which initiallyresults in a lower profit margin. It istherefore in the seller’s interest to ensurethe initial quality of products he orshe markets.

Governments, under pressure from consumer groups, can also force the salespeople to become more transparent,13 notably throughmandatory technical reviews, wherethe buyer is informed about the stateof the car; online availability of insurancecompany records, so consumers canascertain whether or not a car has beenthrough serious accidents; heavy finesfor fraudsters (for example, rigging theodometer); and professional used carsales organizations with regulatedaccess, member training programs and a common ethical charter.

Securing the RelationshipIn the middle of the 1990s, PaulDiMaggio,14 a Chicago Schoolsociologist, observed that the realbuyer is very different from thepurely rational and abstract buyer of economic theory. Individuals arerooted in networks and receive theireducation against a specific socio-cultural backdrop. This leads them to carry out economic exchangesaccording to the conventions andcustoms of their given background.The buyer facing informationalasymmetry can offset the disadvantageby gathering information on theseller’s honesty, or again by “doingbusiness” with people the buyerknows and who are from a similarculture, social background, religiousfaith, nationality and so on.

DiMaggio shows that in the case of usedcar sales, half of the buyers (in the U.S.)will use their personal networks to assessnot the quality or reliability of the carbut that of the car seller.

13 For example, through U.S. consumer law known as “Lemons Act.”14 DiMaggio, Paul, and Louch, Hugh (1998), “Socially Embedded Consumer Transactions: For What Kinds of

Purchases Do People Most Often Use Networks?” American Sociological Review, vol. 63 (4), pp. 619-636.

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Sales ChannelsThere are three categories of sellersin the used vehicle market: franchiseddealers, independents and private sales(consumer-to-consumer or C2C). Theaccompanying table (Used Vehicle MarketShares by Distribution Channel – ANational Comparison) shows marketshares for seven countries.

The data demonstrates that:

■ The market share for franchiseddealers varies from 26% in the UKto 50% in France, almost double.

■ According to Datamonitor, thestrength of franchised dealers inFrance may be partially due to thestrong and growing market ofrental fleets, which are generallyremarketed through franchiseddealers. Manufacturer and leasingfleet disposals represented 10.3% of used vehicle sales in France in 2004, compared with 6.3% in Germany.

■ The C2C channel accounts for almosthalf of sales in most of the Europeancountries.

■ Professionals (both franchised dealersand independents) are particularlyprevalent in North America, wherethey have a relatively significantmarket share at the expense of theprivate (C2C) channel.

The traditional franchised dealer is in a unique position. Following a newcar sale, dealers almost always have the potential of a used car to put up for sale.15 The car taken back will beresold with relative ease or difficulty,depending on the state it is in. Obviously,it is in dealers’ interests to acquire the

most recent, good quality cars, of thesame brand that they represent. Datagathered on different markets showsthat franchised dealers have indeedspecialized in the sale of cars that are 3 to 4 years old or less.

To create an attractive used vehicleoffer for prospects, it is thereforeessential for dealers to dispose of thevehicles that are the hardest to selland potentially to obtain good qualityvehicles that are easier to sell quicklyand profitably.

In our experience working withautomotive companies, we have foundthat good dealers differentiate amongchannels to which they sell, based onvehicle age and attractiveness. Theywill sell in the showroom, via thirdparties or to other professionals.

Wholesalers and auction markets are the means by which the used carsupply redistribution occurs (unlessthere is access to recent, good qualitycars). Wholesalers act as speculators,exploiting differences between localmarkets to generate profit.16 Auctionmarkets, when they are well developed,boost the role of wholesalers, therebypromoting constant refurbishment ofdealers’ used car supplies.17 Auctionmarket expansion increasingly dependson the behavior of “leasers.”

Depending on the country, leasers,who have a stock of recent cars ingenerally good condition and withmonitored mileage, tend to eitherreserve their cars at the dealers, if they are the manufacturer’s financialarm, or work on the downstream side

15 Note that this used car does not have to be of the brand that the dealer represents. Indeed, selling usedcars is a multi-brand business.

16 In Canada, the average margin made by a wholesaler is $400. It is estimated that wholesalers lose moneyon 40% of the transactions, break even on 20% and make a profit on the remaining 40%.

17 For example, in Canada and the U.S., where these markets are especially mature, dealers only sell roughly60% of the cars they have taken back. This means that 40% of cars taken back are sold on to wholesalersor auction markets, and replaced by new acquisitions. (CNW Marketing Research, Inc.)



to try to harness dealer profits, sincein this hypothesis, the two are indirect competition with one another.Alternatively, they may have recourseto auction markets (seen as efficient)to sell stock at the best price and with a minimal transaction cost.

In cases where these support marketsare underdeveloped, dealers find itdifficult to redistribute their supply.Business opportunities are thereby few and far between. Total used carsales will tend to hover around theminimal level, which, depending onthe trade-in rate, is close to the numberof sales in the new car market (as inJapan, where the used car/new carratio was 1.0).

The market share for traditionaldealerships therefore depends on thelatter’s access to efficient professionalmarkets. However, dealers find itdifficult to sell their oldest used cars.It follows that the oldest cars are soldpredominantly on the private market.Unable to assess the quality of veryold cars, consumers choose to rely ontheir networks. This explains why theprivate market constitutes such a largedistribution channel.

In between the traditional vehicle dealersand the private market, there is a spacefor independents. Because they do nothave the same access to trade-ins, soleprivilege, or the competitive advantagesof franchised dealers that are affiliatedwith OEMs, independents can developbusiness only if they can accessefficient professional markets. Dealersspecializing in used vehicles are oftenwholesalers whose strategy is to getcloser to the end user.

The more the used vehicle market is professional, organized and ethical,the bigger the possible market shareof independents. When independentshave access to the newest used cars,notably through developed and openauction markets, they can competedirectly with the franchised dealers.The activeness of auction markets inNorth America partially explains whythe market share for independents issubstantially larger than in the case of their European counterparts.

Used Vehicle Market Shares by Distribution Channel – A National Comparison

37%

32%

31%39%

24%

37%50%

10%

40%47% 38%

15%

35%48%

17%

38%48%

14%

26%47%

27%

United States Canada France Germany Italy Spain UK

44,138,000 2,300,000 5,400,000 6,650,000 4,586,894 2,080,754 7,701,308

Total Used Car Market Size (units) Franchised Dealers

Independents

Private Sales (C2C)

Source: CIRP, adapted from various sources, including CNW Marketing Research, Inc. (U.S.), DesRosiers (Canada) and Datamonitor (France, Germany, Italy, Spain and United Kingdom)

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Global Trends Affecting the Used Car Business

A number of global trends and theirconsequences are altering the usedvehicle business in all the markets we studied:

Improved new vehicle quality anddurability. The longer lives of vehiclesin each country studied have resultedin a growing used vehicle market, inaddition to reducing the potential forservice revenue during the first severalyears of a vehicle’s life (during whichcustomers are more likely to go todealers for service). In Europe, forexample, some sources estimate thateach vehicle now has as many as anaverage of four owners throughout itslife, which gives dealers the opportunityto sell the same vehicle more than once.

Availability of information on theInternet. Customers in all marketsnow have greater access to researchmaterial than ever before, from dealerinvoice prices to vehicle history reports,thanks to the Internet, and they aremore than willing to take advantage ofit. According to Florian Zettelmeyer, theInternet lowers prices for consumers inthe new vehicle market for two distinctreasons: first, by informing them about

the invoice price of dealers, and, second,by helping them obtain lower pricesthrough the referral process. Thiscombined effect leads to a 1.5% pricereduction (equivalent to 22% of dealergross profit).18 The posting of usedvehicle prices for visitors of third-partywebsites likely has a similar impact onused vehicle buyers, who are becomingmore knowledgeable and better ableto assess the value of a used vehicleand to shop around for an acceptableprice in a competitive auto market.

Declining new vehicle margins.Global overproduction of vehicles,increased competition among brandsand ever more demanding consumershave led to increasingly high levels ofdiscounts offered to new car buyers,both by dealers and manufacturers.In the U.S., for instance, total newvehicle discounts more than doubledbetween 1995 and 2005.19 Usedvehicles, which provide dealers withan additional source of revenue andoften higher gross margins, are requiredto maintain a level of profitability thatis no longer easily achievable throughnew vehicle sales and service businesses.

18 Zettelmeyer, Florian, et al., “How the Internet Lowers Prices: Evidence from Matched Survey and AutoTransaction Data,” 2005.

19 CNW Marketing Research, Inc., Document 101m: Incentive by month – 1990 to present.



New Business Models Emerge: CarMax

In the latter half of the 1990s, a distinct business model for used sales appeared in the United States, started by CarMax: used car superstores, the big-box retailers of the automotive market. This model was built around no-haggle pricing, a no-pressureatmosphere in the store, and a large selection of reconditioned, high-quality cars, whichoffered customers a certain level of security by providing inspections and warranties.20

Other groups, such as AutoNation and Asbury, exited this business by 2000 in favor ofbuying new car franchises (new cars were more profitable at the time), and today CarMax is the only remaining automotive group specializing in used vehicles.

CarMax enjoys considerable profitability, with a 2.1% net profit in 2005 (up 31% from the previous year). CarMax tends to sell newer and more expensive used cars than theaverage independent dealer, and competes in a higher-value niche similar to franchiseddealers. In 2005, its average used car retailed for $15,66321 with an average gross profitof 11.5%, or $1,817. In 2003, its customers had an average income of $37,729 – onlyslightly below that of franchised dealers.22

A 2003 survey of CarMax customers revealed that they were more likely to have alsoshopped at a franchised dealer’s used car lot (55% of men and 27% of women) than at an independent’s (16% of men and 5% of women).23 They chose to shop at CarMaxbecause of its good reputation (26% of men and 24% of women), because they had thebuyer’s desired car (26% of men and 14% of women), or because they had the widestselection (18% of men and 21% of women), available financing (14% of men and 21% of women) or best price (14% of men and 19% of women).

After CarMax introduced a technology-based inventory management system in itsdealerships, the effect of positive word of mouth spiked. While this may not be the onlyreason behind CarMax’s success, CEO Austin Ligon admits that the company’s biggestproblem during the difficult period from 1996 to 2000 was not knowing which vehicles to stock or the optimal price to pay or charge.24 After competitors exited the business,CarMax’s investment in inventory management technology finally made the no-haggleconcept work.

This requirement to sell used vehiclesto compensate for declining sales andservice revenue from new vehicles iseven stronger in the European Union,where Block Exemption rules arecreating more competition for franchiseddealers in the profitable service business.

Increasing channel competition.Third-party listing websites, completewith multiple photos, detaileddescriptions and vehicle historyreports to reassure used vehicleshoppers, have made it easier forconsumers to sell vehicles of all ages in the private market. In addition,franchised dealers in the U.S., inparticular, are also increasingly underpressure from the independent dealersegment, where new business modelssuch as CarMax are retailing more ofthe late-model vehicles traditionallysold by franchised dealers (seesidebar, “New Business ModelsEmerge: CarMax”).

20 CarMax, “About Us,” www.carmax.com.21 CarMax 2005 Annual Report, Consolidated Financial Statements (Part II, Item 8).22 CNW Marketing Research, Inc., Document 659: CarMax demographics.23 CNW Marketing Research, Inc., Document 503: CarMax perception study.24 Forbes, February 2006, http://www.forbes.com/business/forbes/2006/0327/098.html.

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Dealer Groups: One Response to Competition

Across Europe and North America, dealer groups have emerged as an increasingly importantplayer in the used car business. This is most true of Great Britain, followed by France, withsignificantly lower dealer group penetration in Germany and the U.S. Their business modeltakes advantage of various economies of scale – they share technology, marketing andother resources.

In the United States (the only market where this data was readily available), the average salesper dealership of the largest dealer groups were not always higher than the 1,730 vehiclenational average (based on CNW data). However, in general, the larger dealer groups havesucceeded in achieving higher profits than traditional one-off dealers (2.5% of revenue,pre-tax, vs. 1.6% for all dealers, according to the National Automobile Dealers Association).Several of the biggest auto groups are focusing particularly on training and IT investments(such as inventory management systems for used car stocking) to improve future profitability.

In our experience, we have found that some of the most successful dealer groups investin process quality, such as rapid lead qualification and transparency across their network,and focus on placing vehicles according to demand.

Dealer Network ConcentrationMarket Share of the 50 Largest Groups (% group registrations/total registrations)

11.0 11.0

37.0 37.0

19.0

10.0 11.0

14.5 13.5

21.5

2001

2004

U.S. Germany Italy France UK 0%

10%

20%

30%

40%

50%

60%

Source: ICDP and national sources

At the same time, the Block Exemptionrules in Europe are expected to lead tomore service-only dealers taking on thesale of used vehicles to compensate forlost new vehicle revenue. This will likelyresult in a European used vehicle marketwith increasingly higher competitionfrom independent dealers and moresimilarities to the American market.

Increasing manufacturerinvolvement in remarketing. The used vehicle business is movingup-market in all four countries studieddue to an increased supply of high-quality off-lease and other late-modelvehicles. The profile of used vehiclebuyers is changing to include a greater number of older and higher-income buyers.25 Dealers and manufacturers have seized theopportunity to increase remarketingsales with manufacturer-certified pre-owned vehicles, which command asignificant premium in the marketand sell quickly.

Greater consumer sophistication.The pace of consumer change hasaccelerated rapidly due to consumers’increasingly sophisticated buyingbehavior and knowledge stemminglargely from the availability ofinformation on the Internet. Mostconsumers today have bought andsold several cars and are increasinglydemanding when they purchase anew or used vehicle.

25 For instance, between 1980 and 2002, theaverage used vehicle buyer in the U.S. increasedfrom an average age of 23.4 years old to 29.4years old, with an individual income of $24,944,up from $15,208. (CNW Marketing Research,Inc., Document 390: Typical Used Car Customer)



Comparative Analysis of the Four Markets

Our research found that despite theglobal trends in the used car business,each national market has its ownpeculiarities, yet surprising similaritiesexist as well. In the case of France andthe U.S., for example, there are manydifferences between the markets, but theused-to-new sales ratios are the same at2.6 (see the accompanying chart: Used-to-New Vehicle Ratio: Year-Over-YearNational Comparison). Similar to theU.S., the French used vehicle markethas been strong in recent years, as theaverage age of vehicles on the roadcontinues to increase.

In France, although both the usedand new vehicle markets are close tosaturation, the new vehicle businesshas been shrinking after reaching arecord high of 2.2 million units in2001, while the demand for usedcars has remained high. Due to theweakened economic situation inFrance in recent years, consumerconfidence has been relativelymodest, which may have favored the used car business.26

Moreover, longer-term changes in the habits of French consumers havecontributed to the recent growth inthe used/new car ratio.27 Vehiclepenetration has risen, making multi-vehicle households more commonand helping to fuel a more activeused car market. This has beenespecially evident in the percentageof transactions made with vehiclesolder than 5 years, which, accordingto the Comité des Constructeurs

Français d’Automobiles (CCFA), has risen from 48% of total usedcar sales in 1990 to 60% in 2005.28

The new vehicle market in Germanyhas shown a modest increase insales volume from 2003 to 2005,recovering from several years ofdecline; however, the used vehiclemarket has continued to show somenegative growth. Among the factorscontributing to this are marketsaturation (there is already more thanone vehicle for every two people) andrelatively higher used vehicle prices,compared with other countries.

The Canadian market, on the otherhand, had an anomalously low ratioof used to new vehicle sales at 1.5.Interestingly, this has not always beenthe case. In 1995, the used-to-newratio in Canada was 2.3. It has fallenconsistently over the past decade, asthe proportion of new car purchasesincreased from approximately 30% to40%. This has been largely due to therise in the popularity of leasing duringthis period (from 29% to 45% of newvehicle purchases), as leasing becameincreasingly affordable in comparisonto buying a used vehicle.

26 Datamonitor, “Used Cars: Global Industry Guide,” November 2005.27 CCFA, www.ccfa.fr/publications/pdf/analystat_2006_afrance.pdf, p. 37.28 CCFA.

Used-to-New Vehicle Ratio: Year-Over-Year National Comparison

1999 2000 2001 2002 2003 2004 2005

Germany France Canada U.S.0.0

0.5

1.0

1.5

2.0

2.5

3.0

Source: CIRP

higher than in Europe (13 owners vs.four in Europe29). In addition, theaverage vehicle age on the road in the U.S. (12.1 years30) is significantlyhigher than the average vehicle age inEurope (8 years31).

Channel specialization by age hasdeveloped similarly across all fourmarkets studied, despite differenteconomic conditions and regulatoryframeworks. This implies thatconsumers’ need for the establishmentof trust through dealing with eitherprofessional retailers for late-modelvehicles, or social networks for olderused vehicles, is true for both NorthAmerican and European consumers.

However, franchised dealerships inNorth America are more willing to dealwith relatively older vehicles, comparedwith European dealers. This is especiallytrue for French dealers, where only 17%of used vehicles sold are more than 4years old.

Sales ChannelsFranchised dealer networks in both Europe and North America haveexperienced consolidation in recentyears, a process that has been historicallycharacteristic of the automotive industryand is likely to continue. In the UnitedStates, for example, the number offranchised dealers declined by 22% to 19,311 between 1990 and 2005.32

To put this into historical perspective,between 1960 and 1975 the numberof franchised dealers declined by 35%.33

In Europe dealers have experiencedhigh rates of consolidation, largelydue to the Block Exemption legislation,which came into effect in 2002. Sourcesindicate that between 2002 and 2004,the number of franchised dealer salesoutlets in France declined by about17%, while the number of Germanoutlets declined by approximately 18%.

16

The lower monthly payments of leasing,partly due to the sales tax that is paidon the full value of financed vehicles,appeal to cost-conscious Canadianconsumers, decreasing the demandfor used vehicles. At the same time,their propensity to keep vehicles longerthan Americans (approximately eightyears, rather than five years, accordingto DesRosiers) has resulted in fewerused vehicles entering the relativelyless active Canadian market.

The following pages provide acomparative view of key aspects of the used vehicle market, includingvehicle age, sales channels, used vehiclesourcing, the consumer research andbuying process, and regulatory issues.

Age of Used VehiclesBoth France and Germany have a largepercentage of used vehicles less than1 year of age, compared with their NorthAmerica counter-parts (10% to 11%vs. 1.9% of used vehicles about 1 yearold in the United States). This couldbe largely attributable to the fact thatin Europe, vehicle manufacturers canpre-register new vehicles and sell themas used vehicles. Surprisingly, amongthe four countries, the U.S. has the largestproportion of older vehicles. This maybe attributable to higher leasing ratesin Canada, as well as a more activemarket in the U.S. where the averagenumber of vehicle owners till scrap is

Share of Total Used Vehicle Sales by Vehicle Age

U.S. Canada France Germany

<1 Year1-5 Year5+ Years

–29%71%

–43%57%

10%31%59%

11%30%59%

Source: CIRP, adapted from CNW Marketing Research, Inc., DesRosiers, Datamonitor

29 CNW Marketing Research, Inc., Document 831: Number of vehicle owners till scrappage for the U.S.30 CNW Marketing Research, Inc., Document 392: Average vehicle age.31 European Automobile Manufacturers Association (ACEA), European automobile industry report 2006.32 CNW Marketing Research, Inc., Document 270.33 Thomas G. Marx, “The Development of the Franchise Distribution System in the U.S. Automobile Industry,” The Business History Review, Vol. 59, No. 3, Autumn

1985, pp. 465-474.

The relatively low sales per dealer figuresin some markets are an indication thatconsolidation will likely continue (seeaccompanying table, Franchised DealerSales Overview). France and Germanysold only 389 and 277 total cars persales point, respectively, compared with1,730 total vehicles in the United States.In reality, the discrepancy is smaller thanthese numbers indicate.

The number of European sales outletsis difficult to compare to the UnitedStates, because of different structures interms of the prevalence of multi-branddealerships, the existence of sales-onlyvs. service-only outlets in Europe, amongother factors. However, no matter howthis number is calculated, the conclusionremains the same: There is a strongdiscrepancy between the throughput ofEuropean and American dealers, dueto a higher saturation of dealers in aEuropean market that is less activethan its American counterpart.

It is therefore likely that competitivepressures will push the dealershipnetworks in Canada and in Europetoward a level that is more consistentwith what has been observed in theUnited States. In the U.S., due tocompetitive pressures, the dealer netprofit margin is only about 1.7%,35

even with a relatively small number of dealerships and a focus on high-margin revenue sources.



Notably, independent dealerships(which are significantly more prevalentin the United States than in the othermarkets) have taken a bigger hit. Theindependent dealer count declined by30% between 1995 and 2005 (from63,897 to 44,702), as their unit salesper dealer increased by 44% (comparedwith 11% and 23% for franchisees,respectively).34 This likely reflects thedifficulties small independents face asthey struggle to find a niche in the faceof a more competitive private marketand the superior shopping experienceoffered by franchised dealers.

One thing all of these markets have incommon, however, is that the smalleroutlets are the ones more likely to close.This is to be expected, consideringthat the impact of lower new vehiclemargins on profitability requires highervolumes of new and used vehicle salesto compensate. It is expected that thistrend will continue in all of the marketsstudied, particularly in Canada andEurope, as competitive pressures continueto raise the costs of doing business.

Franchised Dealer Sales Overview (2005)


Number of Outlets (approx) 19,311 3,488 12,250 21,057

New Vechicle SalesUsed Vehicle Sales

16,995 M44,138 M

1,583 M2,300 M

2,07 M5,40 M

3,32 M6,65 M

Total Vehicle Sales 61,133 M 3,883 M 7,47 M 9,97 M

# Households (millions)* 112 11.56 25.6 39.2

# Vehicles/HouseholdNew

Used

0.550.150.39

0.340.140.20

0.290.080.21

0.250.080.17

# Households per Dealer 5,800 3,314 2,090 1,862

Franchised Market Share 37% 39% 50% 38%

Average New Sales/Dealer (units) 878 454 169 158

Average Used Sales/Dealer 852 258 220 120

Total Average Sales/Dealer 1,730 712 389 277

Source: CIRP, using data from CNW Marketing Research, Inc., DesRosiers and HWB International (GMAP European Car DistributionHandbook 2003)*U.S. Census Bureau, Statistical Abstract of the United States: 2006, http://www.census.gov/prod/2005pubs/06statab/pop.pdf, Table 32,p. 37; Statistics Canada, http://www40.statcan.ca/l01/cst01/famil53a.htm; INSEE,http://www.insee.fr/en/ffc/ficdoc_frame.asp?ref_id=ip1060; Federal Statistical Office Germany 2005,http://www.destatis.de/basis/e/bevoe/bevoetab11.htm.

34 Franchised sales per dealer refer to the increase in total unit sales (used and new); used car units sold per outlet increased by 18%, while new sales increased by29%. The number of independent dealers declined from 63,897 in 1995 to 44,702 in 2005, as their unit sales per dealer increased from 221 to 318 units. (CNWMarketing Research, Inc., Document 270)

35 National Automobile Dealers Association (NADA) Annual Report 2006.

18

market in that country, where consumersare not as favorably disposed to buyingused vehicles as they are in the otherthree markets. In the United States, thesame proportion (59%) of used vehicleinventory as in France came fromtrade-ins, while the German proportionof vehicles sold from trade-ins declinedto 46% as dealers pursued activeremarketing strategies. U.S. dealerinventory obtained from trade-inssubsequently declined to 53% of total inventory by 2005. Canadianproportions have been estimated to be in the same range.

The proportion of new sales made withtrade-ins in the United States was 46%in 2003 (declining further to 42% in2005),36 which was comparable to the46% and 47% in France and Germany,respectively. In Canada, the proportionof sales made with trade-ins has beenestimated at about one-third, butprecise data is not available.

The proportions of used vehicle salesmade with trade-ins were remarkablysimilar as well (just over 30% inFrance, Germany and the UnitedStates in 2003).37

The Consumer Buying ProcessThe process of buying a used vehicle isgenerally shorter, compared with buyinga new vehicle. In the U.S, research showsthat buying a new car takes on averagesix months whereas buying a used cartakes just 2.31 months.38 In France, asused car intenders considered “betteravailability” to be an important factorfor buying a used vehicle, consumerswere inclined to take less time for theshopping process. In Canada, the processis slightly shorter than in the U.S. whilein Germany it remains unclear. BothFrench and Canadian consumersconsider price/incentives an importantfactor for buying used vehicles, whileAmericans care more about vehiclemodel/type.

The U.S., France and Germany all haveexperienced growth in consumer-to-consumer market share. ICDP notesthat the reasons for a rising privatemarket in Europe include:

■ Independent Internet sites are the mainfacilitators for the private channels(e.g., Autoscout and Mobile.de).

■ Customers have a very strong priceorientation.

■ The poor “value-for-money” image of franchised dealers encourages theC2C market.

■ Poor financial structures of manydealers: German dealers have anaverage equity capital of around12% of total assets. This minimizesdealers’ flexibility and constrainstheir attitude to risk.

The major difference between the U.S.and Germany, however, is the trend ofaverage transaction prices on the usedvehicles sold through the C2C market.While transaction prices have increasedin the U.S. recently, in Germany, theaverage transaction price of a usedvehicle sold through the C2C channeldecreased. This reflects the fact thatthe C2C channel in the U.S includesmore younger and higher-end usedvehicles. In contrast, in Germany thechannel specializes in older vehicles.Canada is the only country where theC2C market share actually declined,from 45% in 1996 to 37% in 2005.

Used Vehicle SourcingIn recent years, German and Britishdealers were most likely to source usedvehicle inventory (with 39% and 38%of inventory, respectively, actively sourcedin 2003), followed by France at 33%and Italy at 19%. The low level of activesourcing in Italy is likely due to thegeneral weakness in the used vehicle

Percentage of Used Cars Retailed

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

France

50

50

59

33

8

1998 2003

Germany

26

74

46

39

1998 2003

15

Italy

87

13 19

71

1998 2003

10

UK

60

40 38

47

1998 2003

15

Actively Sourced Demo/Courtesy Cars Trade-ins and Demos

Source: ICDP

36 CNW Marketing Research, Inc., Document 920: Trade-in at dealerships.37 ICDP research report 03/04, “Used cars: A new model?,” p.79 for France and Germany; CNW Marketing Research, Inc., Document 920: Trade-in at dealerships for U.S.38 CNW Marketing Research, Inc., Purchase process Wave IX.



in the United States planned to referto manufacturer-specific franchiseddealers, compared with 40% in Franceand 30% in Germany. American andGerman used car buyers were bothmore likely to consult family andfriends (48% and 49%, respectively)during their next purchase thanFrench used vehicle buyers, only29% of whom planned to consultthis source.

French used buyers were least likelyto consult information websites (only35%, compared with 46% in Germanyand 47% in the U.S.). Furthermore,American used buyers were less likelyto consult manufacturer Internet sites;only 27% of respondents vs. 40% inFrance and 50% in Germany.

Independent e-tailer sites were muchmore likely to be used by Germancustomers. As many as 47% ofGerman used buyers planned toconsult independent e-tailer sites for their next purchase, comparedwith only 16% of French and 19% of American used vehicle buyers.

Automotive publications were muchmore likely to be used by Europeans:40% of used buyers in France and38% in Germany planned to use thisinformation source, compared withonly 21% in the United States.

However, American used vehicle buyerswere the most likely to use independentcar valuation services (e.g., Kelley BlueBook, Edmunds.com) in the shoppingprocess (62%), compared with 34% ofGerman and only 11% of French usedvehicle buyers. In fact, the differencein the use of independent car valuationservices is probably the single largestdifference in the use of the variousinformation sources among the three markets.

39 Capgemini, “Cars Online 06/07.”

The shorter buying cycle for used cars has serious implications for leadmanagement, requiring faster leadqualification and response times.

A global consumer survey conductedby Capgemini in 200639 revealed that:

■ Cash-back incentives were mostlikely to be important for Germanused vehicle customers (50% ofGerman used vehicle buyersconsidered incentives as animportant factor vs. 33% ofAmericans and 25% of the French).

■ The reliability of the brand and priceof the vehicle were important forused vehicle customers in all threemarkets (Canada was not includedin the study), with approximately90% of used buyers rating thesefactors as important.

■ The option for additional warrantycoverage or service was moreimportant to Europeans than toAmericans: Only 37% of Americanused buyers rated it as important,compared with 49% of Germans and53% of the French. This may helpaccount for the higher proportion ofFrench buyers who are planning tobuy a certified vehicle.

Dealers’ investment in Internetadvertising has increased in all fourcountries. However, studies from bothNorth America and Europe indicatethat the Internet hasn’t completelyreplaced traditional print advertising.Print is still the most importantinformation source for used vehiclebuyers in most of the countries,although use of the Internet isgrowing rapidly.

Capgemini’s “Cars Online 06/07”survey shows that European usedvehicle buyers reported being morelikely to use dealers as an informationsource. Only 17% of used vehicle buyers

eBay Phenomenon and Internet ImpacteBay Germany, although entering themarket four years later than eBay MotorsU.S., acquired one of the largest onlineclassifiers in Germany – mobile.de – andhas become a major competitor inEurope. It is also one of the reasonsbehind the growth of the private marketin Germany. eBay Germany now has aninventory more than four times largerthan that in the U.S. In addition, in2003, globally eBay’s “virtual stockturn,” a ratio between the number of used car transactions and the sizeof the database at one time, was 28,compared with 0.8 for Autoscout24and 7.0 for La Centrale.40

In terms of Internet activities, notonly does eBay Germany outperformeBay in the other three counties, butGermany also leads in several othermetrics. Based on Capgemini’s “CarsOnline” research, Germans were morelikely than other consumers to use theInternet to research vehicles (amongused vehicle buyers, 97% planned touse the Internet for research in Germanyvs. 84% in the U.S. and 74% in France).German used buyers were also the most

likely to visit third-party websites (e.g.,Autobytel, Cars Direct) when researchingvehicles: 89%, compared with 75% ofFrench and only 48% of Americanused buyers.

It is interesting to note that substantiallyfewer vehicles are listed on the eBayCanada website. This may be due in partto the tendency of Canadian consumersto be risk-averse. eBay’s business modelinitiated with a transaction platformsomewhat similar to the C2C market,where information asymmetry is infavor of the seller and buyers have tomake trade-off decisions between riskand price; it appears that Canadianconsumers are less likely to take therisk. This pheno-menon could beaccounted for by cultural reasons, and is also reflected in the shrinking shareof the C2C market in Canada (downfrom 45% in 1992 to 37% in 2005).

In addition, according to eBay U.S, themost popular cars sold on the site arethe Ford Mustang, Chevrolet Camaroand Chevrolet Corvette,41 indicatingthat vehicle culture plays a role as well.

20

The Impact of eBay


Current eBay vehiclelistings (locatedwithin country)

35,000 507 22,300 161,400

Source: CIRP, adapted from eBay U.S., eBay Canada, eBay France, eBay GermanyNote: eBay Germany owns mobile.de and offers cross-listing to customers of each for a fee.

40 ICDP research report 03/04, “Used cars: A new model?” p. 57.41 USA Today, August 25, 2005, “Buyers kick virtual tires on eBay Motors auction site.”



Canada, banks are not permitted tocompete in the leasing market and,as a result, consumers are more likelyto use dealer financing.

Except in France, where the ratio hasremained stable for consumers topurchase with a financing package,the other three countries show atrend toward increasing use of dealerfinancing.42 This trend indicates thatthe financing packages offered bydealers have become competitive withdirect lenders and provide consumersone-stop shopping to shorten thebuying process.

Used Vehicle FinancingOur research identified a great deal ofdifference between consumers in theU.S. and Canada in terms of financingtheir used vehicles. The distinctfinancing behavior is, to some degree,similar to the way the two partiesfinance their new vehicles. Three outof four Americans use financing topurchase their used vehicles, whilein Canada, 63% of used vehiclesbuyers use leasing or financing. U.S.consumers have a higher tendency topurchase with direct financing wherethey arrange their own financingwithout dealer involvement. In

42 See CNW Marketing Research, Inc., Document 544: Direct-Indirect Financing for U.S.; DesRosiers, The Canadian Automotive Finance Market for Canada; and ICDP 03/04 for France and Germany.

Used Vehicle Financing Method in North America

U.S. Canada

CashLeaseLoan

24%2%

75%

38%5%

58%

Source: CIRP, adapted from CNW Marketing Research, Inc., DesRosiers 2005

Direct vs. Indirect Financing


DirectIndirect

60%40%

48%52%

67%33%

50%50%

Source: CIRP, adapted from CNW Marketing Research, Inc., DesRosiers, ICDP

22

43 California Department of Motor Vehicles (DMV) announcement of Car Buyer’s Bill of Rights,http://www.dmv.ca.gov/pubs/brochures/fast_facts/ffvr35.htm.

44 DAT report 2006 kfz-betrieb.45 OUT-LAW News, “Texas bans Ford selling cars on-line,” http://www.out-law.com/page-1945.

Regulatory ImpactGovernment regulation is one of themost influential factors affecting thedevelopment of the used vehicle marketin a given country. It is linked to varioussocio-cultural issues that differ acrossnations; as a result, it is difficult to makedirect comparisons among the fourcountries investigated.

However, there is a trend in thesecountries to promote the transparencyof the used vehicle business throughregulation. For example, in the UnitedStates, the “Car Buyer’s Bill of Rights”forces dealers to reveal vehicle historyalong with a copy of the inspectionreport when selling certified usedvehicles and provide a two-day salescontract cancellation option.43 Asimilar law governing product liabilitywas introduced in Germany in 2002.44

Other regulations have contributedeither to increasing channel compe-tition or to protecting the marketfrom growing channel pressure. Forexample, in Canada, banks are notallowed to directly lease passengervehicles to consumers (as a result,OEMs have become the only playerwith access to a large volume of off-lease vehicles), while the revision of Block Exemption legislation inEurope has provided used vehiclebuyers with greater vehicle selectionthrough multi-brand dealerships.

In the U.S., government regulationshave favored dealers by prohibitingmanufacturers from owning a dealer-ship or acting in the capacity of adealer.45 Moreover, any direct sales by automakers are prohibited in theUnited States.

In 2004, we examined the degree ofacceptance among consumers for buyinga vehicle directly from a manufacturer’swebsite. While consumers from boththe United Kingdom (10%) and theUnited States (19%) showed a degreeof acceptance for buying a vehicle, thechances of this regulation being liftedare slim due to heavy lobbying byauto dealers.



Success Strategies in the Used Car Business

Improve the Customer ExperienceTo establish a trust-based relationshipdealers must provide customers withtransparent information (price books,visible quotes listed, no-haggle strategies,etc.) and to ensure online/offlineconsistency of information. Thisincludes making pricing informationavailable, both in online listings andwith clear pricing signage on cars forsale on the lot. While some customerslike to haggle, most consider thehaggling process stressful.

Salespeople should be trained toadopt an attitude of assistingcustomers and being available toprovide information and discouragea “hard-sell” approach, which stereo-typically characterizes used car sales.

In addition, visual cues, both online and offline, should inspire trust and communicate an image ofprofessionalism. The ultimate goal isto establish trust, which is a majorcompetitive advantage for dealers,and to emphasize those features ofthe dealer’s service offering thatindependents and private sellerscannot provide.

Rationalize CustomerRelationships Through CRMTraditionally, used car salespeoplehave a three-week to one-monththreshold in terms of customerfollow-up, after which time customerrelations tend to become sporadic andhaphazard. Various IT-based CRMtools, which bolster customer-centricmarketing, enable this process tomaximize sales opportunities. Thesetools optimize both informationprocessing and the cost of customerrelations. Analytical tools for datastorage and retrieval can facilitate

The development of online tools forbuyers and sellers has made the usedcar market more competitive, all thewhile providing dealers with newopportunities to improve operationsand capture profitable sales. The mostimportant success strategies OEMs anddealers must pursue in order to takeadvantage of these opportunities are to:

■ Continually improve the customerexperience, from the Internet to the showroom.

■ Rationalize customer relationshipsthrough Customer RelationshipManagement (CRM).

■ Perfect online promotion andmerchandising efforts to reachprospects and existing customers.

■ Manage inventory and pricing with network-wide IT solutions.

■ Maximize high-margin salesopportunities.

■ Optimize certified used vehicle programs.

1

2

daily operations by simplifyinginformation management andautomating profitable decision-making processes.

The potential to optimize revenuefrom customers throughout theirshopping cycles using CRM tools isvast. Some dealers, for instance, havefound that satisfied certified vehiclebuyers are likely to return for a newvehicle for their next purchase.46

Noted Norm Olson, Toyota’s managerof retail sales operations and certifiedused vehicles, “From our surveys,76% of consumers who bought acertified vehicle in April indicatedtheir next purchase will be a Toyota.They’re pretty happy campers. That’sthe way we keep building sales intothe future.”47

Analyzing such customer trends andoptimizing the targeting of promotionsaccordingly can greatly increase thereturn on promotional spending bydealers and manufacturers.

Putting more emphasis on CRMmay mean moving away from aproduct-centric approach, which canbring with it certain difficulties inimplementation, such as creatingnew types of partnerships and neweconomic models. It involves investingnow for future returns that are noteasy to quantify. This requires anorganizational emphasis on thecrucial role of information systemsfor developing customer relations,instead of seeing used sales as one-

time transactions. These changesrequire organization-wide culturalshifts that must be supported bytraining and support from the top.

Perfect Online Promotion and Merchandising Use of the Internet during the vehicle buying cycle continues toclimb, with approximately eight out of 10 respondents indicating that theyuse the Web to research vehicles.48 Andit’s not just manufacturer sites they’revisiting. In North America, for example,dealer website visits increased by 70%in the past four years.49 It’s important,therefore, that dealers post their entireinventory – new and used vehicles –online to reach prospects.

The Internet is now familiar enough forcustomers to want to use it extensively;moreover, widespread broadbandaccess enables the targeting of a massmarket with sophisticated websitesand cognitive choice-facilitatingtools. Indeed, customers are oftenone step ahead of professionals, whoare still far removed from the Internet2.0 culture increasingly being embracedby their customers. The growth ofconsumer tools such as the Internet,blogs, chat rooms, search engines andonline reviews can lead to fastergrowth of the professional dealers byaccelerating the growth of consumersophistication and rising expectations.

It is essential to increase responsetime for Internet-generated leads,which has traditionally been too

24

3

46 “Auto Execs Highlight Importance of Pre-Owned Departments,” Auto Remarketing, May 16, 2006,http://www.autoremarketing.com/ar/news/story.html?id=4969.

47 Ibid.48 Capgemini, “Cars Online 06/07.”49 AutoRemarketing.com, “Study: Buyers Visiting Dealership Web Sites Grow 70%,” April 25, 2006.


slow, to help reap the benefits of this method of customer contact.Capgemini’s “Cars Online 06/07”research found that almost 40% ofconsumers said they expect a dealeror manufacturer to respond to arequest for a quote via e-mail or theWeb within four hours, up from29% the previous year.

In our experience, we have foundthat dealers in some countries usethe Internet as an alternative saleschannel, for instance selling lessattractive vehicles to third-party sites.They also increasingly use tools suchas Google AdWords to highlight theirown sites and vehicle stock.

An online promotion and merchandisingprogram also should include onlineinventory pooling. Online inventorypooling, especially within a givengeographical area, is essential not justfor building sales, but for avoiding lostsales. It has become a must-have necessity,rather than a nice-to-have expenditure.

The need to manage inventory effectivelyto achieve faster turnover is even moresignificant for dealers’ used vehicleoperations than for new sales for twomajor reasons: Not only is the cost ofholding inventory high in and of itself,but used vehicles also depreciate withevery day spent on a dealer’s lot whilethe cost of “lot rot” cuts into dealermargins. ADESA estimates that $426in reconditioning investment is needed,on average, when a vehicle is held ininventory over 90 days in the U.S.50


One way for dealers to reduce the risksof holding used inventory is to poolinventory online.

Using the United States as an example,a recent CNW study51 demonstratesthat online pooling of inventoryamong dealers in a geographic areahas two important benefits:

1. Customers are far less likely topurchase a competing brand (only16.1% vs. 31.4% in areas with fiveor more dealers).

50 ADESA (a provider of wholesale vehicle auctions and related vehicle redistribution services for the automotive industry in North America), “Supply Sources – Dealers,”Global Vehicle Remarketing, 2006.

51 CNW Marketing Research, Inc., Document 399: Effectiveness of online inventory pooling.

2. Customers shop around less(61.4% buy from the first dealerthey visit vs. 38.7% in areas withfive or more dealers).

Moreover, the cost of not listinginventory online is high: In regionswith fewer than five dealers who didnot list inventory online at all, asmany as 51.8% of shoppers boughtfrom a competitor.

Effectiveness of Online Inventory Pooling

61.4

38.7

53.8

27.7 24.9

19.6

24.6

19.4

20.3 18.4

16.1

31.4 21.3

46.5 51.8

2.9 5.3 5.5 5.5 4.9

20%

0%

40%

60%

80%

100%

Purchased from primary dealer inventory Purchased from secondary dealer inventory

Purchased from non-brand dealer Didn't purchase

Area 1 Area 2 Area 3 Area 4 Area 5

Area 1: Region with at least five same-make dealers pooling Internet inventoryArea 2: Region with at least five same-make dealers who do not pool inventory onlineArea 3: Region with fewer than five same-make dealers pooling Internet inventoryArea 4: Region with fewer than five same-make dealers who do not pool inventory onlineArea 5: Region with fewer than five same-make dealers who do not list inventory online

Source: CNW Marketing Research, Inc.

26

Manage Inventory and PricingWith Network-Wide IT SolutionsCompanies must invest in IT-basedinventory management solutions.OEMs should enable dealers to sharetheir inventory information online sothey can transfer vehicles betweendealerships to help optimize productofferings in different regions.

Some manufacturers have introducedsoftware to help dealers calculatethe margins on certified vs. non-certified vehicles and to learn whichvehicles sell better in their marketsto help them maximize inventorymanagement. Other training, includingmentoring, is also used to improvedealers’ used vehicle operations.

Break-even trade-in values and pricingshould be determined for each vehicleby combining up-to-date marketpricing information with dealershipcost information, so that target marginscan be met. This process should becompletely automated and appliedacross the entire distribution network.

It is essential to develop reactivity incustomer information systems withdaily database upgrades, coupledwith channels to filter out cars thatare “outside quality norms” or thatwould incur prohibitive repair costs.This requires better control over theinformation chain through workingwith sophisticated IT tools,including non-redundant one-clickadministration; and managing supplydiversity by developing open, multi-brand approaches.

Maximize High-Margin Sales OpportunitiesFinancing opportunities are notcurrently maximized in most markets.For some high-margin categories ofused cars, promotional financing,which is normally reserved for newcar sales, may be a profitable strategy,but should be viewed as a revenuecenter and not as a loss leader tostimulate sales.

It may be as profitable for franchiseddealers to sell slightly older cars (4 to 5 years old) as late-model vehicles.Consider the durability of today’s 5-year-old cars, which are still likely to provide customers with a qualityexperience and could take advantageof the online sales and promotionalcapacity already in place. Whiledealers in Europe, particularly inFrance, tend to avoid vehicles olderthan 3 years, North American dealershave found them to be a profitableopportunity. The dealer’s orientationand consumer expectations in thedealer’s local market must be takeninto account, however. As discussedearlier, strategies undertaken bydealers are in many cases a result ofsocio-cultural factors that cannot bereduced to a simple economic logic.

4 5



Optimize Certified Used Vehicle ProgramsCertified vehicles provide a high-margin sales opportunity for dealers,involving lower inventory costs, fasterturnover and higher residual values,thus supporting a dealership’s newvehicle business as well.

As such, certified used vehicleprograms may be the most importantsuccess strategy, as they provide thebest protection against channelcompetition and allow companies toimprove margins significantly. Salesof manufacturer-certified vehicles, asmeasured by CNW, have more thantripled between 1997 and 2006,totaling approximately 1.5 millionunits in 2005 in the U.S.52 That

Why Consumers Buy Certified Used VehiclesOf the following reasons for selecting a certified vehicle, which do you consider most important? (% of used car buyers saying)

30.2

27.2

13.5

10.1

4.1

3.9

3.3

2.1

0% 10% 20% 30%

Inspection process

Warranty coverage

Can return vehicle

Appearance

Price

Age of vehicle

Roadside assistance

Other

Alternative to new

Know history of vehicle

40%

2.8

2.8


52 CNW Marketing Research, Inc., Document 331: Certified used vehicles.53 “Certified used-vehicle sales rise in ’06,” Automotive News, January 22, 2007, p. 40. 54 The Best Used Cars,” Matt Vella, BusinessWeek Autos, July 5, 2006.55 CNW Marketing Research, Inc., Document 192: Consideration of used vehicle types/sources.

growth, while slowing, continued inthe past year. Unit sales of certifiedused cars and trucks in the U.S. in2006 rose almost 2% to 1.6 million.53

According to J.D. Power, 2005 certifiedused vehicle sales accounted for 41%of franchised dealer used sales andcommanded a $1,680 premium.54

Consumer interest in certified vehiclesis significant: According to CNW, asmany as 94% of consumers intendingto buy a 1- to 3-year-old vehicle saidthey would consider purchasing acertified off-lease vehicle.55 And a 2006Edmunds.com survey revealed that asmany as 85% of both new and usedvehicle shoppers would consider or haveconsidered buying a certified vehicle.

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Certified pre-owned (CPO) vehiclebuyers have higher satisfaction ratesthan other used car buyers56 and aremore likely to return to the same brandor dealer for their next purchase thanother used vehicle buyers.57 This isessential for increasing dealershipincome, since there is an importantrelationship between customersatisfaction and future revenue. Infact, J.D. Power found that almost 90%of used vehicle buyers who reportedreceiving outstanding service intendedto return to that dealer for future service.Toyota, for example, counts on this tohelp bring in first-time customers anddrive future demand. An internal surveyshowed that 46% of its CPO buyers

have never owned a Toyota before, and76% of CPO buyers indicated their nextpurchase would be a Toyota.58

In part because of their high levels ofsatisfaction, certified buyers are morelikely to return to the dealership forroutine maintenance, leading tohigher service revenues. At ChryslerGroup, for example, 43% of CPObuyers return to the dealership formaintenance, compared with just24% of non-certified customers.59

Moreover, dealers have the opportunityto generate significant financingrevenues on certified vehicles, giventheir relatively high average prices.

56 CNW Marketing Research, Inc., Document 641: Miscellaneous used vehicle information.57 CNW Marketing Research, Inc., Document 997: Used vehicle loyalty to dealership.58 “Used car brands keep dealers in control,” Automotive News, February 6, 2006.59 “What Does it Take to Drive Successful Certified and Pre-Owned Sales?” Jennifer Reed, June 27, 2006,

Automotive Remarketing, http://www.autoremarketing.com/ar/news/story.html?id=5149.

Certified vs. Non-Certified Turnover and Premium in the U.S.2005-2006

0

10

20

30

40

50

60

70

Jan '

05

Feb

Mar

Apr

May

Ju

n Ju

n Jul

Aug

Sep

Oct Nov

Dec

Jul

Aug

Sep

Oct Nov

Dec

Jan '

06

Feb

Mar

Apr

May

Day

s on

Lot

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$ P

rem

ium

Non-Certified Turnover Certified Turnover Certified Premium


independent certification programs donot result in additional obligations forthe manufacturer, if a customer has aproblem with a “certified” vehicle sold byan independent dealer, the manufacturer’sbrand may still be damaged.

Customer awareness of certification.A 2005 J.D. Power survey showed thatthe majority (64%) of CPO vehiclebuyers only became aware of thecertified program at the dealership. Thispoints to the need for manufacturersand dealers to educate consumers aboutthe benefits of certified vehicles, whetherthrough advertising, in person or onthe Internet.

and age), but there is a limit to howmuch the standards can be expandedbefore the other benefits of certificationbegin to erode.

Competing certification programs.Many independent dealers, as well as some franchisees, have their owncertification programs, often completewith inspection check, limited warrantyand the ability to return/exchange the vehicle.61 These programs are not backed by the manufacturer andare usually less generous, but manyconsumers (57%, according to anEdmunds survey) do not know thedifference between manufacturer andindependent certification. Although

Certified Vehicle ChallengesDespite the advantages of certifiedvehicle programs, there are alsochallenges:

Limited inventory supply. As fewercertifiable off-lease vehicles are availableon the market, dealers are finding thatthere are not enough vehicles to meetdemand.60 Almost one-fifth of customerswho considered a CPO vehicle had toforgo this option because it was notavailable in their desired model.

For example, to help meet demand,Toyota recently expanded therequirements for certifiable vehicles(increasing the permissible mileage



Loyalty to Franchised Dealer% returning for another certified pre-owned (CPO) vehicle

CPO

0%

5%

10%

15%

20%

25%

1-3 Yr Old

7-10 Yr Old 11-Plus Yr Old 4-6 Yr Old


60 CNW Marketing Research, Inc., Newsletter, August 2006.61 “Used car brands keep dealers in control,” Automotive News, February 6, 2006.

30

Conclusion: A New Approach to Used Car Sales

The used vehicle market has grown insize and importance in the past decadeand is poised to continue to do so inthe future. A successful used vehiclestrategy on the part of automakersand dealers is becoming essential totheir operations and is increasinglyrecognized as such.

Sales of new and used vehicles arestrongly interrelated; used sales affectresidual values and new vehiclepricing, in addition to relationshipswith customers and the strength ofbrands. In short, used car sales have a significant effect on many aspects of an automaker’s sales and cannot be ignored. OEM involvement on thelevels of inventory management andused vehicle branding is crucial forenabling dealers to carry out successfulremarketing programs.

Impact on OEMsA dealership’s used vehicle businessimpacts manufacturers on three majorlevels:

■ Loyalty: Satisfied buyers are morelikely to buy their next new vehiclefrom the same manufacturer and toprovide positive word-of-mouth.This principle works the oppositeway as well, as a used vehicle salemay either build or erode loyalty.

■ Profitability: Relatively new, high-quality vehicles traded in at thedealership not only provide significantmargins, but also act as a source ofprofitable financing, insurance andservice revenues.

■ Pricing power: Residual valuesimpact the attractiveness of trade-insand new vehicle purchases, restrictingthe ability of manu-facturers to pricenew vehicles and determining howmuch they must rely on incentives tostimulate demand. Strong used vehiclesales and inventory control can lead tostronger new vehicle sales and higherprofitability for manufacturers andtheir dealer networks.

While national used vehicle marketsdiffer in character and structure dueto a variety of socio-economic factors,this report identified six core strategiesthat are essential for growing dealers’used vehicle sales:

■ Continually improve the customerexperience, from the Internet to theshowroom.

■ Rationalize customer relationshipsthrough CRM.

■ Perfect online promotion andmerchandising efforts to reachprospects and existing customers.

■ Manage inventory and pricing with network-wide IT solutions.

■ Maximize high-margin salesopportunities.

■ Optimize certified used vehicleprograms.

In all markets, the dealers andmanufacturers with successful used car operations make strategicinvestments in technology to improvecustomer experiences and build thetrust that forms the basis of theirability to compete with lower-pricedindependent dealers and private sellers.

Creating positive encounters withcustomers and building long-termrelationships based on trust is ultimatelyrooted in transparency. The informationavailable to consumers online has greatlyreduced information asymmetry in anirreversible way, thereby changing therules of the game. The obfuscationand stereo-typical sales orientation,which characterized the market in the past, are no longer possible in acompetitive market where consumersnot only have higher expectations ofthe used car transaction, but are ableto have their expectations fulfilled atforward-thinking dealerships.

Responding to ChangeConsumer attitudes to used vehicles havebecome more sophisticated as vehiclesthemselves have improved in quality andreliability. The tools used by consumershave also evolved, resulting in the needfor dealers and manufacturers tofundamentally change their approach tothe sale of used vehicles, as this reporthas shown. While these changes involvesignificant financial investments, theyhold the potential for great returnsand are, in fact, necessary in today’smarket. Dealers and manufacturersface a rapidly evolving car market;they must evolve with it if they do not wish to be left behind.

About Us

About the Car Internet ResearchProgram II (CIRP II)

The Car Internet Research Program II(CIRP II) is an industry and academic-sponsored automotive researchprogram directed at understandinghow new information andcommunication technology willimpact the automobile industry.Administered through the Universityof Ottawa, CIRP is sponsored by avariety of industry stakeholders thatinclude: Capgemini, PSA PeugeotCitroën, Renault SA and TheUniversity of Ottawa.

About Capgemini and theCollaborative Business Experience

Capgemini, one of the world’sforemost providers of Consulting,Technology and Outsourcingservices, has a unique way ofworking with its clients, called theCollaborative Business Experience.Backed by over three decades ofindustry and service experience, theCollaborative Business Experience isdesigned to help our clients achievebetter, faster, more sustainable resultsthrough seamless access to our networkof world-leading technology partnersand collaboration-focused methodsand tools. Through commitment tomutual success and the achievementof tangible value, we help businessesimplement growth strategies,leverage technology, and thrivethrough the power of collaboration.Capgemini employs approximately68,000 people worldwide andreported 2006 global revenues of 7.7 billion euros.

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Car Internet Research Program II (CIRP II)Christian Navarre+1 613 562 5800 ext. [email protected]

Capgemini

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cap gemini- the anatomy of used car business

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