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High supply's hitting dealers and residuals

Date: 16 May 2007

That's the stark message from Pendragon chairman, Nigel Rudd, and if things are as bad as he warns, then we all have cause to worry, writes Rupert Saunders

Some curiously mixed signals from the market this week. According to official figures from the SSMT, new car sales are up by 3.1% and sales to fleets are up by 4.8% year-to-date. Yet the chairman of the UK's largest retail group, Pendragon, is warning that there are more pre-registrations around than ever before - and they are in danger of destabilising the whole market. This is despite the fact that most car dealers I've spoken to are very happy at the trading figures for the first four months.

Pendragon non chairman Sir Nigel Rudd even went so far as to suggest the level of pre-registrations and direct sales to fleets was to blame for the closure of smaller franchised retailers across the county.

He told shareholders at the Pendragon AGM: "The over supply of new cars is placing increasing pressure on franchised dealerships as manufacturers supply other channels usually categorised as 'fleet'.

"This is particularly affecting small outlets in secondary markets. As a consequence there is an ongoing attrition of dealerships and the number of dealership locations is reducing as owners leave the industry and often sell their property for alternative use."

This strikes me as a bit rich, particularly coming from the man whose company has spent the last 15 years buying up as many rival firms as possible and then stripping out the assets by selling off freehold property to repay its debt.

“This over supply of nearly new cars puts pressure on the used car market and, in the first quarter, volumes and margins on used cars have been lower.”

Sir Nigel Rudd

But what of the allegation that there is more over-supply than ever? Sir Nigel claimed: "Moving into April there were a significant number of cars registered and not sold to a customer. This over supply of nearly new cars puts pressure on the used car market and, in the first quarter, volumes and margins on used cars have been lower."

You and I know that scarcely a week goes by without one carmaker or another declaring it is going to pull back from daily rental and fast churn courtesy car business. But we also know that, no sooner has one manufacturer pulled out, than another steps in to fill the vacuum.

It will always be thus. Carmakers are in a competitive market and, for some brands, it's all about market share - but at a cost in terms of margins and depreciation.

As business car operators you know all too well the crippling effect oversupply can have on residual values. If the market is really approaching meltdown, as Sir Nigel seemed to suggest, then we had all better start to be worried.

Rupert Saunders is a specialist in automotive finance and retail