Credit Crunch affects auto trade - 2 for 1 sales

The credit crunch brings with it many painful realisations, not least of these is the confirmation that we, the many, have been paying too much, for too little, for too long. This is clear in the current tactics being employed by some auto traders, desperate to retain their franchises and car sales businesses. Many are offering a 2 for 1 sale i.e. buy 1 new large family saloon car and you get a new small economy car, of the same mark, seemingly free. What a great deal, at first glance.

Shall we consider the maths? First you have to understand what drives the auto traders' business priorities, apart from making big profits. The way that auto and other franchise licenses work is that you, the license holder, need to guarantee the franchise owner a large turnover of product and a certain level of other ancillary business items, through your outlet. For auto traders, this is primarily the number of new cars, spares and possibly second hand cars, if they are running a registered and affiliated scheme that is associated with that automobile mark.

The normal mark-up on a new car is around 40%. I know this because I had the opportunity to assist a franchise holder clear his new car stock backlog, by buying some at cost. There is an advantage to do this if you sell on to the private buyer but there is no advantage in doing this if you expect to make money from another auto trader because they have access to an online register that shows the history of the car from manufacture. If you try to trade it in as a nearly new car you will be viewed with great suspicion. They may believe that you are testing their loyalty to the mark franchise by offering them something that has circumnavigated their rules.

Chances are they will either outright refuse to deal with you or tell you a price that is well below what you paid i.e. something around 50% of the normal on-the-road car price.

So let's get back to the arithmetic. Your new family sized Mazda costs you 25,000 monetary units. The dealer paid roughly 60%, 15,000. The immediate profit to the dealer is 10,000 units. He now offers you a free mini Mazda, which normally costs 7,800. You think you are quids in but the mini Mazda only cost the dealer 4,680. So he still has an excess profit of 5,320 on the deal. Plus he keeps his franchise margins, he gets a loyal and happy customer, he gets the spares and service revenue from a loyal and happy customer. In addition there may also be a small commission (between 5 7.5%) from the finance company who provides the customer with a smart personal loan to bridge any shortfall in monetary terms. So everyone is happy and life is good all round.

As a disclaimer, I would like to say that I have conveniently simplified the maths of percentages here and forgotten to mention the further complexity of reducing VAT, car Tax contributions and other legal and admin overheads etc. to simply the argument. Although this post is based on real events, no car dealers were injured in writing it.

For the future, try not to dwell on how much money the dealers has already made from you in the past. Let it go. The hardest pill to swallow is where your current vehicle's residual finance value is far greater than that of the vehicle's current market value i.e. you will need to spend more money to terminate the finance agreement than the car is worth. Ouch!

On the personal front, clear yourself of as much debt as you can and look to the retail markets for more quick win bargains to come. The wholesale manufacturers, retailers and dealers will become more and more desperate to shift stock because 'stock is money out' (bought on credit) and a quick return through a stock clearance event is the best way to greatly reduce the cost of that credit. Most organisations will be under pressure from their bankers and financiers to reduce their credit profile and overdrafts. Credit facilities are being rapidly withdraw. This will lead to a saturation of the retail market with the loss of many of the current familiar players.

In the parlance of the entrepreneurial estate agents, you will be looking for motivated sellers.

Drive safely, your life may depend upon it.