“If used car operators aren’t seeing almost record margins, they’ve got their pricing wrong”

A conversation with Robert Forrester, CEO of Vertu Motors

In this week’s webinar, Catherine Faiers, Auto Trader COO, caught up with Vertu Motors CEO, Robert Forrester for his invaluable thoughts on the next steps for the industry. It was jam packed with insight, and we’ve summarised the Q&A here.

Highlights

• Generally, everyone has been surprised about the overall level of demand and June was much better than we expected

• Retail demand for new cars is robust. SMMT figures reflect the understandable lack of pre-reg activity at quarter end

• Internet leads up significantly and phone leads up 50% YoY

• Walk-ins starting to come back as we begin to see the semblance of normal consumer behaviour

• Increases in disposable income and cash balances for consumers driving demand as consumers opt for car purchases over holidays

• Scottish dealerships performing well. Top performing used car operation in the last two weeks was Glasgow Central Nissan

• Constrained supply and high demand are driving prices up

• If used car operators aren’t seeing almost record margins, they’ve got their pricing wrong

• Retailers should hold firm on pricing at point of sale, especially if supply and sourcing is a challenge

• High demand likely to push through until September, Q4 likely to be more of a challenging period for the industry

• Older used cars are an area of focus to capitalise on people looking for an alternative to public transport

• Pure online sales likely to be a slow process. 56 online sales in June from 8,000 total. Digitisation is more about choice for the consumer and driving efficiencies

• Artificial intelligence is key to driving efficiencies in lead management

• Leicester struggling for sales despite being allowed to stay open

Q&A with Robert Forrester…

Catherine Faiers, Auto Trader COO: Robert, you’ve been very open in sharing trading and sentiment updates over the last few months. I think your latest tweet suggested that you’d achieved 700 sales on Saturday and that performance across new and used was looking strong. Is that representative of what you’ve seen over the last few weeks? How have you found that period post lockdown?

Robert Forrester, Vertu CEO: It didn’t replicate on Sunday actually, we saw a bit of a dip on Sunday, which we put down to general hangovers in the UK population, but I’m pleased it rebounded again on Monday. It’s been a very strange demand profile and I think generally everybody has been very surprised on the upside about the overall level of demand. Actually, for both new and used cars. Last week for example, we saw what must have been the best week for Motability that we’ve seen for a long while. I think we should be optimistic actually. June was much, much better than I ever imagined it would be.


Catherine: You talked about the performance of both new and used cars being very strong, has that been the case since reopening and has there been much difference between the two?

Robert: I think new cars were slightly slower to get going. The SMMT numbers, which came out this week didn’t really tell the whole story. In fact, they didn’t even tell the right story. My take on new cars was that retail demand was robust for new cars. We will probably do a trading update in a couple of weeks’ time, but I was not in any way disappointed by new cars. The reason the market was down on retail, was that there was no appetite either from the manufacturers or from retailers, to undertake the normal end of quarter pre-registration activity. I wouldn’t say there is a chronic shortage of new cars because there isn’t, but there is an element of tightness compared to normal. Which means why would the manufacturers want to go and shift a load of volume at discount into the networks, when I just don’t think that’s their modus operandi; and quite rightly. We saw the month end push did not take place as normal and that’s why the SMMT numbers were down, so I think it gave a very negative view of the market compared to the reality.

Catherine: That’s encouraging to hear, and it certainly reflects what we’re seeing as Rich outlined earlier. We have very encouraging signs on our platform in terms of consumer demand and that’s been replicated across new and used on Auto Trader. You have brilliant insight as you have a broad brand portfolio, which I think gives you quite a unique understanding of how different brands are performing. Are you seeing any interesting trends between volume and premium brands? 

Robert: Yes, we study web traffic by manufacturer quite a lot.  I certainly think Mercedes is going through a very strong time, they’ve been pushing Mercedes online in very high-profile marketing. So, web traffic is very strong and we’re seeing massive levels of enquiries for Mercedes product. But there are very few manufacturers not generating good levels of enquiries at the moment and the consumers are active.

We are seeing some interesting trends now, we certainly saw that the way enquires came at us In June, was very different to the normal structure. I mean you’ve been saying this for a long time, but there was far more engagement on the internet, more use of online forms and more use of online chat. But we saw a 50% increase YoY in phone enquiries, a massive increase in phone enquiries, which put our business under some pressure to actually answer them all if I’m honest. And we saw a decline in walk-ins and I guess given what’s happened and where the virus is and social distancing, that was probably inevitable. What we’ve seen at the back-end of June and into July is walk-ins starting to return, not to normality, but much higher levels of walk-ins compared to where we were certainly in the first 2 weeks of June.  So, I think it’s starting to balance out now and I think we are starting to discern a trend where leads from 3rd party aggregators and our own websites are just coming down and we’re just starting to see the walk-ins come back as a percentage of enquiries. We might be starting to see the semblance of normal consumer behaviour. 

Catherine: When will we know when we’ve reached a new normal and what does that new normal look like? We’ve seen or we think we’re seeing elements within our demand profile that suggests some of the positive momentum in the last few weeks is structural and a shift towards potentially more new buyers coming into market. We’ve seen the data from the consumer research on audience, which suggests consumers are looking to come to market for the first time are now considering owning a car. Consumers that wouldn’t have been 3 or 4 months ago. Are you seeing that through the volume of consumers coming in with part-exchange’s or is there any insight you’ve got as to whether that feels like a permanent shift or whether it will be something that is a characteristic of June/July/August but might not be there later in the year?

Robert: Difficult question that actually. We’re definitely seeing high levels of demand and some of that must be coming from people that have driving licences but are without a car. And as your survey suggested, which was an important survey; 56% of people with UK driving licences that didn’t have a car, were thinking about buying a car.

I think more generally if you try and understand some of the trends, everyone was locked down, income levels were high during the lockdown generally, people were sat at home on full pay or 80% of pay and they couldn’t spend money if they wanted to. You couldn’t spend money on petrol, and you couldn’t go out. So, the banks are reporting that cash balances for private customers are actually at a reasonably high level, because I think most people’s disposable income as it were, went up, because they couldn’t actually dispose of it. Therefore, they’ve come out of the lockdown with quite a sensible cash position and now they have options of how they dispose of it. They can’t go on holiday or don’t fancy a holiday at this time, so they think; if I can’t have a holiday, I’ll have a new car instead. And if I’m going to have to get to Cornwall on a Friday night on the M5, I better have a reliable one and it’s going to have to be a big one because I’m going to have all the kids and the luggage in the back. So, I think we’re seeing people adapting to what they’re going to have to do. And the UK is going to be busy with people staying in the UK for a holiday. As a result, we are seeing quite a different market. Scotland has taken off in the last fortnight. My biggest selling used car dealership in July so far is Glasgow Central Nissan, the Scottish dealerships are doing well and we’re seeing that pent up demand come through there in Scotland.  But you can’t really predict what’s going to happen. We’re definitely in a pent-up demand phase for me, the question then is, what happens in Q4?

“My biggest selling used car dealership in July so far is Glasgow Central Nissan, the Scottish dealerships are doing well and we’re seeing that pent up demand come through there in Scotland.  But you can’t really predict what’s going to happen. We’re definitely in a pent-up demand phase for me, the question then is, what happens in Q4? “

Catherine: We’re trying to capture that consumer sentiment shifting, by asking them the same questions each week.  I think the most interesting thing for us will be how the responses change each week, to get this sense of actually how much of the behaviour we’re seeing at the moment is transient versus how much is a more permanent behavioural shift. I think you’re right, we will all learn more in the coming weeks and months but keeping flexible and open minded about how things trend and how we’re going to respond is obviously going to be very important.

Robert: I think it’ll be strong, certainly new cars. And it will be strong in used cars through to the end of September. I mean if used car operators on this call aren’t seeing almost historically record used car margins, they’ve got their pricing wrong. I don’t think the industry has seen used car margins like this since scrappage, it’s a very different place in terms of used car margins.

The market was going to go one of two ways, if customers are turning up to buy used cars in an environment of very constrained supply, where their options aren’t really open, where we haven’t got a lot of new cars being delivered as we did at the end of June, then you’re always going to get a constrained used car supply. Daily rental, clearly a very important part of the market historically and supply almost disappeared I suspect. So, the used car market supply is going to change, but we are seeing constrained supply, strong demand and that means prices are up and higher margins and I think that’s what people have been seeing.

“I mean if used car operators on this call aren’t seeing almost historically record used car margins, they’ve got their pricing wrong”

Catherine: It will be interesting to see the results of our poll on this topic, but what’s your position on the differences between retail and trade valuations and what would your response have been to the survey question we asked about whether you’re being more robust with consumers at point of purchase when it comes to discounts?

Robert: I mean if you’ve got a shortage of cars, there doesn’t seem any point in giving them away. And where’s the next car coming from. Now this will change when the auctions get going a bit more. I’ve been around the dealerships this week, our biggest issue this week is that we’ve sold a lot of cars. We’ve also taken a lot of part exchanges against new cars and used cars and we’ve got to get them through the process of preparation. Then get them photographed and get them on the internet. So there is a supply constraint and that will lead inevitably to robust pricing. It’s difficult to make predictions because I’m normally wrong, but I can see that being robust all the way through this quarter and then we’ll just have to see where Q4 comes. Q4 is the challenge I think because everybody has seen the list of redundancies, people don’t really know how the furlough is going to unwind and what economic damage under the super structure of the economy has actually been done. And the time it will come, if it comes, will be Q4.

“there is a supply constraint and that will lead inevitably to robust pricing”

Catherine: Yes, that definitely feels like the next risk moment. That October to December window, which is typically relatively quiet, happens to coincide this year with furlough unwinding, probably the unwinding of some of the structural support we’ve seen in other areas of the economy as well. When you’re thinking about pricing at the moment, are you focusing mostly on the retail pricing and looking at how consumer pricing is trending?

Robert: Oh no, we have to look at both. When we take a car in part exchange, we have to look at whether it’s a retail car or a trade car. We make that decision at that point, not later. And we have our methodology of how we value trade and we have our retail pricing methodology as well. We’re about to launch new products within the company with new analytics on used cars, to make that even better. But actually, you could get pricing wrong at the moment and still make a lot of money. You could overprice cars and still sell them, the stock turn is so high you haven’t really got ageing cars, there might even be price inflation in some aspects.

It’s a very strange and different environment than this time last year. Actually we were just coming out of the problem last year, but certainly from the April to June period, where we saw significant price deflation and customer wobbles over Brexit delays. It meant the auction prices were very strong, it was not uncommon to see 8-9% profit because of the supply constraints. The world is a completely different used car market than it was 12 months ago. 

“When we take a car in part exchange, we have to look at whether it’s a retail car or a trade car. We make that decision at that point, not later. And we have our methodology of how we value trade and we have our retail pricing methodology as well”

Catherine: We talked earlier about Auto Trader pricing data reflecting inflation, especially for older cars where price increases have typically been up at 6-7% compared to some of the newer vehicles where it’s maybe been lower, around the 2-3% level. Are you seeing that in terms of demand profile and does this reflect where the supply constraints are in the industry as well?

Robert: I mean I don’t think we’ve got a lot of supply in the nearly new product range either actually. But certainly, the extreme tightness is in the older cars. If you have the hypothesis that people are coming off the bus and are going to buy a car. They’re going to buy a £4,999 one, they are probably not going to buy a £20,000 one. As soon as you see one of those on the dealership forecourt, you know it’s going to be gone within 2 days, it is not going to stick around. So, I think that is very much an area where we are focused, to make sure we can get those cars. The place to get those cars, clearly could be part exchanges, it’s actually probably the best place to get them. In terms of nearly new product, some of the manufacturers do have nearly new supply, but the price inflation isn’t as evident in those areas obviously.

“The place to get cars, clearly could be part exchanges, it’s actually probably the best place to get them”

Catherine: You touched on sourcing before as being amongst the biggest challenges you are facing and we’ve certainly heard from other retailers, that the auctions being slow to come back, particularly logistics has created challenges for everyone. Have you changed the view on part exchanges, what you put back through trade or look to retail again or are you thinking about sourcing separately?

Robert: No, we’ve been going up to 10 years old for quite a while now and we’ve had a focus on making sure we’ve got older retail stock. We prepare them to the same standard as we do all of our used cars, so I don’t actually think we have changed that. It has become more and more important though. And we did have a very strong time on new cars, which meant that we did take in an influx of part exchanges, which will certainly fuel the next few weeks. And we’ve got some very, very strong marketing campaigns in used cars, with significant use of television coming up. So, we expect to be very busy on used cars in the next month.

“We’ve been going up to 10 years old for quite a while now and we’ve had a focus on making sure we’ve got older retail stock”

Catherine: Many businesses in other industries as well as our own have been reflecting on what the last few months have meant for their business, how they might think about their strategy or their operating model going forward. Are there any big things that you’ve thought about in terms of your priorities within Vertu that have now risen up within the priority list? Or are you looking to think about anything differently over the coming months and years as a result of what we’ve learnt over the last few months?

Robert: I don’t actually think so. The strategy we had that was reviewed again during the lockdown, we feel is the right strategy. All we’ve done is accelerate it. And I think we’ve got very clear views on what digitalisation is and what it isn’t. Digitalisation for me falls in two parts, both equally important. One is making sure we’ve got absolutely fantastic levels of customer omni-channel retailing capability. Not so much online capability actually, I’m pretty nonchalant around pure online in automotive at the moment. We’ve got it. I mean, we really revamped our online, I mean pure online during the lockdown and launched a brand-new online retailing platform for used cars on the 15th May.

We saw an immediate uplift and everybody gets very excited by this immediate uplift in pure online retailing. We sold 56 cars purely online in June, when we sell 8,000 cars in a month. Let’s not get excited by this, this is a broad irrelevance to our industry at the moment. What isn’t an irrelevance is that we took 230 reservation fees online. Where people paid £99, reserved the car for 48 hours and took the car off the website. And that converted at 73%. Actually 160-170 used cars, that’s a meaningful number of used cars, it’s a good used car operation if they’re doing 170 in a month in our world.

So, I think that’s very important, the ability to have the right processes and customer journey. I mean I’ve got a problem at the moment in that cars move so quickly and online is so busy, that we’ve actually had quite a few instances in June where somebody has been test driving a car, and during the test drive somebody has bought the car online or has reserved it. And that has broadly caused chaos. So, we are going to implement a new thing in the next few hours/days whereby if a car is on test drive it flashes up on the web that says somebody is test driving this car, you cannot buy it. Which, if that was my wife, would be like a hawk at that and she’d buy it the minute that test drive was over. So, there is a lot to do to get all of that online retailing done, less so pure online, which in my opinion is coming but slowly, very slowly.

But the other flipside of digitalisation, which is equally important and actually the new world is vital, is using digitalisation to streamline processes, to improve quality of processes and to make us leaner and fitter. We’ve done a lot of work on that, we’ve got a lot of work to come and it sounds very technical and that’s because it is technical, things like robotic processing. So, rather than somebody inputting data, a robotic programme does the processing. Things like integrating systems with APIs, just making the business very, very efficient and productive.

I mean one whole area, which will impact Auto Trader no doubt is that we treat pretty much every enquiry we get the same and we go through a process that is pretty uniform. What we should be doing is using artificial intelligence to prioritise which leads are actually going to give us the best conversion and put them through different processes, so our resources are applied to the ones that convert and aren’t applied to the ones that don’t. That’s a massive project that we need to be getting on with quickly and we are getting on with. So, use of technology and digitalisation to make us supremely efficient, especially if we’ve got a scaled group. We’ve got a lot of dealerships, but we are too small. But If we’ve got these processes or technology and then we apply it over more dealerships, then we can be a high quality, low cost business and that’s where we need to get to. I am absolutely convinced. Everybody on this call who has run a business during this lockdown, will have been reasonably amazed about what they could do with a limited amount of resource. And we’ve got to learn from that. It was real eyeopener to everybody, what could be done.

“Digitalisation for me falls in two parts, both equally important. One is making sure we’ve got absolutely fantastic levels of customer omni-channel retailing capability. Not so much online capability actually, I’m pretty nonchalant around pure online in automotive at the moment”

Catherine: It sounds like actually digitalisation for you is about providing consumers the experience that they choose. Which at the moment and we see this in our research is that for most consumers, there is still a strong demand for some kind of human or physical interaction. We talk about it being an assisted sale, rather than a true end-to-end transaction?

Robert: I’m not convinced and I don’t know the answer to this question. I mean a traditional sales approach is to slow the customer down and build value. Speed kills and all that sort of thing. And I think there is a lot of truth in that, but actually customers might want a speedier process, where they have done everything online and they come into the dealership to complete the process and they’re away. We’ve got to get our minds round that and certainly giving customers the options of how they deal with us. For example, all signatures now in the sales process are done by SMS text message, whether you’re sat down in the showroom or you’re at home. It doesn’t make a blind bit of difference where you are now. That’s where we are and that’s where we need to get to. Use of video technology embedded in our showroom systems so we can talk to customers via video or show them the car via video are massive leaps forward, but there’s clearly a long way to go. And in my opinion, it’s much easier in new cars than used cars and the industry hasn’t really cracked that yet, but it’s coming no doubt. Obviously, it was an economic and human catastrophe what we’ve just been through; kids not getting educated, premature deaths. But actually from a running a business point of view it has been a real eyeopener and one that we shouldn’t forget in a hurry.

“actually customers might want a speedier process, where they have done everything online and they come into the dealership to complete the process and they’re away. We’ve got to get our minds round that and certainly giving customers the options of how they deal with us”

Catherine: No I agree, we’ve learnt a huge amount over the last few months about what is possible and certainly I think when we reflect on our strategy at Auto Trader, much of it is about prioritising or accelerating things that we were already working on. Some things for us certainly feel a lot more important than they did a few months ago.

It feels like Vertu are going to emerge strongly, potentially stronger than they were before they went into the crisis. When you reflect on the last few months and what must have been an extremely difficult management and leadership challenge for you and you reflect on the decisions that you made. If you could go back and live the last 4 months again, would you do anything differently, would you have taken different decisions at different points in time?

Robert: I should probably remember that Boris Johnson is not very good at detail and what he says isn’t necessarily what he means. So, when we had the famous speech on the Monday night, when the country closed down. He didn’t actually mean that, and we closed our business down on the Tuesday, then by the Wednesday morning we realised that’s not actually what he meant. So we then had to ramp up. In reality, was that a mistake to close the business down? It actually made life a lot easier, it was a lot easier to ramp up 98 service departments from a closed position, than it probably was to half close. So, I’m not so sure even if I understood what he was telling us, whether I’d have done anything differently or not. It was quite reassuring to have a business completely closed, it only completely closed for 48 hours. Probably, I think we would do the same again. I don’t think we’ll ever have another lockdown though, I just don’t think that’s ever going to happen. Leicester didn’t sell many cars at the weekend though, I would say that. Leicester is not firing.

Catherine: That’s interesting. Obviously it was good news at the end of last week, when we finally did get the confirmation that retailers could remain open. We’ve seen reasonably robust demand levels on our platform but hopefully it will be a relatively short-lived return for Leicester to what feels like where we were at the beginning of June?

Robert: Well my view was, we’re open, we’re allowed to be open. You’ve got the internet, let’s crack on. Usual simplistic view of life. But actually, customers anecdotally of course not statistically, were saying; well I don’t want a car from Leicester. So that wasn’t quite as simple as I’d thought. I understand the thinking behind such statements, when you think I bought a new car last week and it’s from Leicester, it would certainly raise a few eyebrows in some places wouldn’t it.  Let’s hope that lockdown is reversed in the near future and reasonably speedily and we can get back on track. We’ve got to rebuild the economy. The economy in my view is in quite a poor position and it’s going to take us quite a few years to get it back again.

Catherine: I mean it was mentioned earlier that all of the mood music that we see is positive at the moment but there is this underlying sense that when things start to unwind and when we get to the October period that we talked about earlier, that we’re certainly not through the worst of it. But lots of reasons for now to be positive.

Thank you very much for joining us for this chat, Robert and for taking the time out of your very busy schedule.