Editor’s letter: Competition heats back up as new car discounts return

The average Target Price discount has steadily risen to £1802 (4%) per car

As the supply of new cars returns so does the pressure to discount them – can manufacturers resist?

Discounting is returning to the UK new car market, as Nick Gibbs’s piece recently detailed on Autocar Business. It’s welcome news for car buyers after the staunch ‘no discounts’ policy during Covid rolled directly into the constrained supply of the chip shortage, but less so for car makers and dealers. 

Many car makers are talking a good game about maintaining the ‘no discount’ policy, particularly with one eye on the agency shift, yet it’s hard to see that line being held when presented with losing sales to direct rivals who are more than happy to start discounting. The dominoes will surely start tumbling - or will they?

Nick’s piece quoted Pat Hoy, automotive industry researcher and head of What Car?'s Target Price mystery-shopping team. What Car? Target Price, a product of our sister brand, is what is considered a fair price for a new car based on this mystery shopping.

“All OEMs were in the same boat during Covid and the chips crisis,” says Hoy, who has looked in even greater detail at the numbers behind discounting. “OEMs couldn't unilaterally increase production to gain market share advantage. But now they can, and once one or more starts doing so in earnest, these actions will cascade.”

Hoy says that pre-pandemic in January 2020, the average Target Price discount was £3200 per car, or 9.1% off the list price. It bottomed out at £1560/3.5% per car in July 2022, and now it has steadily risen to £1802/4%.

“A key indicator we look at to help assess the direction of travel for discounts is the level of willingness to discuss and countenance discounting among dealers,” says Hoy. “This is rising, and currently stands in stark contrast with the solid 'no discount' feedback we experienced in the depths of the chip crisis. Dealers are more aware that competitors (both same brand and from alternative brands) may well be pushing discounts to take buyers out of the market and to shift increasing stock coming through.”

Hoy cites “dealer sales teams that have got used to defending their margins and residual perception among buyers that low discounts are the new normal” as two reasons why a return to discounting may be gradual. Within the speed of that return lies an opportunity for a car dealer or maker looking to protect margins.

To illustrate this point, the Volvo XC90 is cited by Hoy as a car where mystery shopping reveals discounts ranging between 4% and 12%, depending on where you buy it. 

“While that tells us consumers should be targeting the higher end of this range (as the higher end is not an anomaly) it also reveals that some dealers are still overcoming the hangovers mentioned earlier and are not there yet with sanctioning higher discounts,” he says.

"From an OEM's sales and marketing team's perspective they should be looking at the range of dealer discounts being offered across a given car and know the typical level of willingness to discuss or countenance discounts experienced. This will help them assess what sales training materials and dealer support could be made available to help their dealers better defend their margins.

“It will also help them to assess what sales support marketing - for instance finance offers, deposit allowances or OEM discounts - they might want to introduce/increase/decrease to achieve their desired market outcome for a given car.”

On finance, Hoy says that pre-pandemic average APR on a PCP deal was 4.5% and the average per-car finance deposit contribution (FDC) was £1717. By July 2022, this had peaked at 6.1%/£746, a 35.5% increase in the former and a 56.5% drop in the latter. “Since then there has been a consistent upward trend in FDC support to £1118 per car currently,” Hoy adds.

“This is evidence of OEMs wanting to take advantage of the more fluid market conditions, for instance to increase market share, without overtly upping the cash discounts. As most people eventually buy based on how the monthly payment looks, this is a tried and tested way of boosting an OEMs presence without devaluing the brand.”

There are ways of discounting without declaring you are discounting, then, and in the weeks and months ahead, Hoy believes “OEM sales support marketing will likely see the biggest increase, most quickly, not least to also help mitigate the effects of the national interest rate hikes that started at the end of 2022”.

“Smarter dealers will try to use these OEM offers to deflect requests for dealer discount, but the incoming tide of competition will reveal who is prepared to go a bit extra for a deal, and therefore set in motion a return to the competitive car sales environment we saw prior to Covid,” he concludes. 

Let the games begin. 

Target Price has been rolled into a wider product, Pricing Indicators, that houses ​​make model derivative pricing data for all major cars on sale, and allows them to be searched and compared next to rivals on areas including cash pricing, OEM marketing deals, dealer discount data, APRs, monthly payments, PCP terms, and PCP contributions. If you are interested in using it for your business, please contact chris.daniels@haymarket.com