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James Baggott: The numbers don’t add up – and that’s clearly not good for business

James Baggott by James Baggott
April 15, 2020
0
Home James Baggott

NOW, I’ve been told more than a few times over the past few months that times are tough out there.

Car dealer bosses I’ve spoken to have painted a tale of woe as sales dwindle, buyers dry up and new car buyers become few and far between.

But it wasn’t until recently, when I got out there to visit a few sites with my new-car-buying mother, that I realised just how bad things were.


My mum has been in new cars for six years now, having bought into the cheap PCP cycle that allowed her access to a modern motor for not huge amounts of cash after I convinced her it was a good idea.

In fact, I helped her buy her first new Skoda Citigo a few years back after pulling together the best cars on offer for under £100 a month as a cover feature for this very magazine. It was that process that saw her driving around in a lime green Skoda for not much more than a mobile phone contract.

Two and a half years later, the dealership called her up, knowing her PCP was coming to an end, and offered her the chance to upgrade to a Fabia for £169 per month. This time it was an automatic 1.2 petrol, a bit bigger and, importantly, a five-door. Mum snapped up the offer and has been enjoying that one for the past three years.

Now, with that PCP coming to a conclusion she wanted something new, and asked if I could help her find something. The criteria were pretty simple: something a bit bigger, automatic again, and apart from that there were few other restrictions.


Ideal

The PCP did what it was designed to do and forced her back into the hands of the Skoda dealer who – and it’s at this point I should have realised something was up – offered her a six-month-old demonstrator for more than she was currently paying.

She quite rightly turned them down.

I had a good think, asked the team in the office for their thoughts, and did some reading up of our reviews. With a shortlist in mind, we set out one Saturday to visit a few dealerships and started at the local Kia site. I thought the Stonic would be ideal – mum liked its slightly jacked-up looks, driving position and the equipment. There was a cool special edition in the showroom that took her fancy too.

With that in mind, we sat down to crunch some numbers – and it was at this point we got a bit of a shock. A three-year PCP deal on the £19k car was coming in at £286 per month.

Worryingly, the equity in my mum’s 8,000-mile Skoda was just £300 too – I hate to think how much negative equity she’d have been in if she’d done normal mileage in it. Mum was putting in a few hundred quid more to the deal, but I was still shocked at how much it was.

The Kia dealer was a little embarrassed too – he knew what mum was currently paying and guessed that without getting it under £200 a month there wouldn’t be a sale.

It was the same at Citroen. We looked at a C3 Aircross – a funky car with cool styling and lots of space. The sales manager was even doing me a mates-rates deal but still couldn’t get anywhere near the price mum wanted to pay, his deal coming in at £260 per month.

I asked the salesman what was going on. He explained that a combination of price rises – of which he’s seen five this year alone – and finance companies catching a cold on guaranteed future values had shocked the market. One dealer told me he’d seen just three customers this year who had been on the right side of the future value on their car – all the others had simply handed their cars back to the finance company and walked away.

Plummeting

‘It’s a very difficult conversation to have with a customer when they come in and their car is worth £2,000 less than the value written into their deal and you have to ask them to stump up another deposit for their next car – and at the same time pay more a month,’ said one clearly frustrated dealer.

‘The customers at this point have understandably lost faith in PCPs.’

As you well know, PCPs were designed so customers ever so slightly overpaid each month so when they came around to changing it they had the money in the car’s value for the next deposit. But with values plummeting on used cars – thanks to a toxic mix of diesel demonisation and Brexit – finance companies are running scared.

The future values I saw written into those deals offered to my mum were poor and overly cautious – consequently serving to push the monthly payments out of mum’s reach. And all this at a time that consumer confidence has taken a tumble.

So, what did mum do?

After much wrangling, she decided to keep her Fabia. With just 8,000 miles it was barely run in and she owed £7,500 on the finance. She took out a loan, paid off the balance and will keep it until it doesn’t work any more.

Another new car buyer out of the market.

What’s worrying is that I’m sure she’s not alone and that there are many more conversations like this one happening in dealerships like yours every single day.

No wonder the new car market is so tough.

James Baggott is the founder of Car Dealer Magazine and chief executive officer of parent company the Baize Group, an automotive services provider. He now spends most of his time on Twitter @CarDealerEd and annoying the rest of us.

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