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Seeds of recovery
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Page 53
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The R-word is banned at Manheim Auctions, as signs of price stability through September offer hope. Alex Wright, sates director for commercial vehicles, assesses the situation.
Words: Kevin Swallow
When Alex Wright, sales director for commercial vehicles at Manheim Auctions, says the 'R-word' has been banned, the next question is which `R-word' — residual or recession?
Now that the Prime Minister, Gordon Brown, has uttered the word 'recession', cards are starting to be placed on the table. Buyers are becoming picky, and vendors are being forced to assess resale prices. Wright, who was on the rostrum in 1989, sees the trend mirroring the last economic disaster, Back then, it was Margaret Thatcher's Conservative government preparing for the advent of the monetary union and the euro that led to economic woe. From May 1988, Bank of England interest rates started to rise from 7.38%. They reached 14.88% in October 1989. This damaged the burgeoning UK housing market as people suddenly found themselves in negative equity.
The decision in June 1989 not to join the monetary union led the British economy, which had been set up to compete with other European economies, to spiral out of control. It would be May 1992 before it got below 10%, before full recovery in February 1994, when it fell to 5.13%.
Main differences
Wright believes the main differences between the last recession and the current plight is technology and the internet. "The working tool was a bit more basic then." he states. "Everyone went back to cheap and cheerful, it was cost effective; they went for the Ford Transits, Leyland Daf Sheipas and Royal Mail vans. Those prices picked up a bit.
"The reason Transit dominated during that time was spare parts. Engines you could replace for £500, reconditioned gearboxes for £300 and rear axles for £100; they were the standard prices across the range.
"In this potential climate, we are seeing the same trend back towards cheaper vehicles. Royal Mail vehicles are starting to go back up in price, but the main difference is technology. The driving forces for manufacturers have been efficiency on diesel, restrictions on emissions, and the move into electronic engine management systems, which has meant replacement parts on used vehicles are more expensive for the buyers," he explains.
"The retailer has to juggle more potential costs when buying a used vehicle and has to fix more things," he adds.
"The second difference is the Web," Wright reckons. "As prices dropped in the last recession, I would phone retailers and say, 'We've got two-year-old BT vans at £2,500, why don't you put them back on your forecourt at 13,500?', and the standard reply would be, 'They would make the rest of my stock look dear'."
Retailers were self-sufficient, owned their sites, paid with their own money and refused to take losses on their own stock. Wright continues: "Since everyone can (now] see what the market is doing on the Web, you only have to go to Auto Trader or eBay to value a vehicle.
"We are finding sharp retailers going online and valuing their prices on a weekly basis because there are fewer buyers. They have got to get a buyer, and one way is to be £50-£100 cheaper. Retailers are prepared to blow £100 now because they know they could lose more," he says.
Know the market
Back in 1989, British Gas changed its policy to remarket vehicles after two years instead of three. "British Gas got the market wrong by coming out from three-year-old to two-year-old vehicles; it went to more expensive vehicles at a time when the market wanted cheaper ones," he says.
Buyers preferred cash, and with high interest rates, finance wasn't an option. Prices plummeted and assets were turned into cash in a market flooded with vans. By the time Thatcher was replaced by John Major in 1992, the seeds of recovery had begun in the bargain basement.
"It started with the cheaper stuff, which held strong during that period, and then it filtered up into more expensive vehicles as the confidence grew. What stimulated the recovery in prices was the lack of new stock coming into the market because the new sales had dropped back."
This time around, the credit crunch was ignited by 'optimistic' mortgage lending in the US being spread globally. Signs of a downturn were spotted in June as buyers weren't paying the going rates for vans. "Buyers were being choosy. The first vans that dropped off were high-mileage, tatty ones. Suddenly, buyers had more choice, then conversion rates started to drop and then the actual market started to drop," Wright reveals. "My initial reaction to June was, 'Oh, we got our seasonal trends back', the past 18 months was just bonanza. We had never seen markets that high, that strong."
Customer first
Van retailers now have smaller stocking plans, believes Wright. They are more likely to buy if they have a customer lined up, preferring to pick off a catalogue by going online.
At auction, vendors initially held out for established prices, but when the next wave of deflected vehicles came in, things started to back up. Retailers quickly spotted the leasing and finance companies holding out and steered clear. "Buyers were very quickly picking up on the vendors who wanted to sell and we would have a [specific] vendor [lot] where all the buyers would come in," he says.
Vehicle demographic hasn't altered in terms of age, mileage, condition, or days in stock. What has changed, though, is overall value, which has dropped £800 in 12 months and value against recommended retail price, which has dropped 6% in Q4 2007 to 21% at the end of this year's third quarter.
September shows stability, but Wright won't be drawn on the future. However, he does spell out a possible scenario. He explains: "After the initial influx of vehicles, due to fewer buyers than sellers, you then get a lack of part-exchanges coming back because of new sales and extended contracts, which sees a reduction of vehicles in the market and stability within the used market."
Wright turns to strategy: "We need to work with the vendor to access as many retailers/buyers as possible. To do that, our strategy is to use the Web. This year. we've made all our vehicles available online as well as at a physical sale."
At the moment, 7% of all vans sold are done online and supplying a retailer with a customer in Manchester with a van from Gloucester is where the market is heading.
"We are looking at ways of getting around 'sold as seen', giving more details, better presentation, better photographs," he says, "to make sure they get the information as soon as possible, so they can work their local markets."