REMARKETING: Damage limitations
24 October 2011
Will carrying out a refurbishment on a fleet vehicle prior to reselling add enough value to make the exercise worthwhile? Rachel Burgess speaks to remarketing and residual value experts to find out the pros and cons
According to BCA director Tony Gannon, contract hire and leasing companies send more vehicles in for repair than any other sector because they see the greatest value in presenting their cars in ready-to-retail condition.
Gannon, however, believes that a wider selection of vehicles from the wholesale market could be suitable for repair; BCA suggests that more than 90% of vehicles would benefit from some kind of refurbishment over and above pre-sale valeting.
In terms of what types of vehicles need most repair, Steve Weston, general manager at Manheim Inspection Services, says there isn't enough data to draw definitive conclusions on whether any particular cars, models or brands suffer the greatest damage. "It's fair to say most fleets are well looked after and are serviced regularly, and therefore most damage is cosmetic, reflecting natural wear and tear such as stone chips, scruffs and scrapes," he comments.
Whether a damaged car is worth repairing varies according to a number of factors: the type of buyer targeted, market conditions and vehicle grade.
Weston says that, traditionally, car supermarket buyers work on a business model of high volume and quick turnaround, so spending time repairing stock themselves simply isn't an option.
"Some of your smaller traders will look at the potential profit in each unit and happily spend the time and money repairing it if they can see a profit margin. This is also true of unique or rare vehicles that can be matched to a specific customer."
He adds: "More recently we have seen stock shortage caused by the meltdown of the fleet market back in 2008. This means high-quality vehicles are in shorter supply so more buyers need to fill the voids by looking at purchasing lower-grade stock and spending the time and money repairing it."
BCA's Gannon says that the importance of preparation and repair in the remarketing chain just cannot be over-estimated, whatever the market conditions maybe. "Sellers should be considering every tool in the remarketing preparation box - that might mean repair to trim and paint, dent removal and a machine-operated polish."
BCA data shows that Smart-prepared cars enjoy high conversion rates, particularly for first time entered and sold. In a strong market, preparation may mean a significant increase in return for the seller, and when demand is slower it could be the difference between selling or remaining unsold. "Whatever the market conditions, sellers should ensure their vehicles stand out in the crowd," says Gannon. "If residuals come under pressure then professional buyers become more cautious about buying for stock and may avoid any vehicle that requires repair or refurbishment if better examples are available."
He continues: "Pre-sale preparation gains even more significance if vehicles are to be sold online. The virtual bidder does not have the luxury of physically inspecting the cars they bid on, so they must have confidence in the condition and the presentation of the vehicles. If they know the vehicle has been pre-sale prepared by BCA, this is a mark of quality that speaks for itself. When this is backed-up by a series of high-quality digital images and comprehensive condition appraisal and grading report, then online buyers feel confident to bid or buy vehicles outright, depending on the remote channel they are using."
Based on the average sale price at BCA, vehicles that are in the top 'Grade 5' condition will see an uplift in value of around 16% - typically £700-£800 - if Smart repairs are carried out. And the time to sale decreases, improving churn for the seller.
Manheim's Weston says the simple rule of thumb is to ask "will the cost of repairing the damage be realised in the sale value of the stock". If it costs £500 to repair the damage and it will only bring an extra £400 of revenue then you'll find the repair doesn't make sense. In this instance, many buyers will instead invest in the repair themselves.
According to Weston, many fleet owners are taking advantage of off-site inspection services. Manheim inspects more than 50,000 vehicles per year to BVRLA-approved standards on behalf of various fleets. Most of these are on an 'inspect and collect' basis:?"Our inspectors will record and note any damage, missing keys, V5s or other documentation and then, depending on the fleet operator's requirements, can present the driver or business with an invoice to recoup the value of repair costs, arrange for the vehicle to be delivered to an approved repairer or pass it straight through to a remarketing channel."
He adds: "This means the fleet operator has a number of flexible tools at his disposal to not only ensure the desired value for that vehicle is realised but also to act quickly."
High-visibility items such as alloy wheels and bumper scuffs are the most obvious repairs to carry out and potentially represent the best value to the seller, says Gannon. "It is worth remembering that most serious repair work will have been done before the vehicle reaches the remarketing chain, either as an in-service repair or following a de-fleet damage recharge."
He adds that fleets that repair vehicles arguably generate: a better following for their brand in the remarketing arena; improved residuals and conversions, leading to a shorter time between fleet and sale; and lower depreciation. "These are persuasive arguments for the value of Smart repairs," he says.
Meanwhile, Manheim's Weston says that the primary goal of fleets is to maximise return on their stock value against forecast residuals, and reduce the amount of time an asset remains on their books at the end of its life. "Fleets work with a remarketing partner to determine where it is appropriate to put a vehicle through a repair process or put it directly into auction," comments Weston. "Equally, some buyers will happily buy the right stock and repair it themselves or utilise remarketing services for a showroom-ready vehicle."
Gannon concludes: "For business operators there is also a benefit from engaging in activity upstream to ensure damage does not affect residual values. Fleet policy should accept that minor accidents will happen from time to time, and company drivers should understand it is their responsibility to report them. This means a no-blame culture in-house for accidents, then work can be put in hand to repair damage before deterioration sets in."
Gannon recommends that monthly driver reporting is good practice anyway, and a mid-term inspection will help to uncover instances of un-reported vehicle damage. "Dialogue is important and good communications with drivers through whichever medium is appropriate - staff magazine, face-to-face, training sessions - help explain why certain policies are in place."
The residual value expert's view
Cap chief editor Chris Crow says there is no research from Cap teams that show specific models are more likely to incur damage than others. However, unsurprisingly, company vehicles run by more than one driver are more likely to suffer, along with vehicles operated by driving schools.
Crow confirms that any damage impacts on the trade value of a car: "The higher the standard of presentation, the greater the value achieved. Kia consistently presents vehicles to a high standard and regularly exceeds Cap Clean without offering additional dealer incentives.
"That said, a vehicle with superficial damage requiring minimal Smart repairs will suffer little diminution in value. In contrast, a vehicle requiring major repairs to reinstate back to retail condition will suffer a greater reduction in value than the cost of the repair; so it really does make sense for a vendor to think twice before presenting a vehicle with major damage for resale."
He says the impact of damage on a vehicle's value will vary depending on the availability of stock and the level of retail demand: "As retail demand eased into quarter two, values of vehicles requiring work slipped and the gap between the Cap Clean standard and Cap Average increased."
It is advised that it is worth undertaking work on vehicles that require attention over and above Smart repairs - unless de-stocking is more important, as this will increase the time it takes for a retailer to sell the vehicle.
However, Crow adds that attitudes to damage repair vary "depending upon the volume of vehicles being disposed of, as some of the larger fleets do not have the resource to administer repair standards and have to liquidate stock".
He concludes that the most common problems include wheel scuffs and stone chips followed by dents and cracked glass.