WHEELER DEALERS

The retail car market is moving into top gear again after two disastrous years. But are the sales real or the product of an industry practice called back-end loading which artificially inflates the market?

As the first P-registered cars roll off dealer forecourts tomorrow manufacturers will be hoping that the recovery in the car market, which has been evident since April, will continue.

In successive months the market has enjoyed volume sales growth of 17.2 per cent in April, 8.5 per cent in May and a healthy 4.7 per cent in June. More than 1 million cars were sold in the first six months of the year – a six-year high – and an increase of five per cent on the same period last year. Manufacturers are predicting that this year the market will top 2 million cars for the first time in seven years and more than 480,000 cars are likely to be sold in August – an estimated increase of three per cent.

All the figures indicate confidence has returned to the car market after a nightmare two years when the retail sector collapsed and manufacturers only survived because of fleet sales. And a combination of give-away promotions and finance offers which cost the companies dear and only attracted limited retail business.

The multitude of offers led one marketing director to dub the market “the sale of the century”. The Government has even taken this year’s sales increase as a sign that the elusive feelgood factor is returning.

But the figures and the confidence they engender are being exaggerated by an industry practice called “back-end loading” which inflates the total sales. Cars are being pre-registered to dealers at the end of each month to boost market share figures without having actual buyers.

The Retail Motor Industry Federation which represents dealers estimates that ten per cent of the cars sold in the first six months of the year – 100,000 vehicles – were registered in this way.

“It is the nature of this business that you will always get some element of back-end loading,” says RMIF director general Alan Pulham. “Manufacturers will have to realise that the easiest way to solve this problem is by price changes.

“Volkswagen is doing well at the moment, having introduced price changes, and you don’t see brand new Volkswagens on used car lots. Other manufacturers will have to learn.” Pulham believes that the problem has eased from a point when 20 per cent of cars were registered in this way several years ago but still believes it needs to be reformed.

It is a practice that has dogged the industry – obsessed by the drive for market share – for several years. But one that according to some manufacturers has returned with a vengeance since the start of the year.

One car industry veteran who has taken part in the practice in the past explains: “The false sales come two ways – through the dealer network or internal company cars. The company will go to its salesforce and say we need to sell x thousand by the end of the month and this is the budget. The salesforce will then go out and speak to, and offer incentives to, dealers to hold on to market share. This could be costing the manufacturers millions of pounds.”

The cars then go into the limbo state of “nearly new” sitting on dealers books with 200 miles on their clocks until they find a buyer.

Manufacturers receive daily information on their sales, and those of their rivals, throughout each month from their trade body the Society of Motor Manufactures & Traders (SMMT). Those statistics are then bunched into ten-day figures which allow some manufacturers with a poor early-month performance to take action to improve their sales – via marketing and sales support including special offers – and retain their market share position.

But it is becoming a standing joke within the industry that the ten-day figures are being used to trigger pre-registrations of cars to dealers. This effectively means that if a consumer buys a car on August 1 they might find exactly the same car, with exactly the same specifications and registration, with at least 1000, and probably more, cut off its price on September 1.

Not only does it distort the headline figures, it destroys the residual value of the marque and undermines any brand-building campaign executed by the manufacturer via advertising. Crucially it is a short-term practice that could lead to a manufacturer being caught in a vicious spiral having to concentrate attention on selling last month’s cars as used when it should be selling this month’s.

Only the SMMT’s month-end figures are published. The organisation advised some manufacturers, asked to help with this article, that they would not be given the full daily sales information they currently receive if they were to help Marketing Week.

But not all manufacturers are indulging in pre-registration. Vauxhall told all its dealers several years ago that it would not use back-end loading. Many are expanding or holding their market share without the practice and all deny that their figures have been inflated in any way. But the fear is that the intense competition in the market is leading to a growth in back-end loading. And that the market is being distorted by the growing “nearly-new” sector.

Marketing Week has seen the confidential daily figures for the past five months and the ten-day figures for April, May and June 1996. Both Renault and Ford enjoyed dramatic growth in the final ten days of June but figures for other manufacturers including Peugeot also illustrate a rise towards the end of the month.

All three deny that their figures have been boosted by back-end loading. A Ford spokesman, explaining why the company sold more than 30 per cent of its June sales in the last four days of the month, says: “Pre-registration is a bad business practice and damages the brand. The figures are explained by the way we do our business and some external factors including large fleet sales.” Fleet sales above 25 cars would not be included in the retail figures and the pattern is also true for the market leader in April and May.

Peugeot-Talbot blames the fact that dealers delay reporting registrations until late in the month to explain why 4,500 cars out of its June total of 10,900 were sold in the final four days of the month. A pattern repeated from April and May.

Equally, Renault UK director of communications Phil Horton claims a mixture of late reporting by dealers and the structure of the company’s bonus scheme to dealers explains the fact that it took a market share of more than 12 per cent in the last ten days of June compared with 3.8 per cent and 4.25 per cent in the first and second ten day periods.

June is often an unpredictable month with budget-end periods and promotions leading up to the August sales. But the figures from the other months support the argument that sales are being inflated. Although it is impossible to calculate exactly how many cars are involved.

“It is getting out of hand,” says the marketing director of one top ten manufacturer. “There is more product than demand and a lot, not all, of the retail improvement has been self-inflated.

“It is clear from the figures that some manufacturers are selling more than 20 per cent of their volume of cars in this way unless they are employing a sales strategy that the rest of the industry does not understand. As long as they persist in doing this it is an indication of weakness and bankruptcy of ideas.

“Whatever they are doing from a marketing point of view is not working. But the residual damage also affects other products in the market. At one level it reflects a desperate need to maintain their performance and at the other end it reflects the fact that people are trying to protect their jobs – they are under intense pressure to deliver. If they don’t there is a straightforward penalty – the sack.”

It is a view echoed by Mazda managing director David Heslop. “Back-end loading kills the residual value of the brand. The factory push is not meeting the retail pull and at the end of the day they are just artificially deflating the price of the cars to move the metal with no thought for the long-term damage. Other manufacturers are marketing themselves out of the same problem.”

That is not always an option for a manufacturer with a market share of over five per cent whose parent company wants to know why it is ordering fewer cars. But it can be argued that pre-registration, rather than being an indication of marketing failure, is actually contributing to an undermining of a marque’s advertising and marketing activity.

The reason for manufacturers indulging in such practice is clear. Falling sales, rising marketing costs and massive over-capacity have combined to make the UK car market the most competitive in Europe throughout the Nineties. There are 38 separate marques available – more than in any other European country – and every year for the last four has seen a record amount of advertising expenditure.

TV expenditure in the first six months of this year rose by an average 24.5 per cent until July when there was a one per cent fall. Total spending has already topped 250m and although a fall is expected in August and September, spending should top last year’s 500m (Register-MEAL) once again.

Vauxhall increased its spend by 49 per cent last year to 78m and Rover by 37.5 per cent. Both appear to be sustaining those spends and this year the total will be added to by the likes of Peugeot following the most expensive launch in its history – the 406, Fiat with its Bravo/Brava and Nissan with its all-singing and dancing Primera.

There is also pressure for a return to the days when the car industry, as the indicator of economic health, sold more than two million cars each year.

This, coupled with the ridiculous nature of the August 1 registration which means that 25 per cent of the new cars “sold” this year will be registered in a single month means marketing departments in car companies are under increasing pressure to deliver.

Many openly admit that the pressure will lead to an explosion. This will either lead to personnel changes or by the end of the decade some manufacturers being squeezed out of the market.

Another senior source with more than 30 years in the industry predicts that back-end loading will be again employed at the end of August because manufacturers depend on a “good August” for successful full-year figures. An August like last year when sales rose by just 3.6 per cent will be avoided at all costs.

“April, May and June have all seen very dramatic increases in back-end loading,” he claims, “and August will be another classic month if as in recent months consumers are not buying certain marques in the early days of the month companies will be forced to pre-register to meet their internal targets.”

Sales are returning to the UK retail car market. But it is so competitive that manufacturers are doing everything that they can to hang on to market share. That includes a practice which undermines the advertising and marketing on which they are spending record amounts of money.

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