How is pricing being affected during COVID-19 and what should my strategy be when trading resumes?

We’ve been getting a lot of questions from our retail customers on what pricing behaviours we’re observing and what they might expect as this pandemic progresses.

We started our webinar on 8th April with a poll of around 1,000 attendees, and 88% of retailers said they are not reducing their prices more than usual during lockdown, echoing what we see in our data.

Will our market be affected in same way it was in the 2008 financial crash?

Some of you may think back to the last financial crisis in 2008 and remember the collapse of Lehman Brothers in the US and the massive drop in stock market values. We’re not seeing this kind of crash in automotive today, but data from JD Power shows that we did see a significant depression in used car values in 2009 following the crash. The reason that happened was because whilst at the time there was significant economic slowdown, markets were still open and retailers were still trading, but there was a weakening in consumer demand. The same number of retailers were fighting for a reduced buyer demand resulting in the suppression of used car prices. As a result of this crash, the US put circuit breakers into the Dow Jones so that if prices fell too much again in future, trading would be paused until things stabilised. I think this ability to pause a market is something we can learn from.

Whilst I can’t guarantee it, I don’t think such a crash will happen this time, but it’ll all depend on how retailers think about their pricing as we come out of this. If anything, the market being paused could be a positive in the long-run. If car retailing had been allowed to continue alongside the drop in demand we’re seeing, this would have caused problems. There is still significant activity on our marketplace which should create a surge in latent demand once trading resumes. I’m sure we’re all feeling that cabin fever and want to get back to normal life, so we should see a rapid return to pubs, restaurants and retail, which we expect to be felt by the motor trade too.

How should our industry react to this pandemic?

Our role as an industry is to avoid a race to the bottom where too many retailers come back to the market and try to force prices down too quickly, to cover cash flow. The worst thing you as a retailer could do is act too quickly or not strategically enough with how you apply price changes to your stock. If too many retailers come back to market and lower prices too fast, it will put margin pressure on the overall industry which could create bigger long-term challenges. Most economists are saying we are already in the midst of the biggest global recession we’ve likely ever seen; it could be quite deep but it is expected to recover quite quickly.

So, what are retailers doing with their pricing today?

This week we shared our latest monthly Retail Price Index data which shows that like-for-like prices for March remained flat at -0.2% vs. last year. If we look in more detail, absolute retail prices over time continue to increase as normal, but relative prices in March 2020 were down by -0.2% which is less of a decline than we’d seen in the seven previous months - which should give some comfort.

23rd March saw panicked reactions from retailers

On a typical day we’d expect around 12,000 daily price changes. If we look at 23rd March, which was the day before lockdown, there were 17,055 price changes. This is the last day most retailers were likely to be open and trading. On that day we saw around 3% of stock change price and with an average price reduction of over £1,100, more than double the £477 we usually see. This would have been a big cause of concern for me if we had continued to trade, as retailers would have slashed prices to respond to lower consumer demand and generate sales.

During lockdown, things have stabilised

As soon as the lockdown came into effect, we saw an immediate drop in price changes, with only 821 retailers making much smaller price drops than we’d see under normal conditions. This is why I believe it’s a good thing that the market has been temporarily paused putting a stop to the earlier panic slashing of prices from some retailers.

I think it’s really important we give people the confidence that retailers are no longer slashing prices, but what’s more important is what happens once the play button is pressed again once we come out of this lockdown phase.

So, what should my strategy be when things return to the new normal?

Whilst as a retailer you will need to think about your own business and pressures you face, we also need to think about the health and profitability of the overall market. If we can all stick together there will be opportunities to come out of this with a lower impact on overall profitability.

Many of you will need to think hard about cashflow, but as Jacob Freshwater alluded to in our webinar, that’s not at any cost. I wouldn’t be thinking there is a need to go back into your business and slash prices as the demand should be there.

Where I do think we might see risk is in the trade valuations market, where it’s going to be difficult to predict what’s going to happen with retailers going back to auctions and deciding what they’re going to bid. So, my advice here would be to make sure you reference retail prices daily when you’re buying stock in future to make sure you can bring that to market and sell it profitably.

How can retailers stay on top of pricing in this period?

Auto Trader customers have access to our AT Retail Valuation in Portal and those who have access to our more powerful data tools such as Retail Check, Retail Accelerator or Market Insight should use them and base decisions on data rather than following gut instinct, now more than ever. All our contract customers should know that we’ve just launched our latest data tool, Market Insight. These tools will not only give you a macro market view of supply and demand trends, but also allow you to look at make/model trends – all of which will help you to make more informed decisions on pricing. Customers who then have access to Retail Check, which from 1st April all our Independent customers have as part of their package, or Retail Accelerator, know that these data tools allow you to understand the market and pricing at a derivative and trim level car by car to make sure you’re following the market and not reducing unnecessarily and even point to vehicles you should be increasing.

So, in short, I believe the industry is stronger together. If we all pull together, recognise that this is a paused market and that there will be pent-up demand when restrictions are lifted, we can all make clearer decisions. I would advise against knee-jerk panic reactions and immediately slashing prices to make things turn. I would always advise you to consider your pricing approach carefully and to use data over your gut to make pricing decisions. Think longer term profitability over short-term cash flow wherever possible.

To watch the webinar back in full to see me talk through this insight plus more, click here.