UK car dealers make record profits per sale amid supply shortages

"I worry about supply coming back!” said Vertu CEO Robert Forrester in May

Supply shortages driving price hikes mean some major dealers are making thousands more per sale in 2022

Britain’s biggest dealer groups have capitalised on the shortage of new cars to extract greater profit than ever from each sale so far in 2022, financial figures show.

However, bumper profits recorded last year on the back of the soaring value of used cars have slipped back this year, as the cost to source those cars has also increased.

Vertu, best known for its Bristol Street Motors brand, recorded its second highest ever profits in its history with new cars “the star performer”, it said in a release detailing figures in the first half of its financial year, which started on 1 April.

Vertu said the amount of gross profit it made from each new vehicle sale rose by more than a quarter to £2124, which increased gross profit at the company by £7.7 million to a pre-tax profit figure of £28m. Vertu has 160 sales outlets in the UK.

Car dealers are experiencing the same jump in profit margins as the car makers themselves, as supply-chain bottlenecks increase competition for cars that do get built.

What’s currently a tough situation for buyers is quite the opposite for the dealers. “Someone asked me 'are you worried about supply constraints?'; I said 'no, I worry about supply coming back!'” Vertu CEO Robert Forrester told Motor Trader Radio back in May. 

Reduced supply for both new and used cars would continue “well into the next financial year,” Forrester predicted in his first-half statement. “Margins are therefore expected to remain strong and used car pricing robust,” he said.

Dealer group Pendragon, owner of dealership brands such as Evans Halshaw, meanwhile said that gross profit it made per new car sold had risen almost £1000 to £2576 in the first six months of the calendar year. The company, which also has around 160 outlets, said that the average new price of new cars sold rose to £29,213, up 13% from the same period the year before.

The story was similar at dealer group Lookers, with the amount of gross profit it made on each new car up £200 to £2100 in the first half of the calendar year. Lookers sells from around 150 dealerships in UK and Ireland.

These three groups are singled out because they release more detailed financial information to satisfy their requirements as publicly listed companies, but the story is likely to be the same across all dealers.

Because new cars are in short supply, dealers can charge close to the full price of the car they paid the manufacturer under their wholesaling agreement. 

Vertu indicated that the amount of bonus received from the manufacturer for hitting volume targets had reduced, but given that they no longer need to stimulate demand by paring back their margin to the bone in form of discounts, they no longer need to rely on that for profits.

Just how restricted new car supply is currently is revealed by overall sales figures, which in the year to the end of June (the period in which Lookers and Pendragon are reporting) were down 12% to 802,709. For comparison, by the same time in 2016, the UK car industry’s most recent peak, 1,420,636 cars had been sold by the same time, according to figures from the SMMT.

Vertu’s confidence that supply will remain constricted for new cars might not translate into the same high margin business going forward, however. Other forces are now working on the car market.

"As consumer credit becomes more expensive, due to higher interest rates, we expect to see a fall in the average price paid for new vehicles, whilst some consumers will delay buying a new car altogether,” said Chris Knight, automotive partner at KPMG UK.

Order books are full. Lookers, for example, had an order bank of 22,000 going into the second half of the year. But that won’t sustain dealers for ever as consumers tighten their belts.

“It’s likely that the number of enquiries will fall, raising questions amongst some dealers about prospects for 2023,” said Jamie Hamilton, automotive partner and head of electric vehicles at Deloitte.

UK dealers are likely to ride out this storm. New cars have traditionally played second fiddle to used cars as far as profits are concerned by dint of the greater numbers sold and their values are still high, albeit not quite as high as they were. 

For Vertu, used car profits fell £15.8m in the six months from the beginning of April to the end of September compared with an “unprecedented” six months the year before, with gross profit per car down to £1579 from £1665. However, the average selling price was still up 23%, at £19,958, suggesting the cost to buy used stock had risen as groups compete for cars.

The used car dent was a big reason for Vertu’s reduction on profit before tax from last year’s record £51.8m the same period last year to £28.2m.

Pendragon meanwhile was still seeing its average gross profit per used car rising in the first half by £310 to £1676, with average prices climbing 13% to £18,965.

To illustrate how important used cars are to dealer groups, Pendragon sold 46,016 used cars in the six months, compared with 24,686 new cars.

Lookers beat them both with a claimed gross profit per used car of £2100 in the first half of the year, up £200 from the same period the year before. 

Motorpoint, another listed group, which focuses mainly on used cars, boosted its profit per used vehicle to £1446, up from £1254, albeit for the financial year ending March 31, so during the peak used-car madness.

However, Motorpoint warned in its end-of-financial-year report that there was a danger that if new-car supply returned, used-car prices could sink below the cost the company paid for them.

Motorpoint has also raised the interest on its finance products back to 9.9% APR, after reducing them to 8.9% last year, again increasing the barriers to purchase for cash-strapped consumers.

A bigger concern, however, is looming for dealer groups as car makers look to streamline their sales and distribution operations and keep more the profit by moving to the so-called direct sales or agency model. Flat fees for sales could spell the end for bumper profits per car.