What was once cumbersome for new car dealers, considering the numerous concerns related to increased overheads, enquiry leakage and frauds, the used car business is now turning out to be lucrative for many. Many new car dealers and car manufacturers are fiercely eyeing this segment, which was until a few years unstructured and unorganised.
Various dealer partners Mobility Outlook spoke to attribute the primary reasons for this shift to higher margins on used cars compared to new car sales, opportunity to churn out new cars in their exchange programmes, increased sales of parts and services for pre-owned cars and maintaining customer loyalty.
On the other hand, new-age start-ups, backed by venture capitalists and increased funding are bringing in transparent deals, easing basic operations like RC transfers and making vehicle buying and selling a connected and convenient process.
Overall, the used car segment is projected to become a 7.1 million units-string market by FY25.
| Year | Volume (Mn/Year) |
| FY2016 | 3.3 |
| FY2017 | 3.6 |
| FY2018 | 3.8 |
| FY2019 | 4.0 |
| FY2020 | 4.2 |
| FY2021 | 3.9 |
| FY2025 | 7.1 (Projected) |
Source: Industry Reports
Industry pundits believe the growing aspirations of consumers and new technology are driving them to buy a used car in a higher segment than settling for a lower-level car at the same price.
“The used car market has been growing fast on the back of people preferring personal mobility to be safe in the pandemic and also because of better affordability. Going by global standards, the new car to used car ratio is still lower in India and thereby signalling a significant growth potential. The used car business has also been a boon for dealers as with new car sales being low in the last two fiscals, the used cars have provided a much-needed cushion,” said Ashim Sharma, Partner & Group Head Business Performance Improvement Consulting (Automotive, Engg & Logistics), Nomura Research Institute.
COVID-19 has further propelled used-car sales. Customers now seek safety, convenience, transparency and minimal risk, while buying pre-owned cars.
A Deloitte survey reveals that 77% of respondents wished to reduce the use of public transport, while 70% wanted to completely skip ride-sharing options. Interestingly, 79% sought to own a vehicle. Furthermore, 72% of used cars are bought by those under 35, with 68% being first-time car buyers, found the study.
Major Growth Opportunity
Factors, trends and projections are indicating that there is a huge opportunity in the used car business for new car dealers.
“It is certainly a very important vertical profit centre for dealerships, one to facilitate aggressive new car business and second to capitalise the trust the customers have on the dealerships for buying a quality used car and making decent margins,” said MP Shyam, Managing Director, Akshaya Motors, a popular dealer in Karnataka.
Top 10 Popular Models in Used Car Segment
1. Maruti Suzuki Swift
2. Maruti Suzuki Dzire
3. Mahindra Scorpio
4. Maruti Suzuki Baleno
5. Honda City
6. Hyundai i20
7. Alto 800
8. Mahindra Bolero
9. Honda Amaze
10. VW Polo
Source: Market Research
A new car dealership has basically four-five major revenue streams, including margins on new car sales, sales of spares, service, F&I (finance & insurance) and accessories. Four out of five services are largely controlled and ruled by car manufacturers. Used cars segment is the only allied business that can operate independently and is cash-rich.
Seeing the global matrix of a standard new car dealer, “used car business contributes over 35% of the total profitability. So, this means most of the dealers in the US or western countries will not be able to survive if they don’t have a used car business in their portfolio. The stock is much higher than new cars. If they don’t have used car inventory, they go to auction houses to buy used cars,” said Nikunj Sanghi, Director, JS Fourwheel and Director – International Affairs & Past President, FADA.
Nascent Market
In India, the used car business market is at a nascent stage, as only 1.35 used cars are sold to every new car sold, whereas in the United States, four used cars are sold over one new car.
At over 4.5 million annual transactions, the used car market witnessed around 35% more transactions than new cars transactions in FY20. The ratio of new car transactions to used car transactions has grown from 1:1 in 2014 to 1:1.35 now, and is expected to cross 1:2 by 2025 (with expected used car annual transactions at nine million).
Also, the average age of a used car at the time of first transfer of ownership has seen a drop from somewhere around seven years in 2014 to 4-5 years in 2020, according to Cars24, an online buy and selling platform for used car business.
“A few years ago, no one would have imagined that the dealer community in India would bid and acquire pre-owned cars remotely and extensively online. However, this is very much a reality now; platforms like us have been able to disrupt this segment by solving the problems of trust among consumers and facilitating the shift to online buying as well,” said Gajendra Jangid, Co-founder and CMO, CARS24.
The owner of Shiva Motocorp, a Noida-based dealer with an annual turnover of INR 1,000 crore with dealerships for Jaguar Land Rover and M&M, Amit Garg said the used cars business is currently contributing 20-30% of the total business. Advocating the importance of the used car segment, he added, “It adds a strong revenue stream other than car sales and services. Car exchange, accessories, value-added treatments in service and sales contribute to good revenue generation to dealerships and makes dealer more profitable.”
However, it is not a cakewalk for dealers to enter the pure-play of buying and selling used cars, said Gaurav Chopra, Business Consultant for the automotive sector. He believes procurement of used cars is a challenge for new car dealers seeing the replacement demand dipping down. Apart from this, he mentioned that new car dealers are interested in increasing his car parc in his region.
Amit Kaushik, MD, Urban Science, on the other hand, highlighted, “Used car business has become an important driver of the overall profitability index of dealers since the last couple of quarters. This is primarily driven by the package and affordability factors to the end consumer considering the total cost of ownership of a vehicle of used cars vis-à-vis new cars.
Win-Win Partnership
There have been debates that start-ups such as Cars24 and Spinny will cater to the largest portion of the used car business, as only a few others have both offline and online presence. Experts believe that start-ups and dealers need to work in tandem.
“Start-ups are good as they bring some energy and make the market vibrant. But the flip side of it is that the margin per car reduces due to the competition. Since the segment is growing exponentially, dealerships have to be present and keep up with the market by skill and infrastructure. Used car segment has proved to have a brick and mortar platform and just a software platform doesn't work, hence Cars24, Spinny, etc have come with their own showrooms. This is where our experience in managing our facilities well will have an edge,” said Shyam.
Cars24 and Spinny, which are more C2B and B2C businesses transacting old cars, Okshan, a virtual marketplace for used cars, facilitates B2B transactions. The main USP of Okshan is that sellers can see real-time bidding and get an update when any consumer, dealer or broker lists a particular car on the platform, which is unlike any other platform in the country.
“Being into both used car and new car business for over 27 years, I feel there is a huge opportunity in the used car market. But at the same time, it has its own challenges. To solve this, we are bringing a technology-driven platform that is transparent, seamless, and trustworthy,” Ranjeev Dahuja, Founder and Chief Executive Officer, Okshan said.