Used Car and Light Motor Vehicle Dealers in the UK

Driving sales: The end of scrapping incentives helps the industry recover from the recession IBISWorld Industry Report G45.112 Used Car and Light Motor Vehicle Dealers in the UK May 2010 Sarah-Jane Derby 2 About this Industry 2 Industry Definition 2 Main Activities 2 Similar Industries 2 Additional Resources 3 Industry at a Glance 4 Industry Performance 4 Executive Summary 4 Key External Drivers 5 Current Performance 8 Industry Outlook 10 Industry Life Cycle 12 Products & Markets 12 Supply Chain 12 Products & Services 13 Major Markets 14 Globalisation & Trade 15 Business Locations 17 Competitive Landscape 17 Market Share Concentration 17 Key Success Factors 17 Cost Structure Benchmarks 18 Barriers to Entry 19 Major Companies 19 Pendragon plc 20 Penske Automotive Group 20 Arnold Clark Automobiles 21 Inchcape Retail 23 Operating Conditions 23 Structural Risk Index 23 Investment Requirements 25 Key Statistics 25 Industry Data 25 Annual Change 25 Key Ratios 26 Jargon & Glossary www.ibisworld.co.uk info@ibisworld.co.uk

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 2 About this Industry Industry Definition Companies in this industry sell used cars and other light motor vehicles to final customers. Vehicles sold include passenger cars, SUVs, jeeps and any other vehicles weighing less than 3.5 tons, including ambulances and minibuses. The sale of new vehicles is not included in this industry. Main Activities The primary activities of this industry are Sale of used cars Sale of used light motor vehicles The major products and services in this industry are Executive and all other vehicles Four-wheel drives Light commercial vehicles Lower medium cars Luxury and sports cars Mini and supermini cars Multi-purpose vehicles Upper medium cars Similar Industries G45.111 New Car and Light Motor Vehicle Dealers in the UK New car dealers sell new cars and light motor vehicles to final consumers. G45.190 Sale of Other Motor Vehicles in the UK Sale of new and used heavy vehicles such are lorries is carried out by this industry. Additional Resources For additional information on this industry www.autoindustry.co.uk Auto Industry www.ons.co.uk Office for National Statistics www.smmt.co.uk Society of Motor Manufacturers and Traders

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 3 Industry at a Glance Used Car and Light Motor Vehicle Dealers in 2010-11 Key Statistics Snapshot Revenue 12.4bn Annual Growth 06-11 3.3% Annual Growth 11-16 0.4% Profit 595.5m Wages 719.5m Businesses 11,100 Market Share Pendragon plc 8.4% Arnold Clark Automobiles 6.7% Penske Automotive Group 6.6% Inchcape Retail 5.8% Key External Drivers Consumer confidence index Real personal disposable income World price of crude oil Business capital expenditure p. 19 % change Revenue vs. employment growth 10 5 0 5 10 15 Year 03 05 07 09 11 13 15 Revenue Employment % change Products and services segmentation (2010-11) Luxury and sports cars Multi-purpose vehicles 5.8% Executive and all other vehicles 6.5% Four-wheel drives 8.3% Upper medium cars 5.3% 17 4.5% Real personal disposable income 4 3 2 1 0 Year 02 04 06 08 10 12 14 31.6% Mini and supermini cars 16 p. 4 10.2% Light commercial vehicles 27.8% Lower medium cars SOURCE: SOURCE: WWW.IBISWORLD.COM Www.ibisworld.com Industry Structure Life Cycle Stage Mature Revenue Volatility Low Investment Requirements Medium Industry Assistance Low Concentration Level Low Regulation Level Technology Change Barriers to Entry Industry Globalisation Competition Level None Low Low Low Medium For additional statistics and time series see the appendix on page 25

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 4 Industry Performance Executive Summary Key External Drivers Current Performance Industry Outlook Life Cycle Stage Executive Summary The recession has not been good to the automotive sector, and the Used Car and Light Motor Vehicle Dealers industry was not spared. IBISWorld believes that over the five years to 2010-11, industry revenue will decline by 3.3% annually to 12.41 billion. These losses mainly occurred when the financial crisis hit. Households and businesses confidence in the economy plummeted. 88% of purchases in this industry are by private customers, and they were badly hit by the High fuel prices and concerns about the environment shifted the way people drive and use their cars recession. As job losses mounted and households felt pessimistic about their ability to finance a used vehicle, demand for used cars crashed. The number of cars and light commercial vehicles sold is expected to fall by 1.6% annually to just under eight million vehicles over the five years to 2010-11. The government scrappage incentive in 2009 promoted the purchase of new vehicles. This led to a fall in demand for used vehicles, particularly near-new (vehicles aged up to three years). However, demand for used cars was already struggling prior to the recession. High fuel prices and concerns about the environment shifted the way people drive and use their cars. This has led to a fall in the demand for cars, both new and used. At the same time, cars are lasting longer due to improvement in vehicle technology, which is lengthening the replacement cycle and reducing demand for used vehicles. The next five years will be more favourable for used car dealers, although some hurdles will remain. Dealers will face a shortage in the supply of near-new cars due to new car owners, in particular, business fleets, holding on to their vehicles for longer instead of replacing them. This will raise the price of used vehicles, although some dealers may benefit from higher profits or through the sale of older cars. Other businesses will, however, lose customers to the new car market. The UK economy will still be fragile, and uncertain conditions will continue to prevail due to high debt levels. This will negatively affect consumer and business confidence. IBISWorld believes that over the five years to 2015-16, industry revenue will rise by 0.4% annually to 12.65 billion. Key External Drivers Consumer confidence index Consumer confidence is a key indicator of how consumers feel about the economy and their financial position. As a general rule, the higher the sentiment, the more likely consumers are to spend their income on expensive items such as cars, whether new or used. Consumer confidence is forecast to decline over the five years through 2010-11 due to the recession and rising unemployment. Real personal disposable income The amount of income that consumers have at their disposal is generally a good indicator of potential expenditure on new or used cars. Over the past five years, disposable income has been steadily rising. With historically low interest rates, mortgage repayments have fallen, leaving more money at the disposal of customers. However, they have not been spending that money, preferring instead to save it or pay off debt due to dismal economic conditions. World price of crude oil Rises in the price of fuel have changed the way people use their cars. They have been shifting their commuting needs to public transport, or driving less in order to save on fuel costs. As a result, the demand for used cars has declined. Conversely, the long-term growth in fuel prices is causing consumers to shift from fuel-inefficient to fuel-efficient vehicles such as hybrids. Overall, IBISWorld believes that petroland diesel-price increases have a negative

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 5 Industry Performance Key External Drivers continued impact on demand. Business capital expenditure Businesses tend to invest more into assets such as light commercial vehicles when business confidence is high and economic conditions are good. Capital expenditure has been falling over the past five years, mainly due to the recession and poor business confidence. However, there has been some demand for used light commercial vehicles during the downturn as businesses looked to save costs by not buying new vehicles. Real personal disposable income 4 Consumer confidence index 10 3 0 % change 2 Index 10 1 20 0 Year 02 04 06 08 10 12 14 16 30 Year 02 04 06 08 10 12 14 16 Current Performance The Used Car and Light Motor Vehicle Dealers industry has slowed down over the past five years. Skyrocketing fuel prices, combined with more difficult economic conditions, reduced the demand for both new and used cars. Traditionally, when the economy turned sour, households would turn away from new cars to the used car market for their car needs. However, over the past decade, improvement in vehicle technology has meant longer replacement cycles. Households started holding to their existing car for longer. Even used vehicles, particularly nearly-new ones, last longer which has been negatively affecting demand. The recession made things worse for used car dealers as demand declined even further due to dismal consumer confidence and rising unemployment. IBISWorld believes that over the five years to 2010-11, revenue of the industry will decline by 3.3% annually to 12.41 billion, while the number of cars and light commercial vehicles is expected to fall by 1.6% annually to 7.78 million. Consumer and business sentiment crashed due to the crisis and consumers reacted to dismal economic conditions by cutting back on unnecessary expenditure. Theoretically, the demand for used vehicles is fairly resilient during recessions as households and businesses purchase used vehicles instead of new ones. While this did happen to some extent during the current recession, the substitution effect was not significant enough to offset the overall demand for all types of vehicles. Used car and light commercial vehicle sales fell by 4.2% in 2008-09. The scrappage incentive introduced by the government in 2009 exacerbated problems for used car dealers. Colloquially known as bangers-for-cash, the incentive provided customers of new vehicles with a 2,000 ( 1,000 funded by the government and 1,000 by the car dealer) rebate when they traded in an old car. The old car, which had to be at least 10 years, was then scrapped. The scheme cost the government 300 million and ran from May 2009 to March 2010.

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 6 Industry Performance Current Performance continued IBISWorld believes that 400,000 new vehicles, the limit of the program, were purchased under the incentive. It negatively affected the demand for used vehicles, particularly near-new used vehicles, as consumers chose to purchase a new vehicle rather than a used one due to the cash incentive. Better days It was not all doom and gloom during the downturn. The demand for used vans fared relatively well as businesses chose to save costs by buying a used, rather than new vehicle. Light commercial vehicles performed better than private vehicles, although overall demand did decline. In late 2009, demand conditions started to improve and the industry will continue to outperform new car demand into 2010-11. This will mainly be due to the expected crash in demand expected following the end of the scrappage incentive. At the same time, the economy will remain fragile. Unemployment will continue to rise and even though consumer confidence is improving, there are still doubts about the strength of a recovery due to high debt issues across the UK and Europe. IBISWorld believes that used car and light commercial vehicle sales will rise by 0.6% in 2010-11. Revenue will not increase by the same magnitude as used car prices are forecast to decline during early 2010-11. The supply of used cars will be constrained in 2011-12 and 2012-13, which is expected to push prices up again. Car types Some used car dealers did win during the downturn, including those specialising in specialist sports vehicles as well as alternative-fuel vehicles (AFVs). The supply of used sports vehicles increased during the downturn as their owners defaulted on payments or looked to sell their cars due to job losses, lower income and decreasing confidence about their financial future. This led to a rise in the number of value-for-money near-used used sports vehicles in the used car market following the crash of the financial sector in late 2008 and enthusiasts did not hesitate to purchase them. Petrol vehicles are the most common types of used cars sold, mainly because older cars are more likely to run on petrol than newer ones. This trend has been changing over the past five years though, and during the recession sales of vehicles running on alternative fuel rose, bucking all trends. Diesel-run used cars also saw an increase in sales, while the sale of used petrol-run cars plummeted. However, AFVs will only account for an estimated 0.5% of total used car sales in 2010-11, while diesel vehicles will only account for used car sales by fuel type, 2010-11 Fuel type Share Diesel 27.0 Petrol 72.5 AFVs 0.5 SOURCE: IBISWORLD 27.0% of used car sales. Among AFVs, hybrid-electric vehicles were the most popular used cars as they offer value for money. New hybrid vehicles carry a price premium while the price of used hybrids declined during the recession. AFVs have become popular over the past five years due to skyrocketing fuel prices and growing concerns about the environment. As they are typically more fuel-efficient than standard petrol cars, consumers can kill two birds with one stone when buying an AFV: save on fuel costs and save the environment at the same time. Dealers that carry environmentally-friendly vehicles fared better during the recession and will continue to gain market share in the next five years.

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 7 Industry Performance In trouble This industry was in trouble even prior to the recession. Car usage trends have been changing over the past five years. British residents are driving less and holding on to their cars for longer, encouraged by a combination of high petrol prices, increasing road taxes and improvement in car technology. This has been affecting the entire automotive sector, not just used car dealers. The price of used vehicles has also been decreasing steadily over the past decade, partly due to an increase in the supply of cheaper, imported second-hand vehicles from mainland Europe. This has squeezed the margins of used car dealers. The structure of the Used Car and Light Motor Vehicle Dealers industry has been changing. The internet has changed the way people shop for cars. Dealers with a web presence that allows consumers to browse through used vehicles online are more likely to be successful and gain market share. In this age of information, potential buyers will often compare prices and cars online before going into a used car dealership. This has led to a rise in price and product range competition between dealers. Large dealerships which sell both new and used vehicles have been gaining market share. Although they traditionally focused on new rather than used vehicles, this trend has reversed. Margins on used vehicles are typically higher and large dealerships have been expanding their used vehicle business. As a result, the concentration of this industry has risen and so has competition. Large dealers have the upper hand on smaller dealers as they often come with a reputation, enough finance to have online showrooms and to have a greater market reach. Smaller traditionally used car dealerships have been losing market share. The number of establishments will rise by an estimated 0.8% annually over the five years to 2010-11, mainly due to pre-recessionary growth from larger players. The profitability of this industry has been declining over the past five years due to lower volume and prices. The increasing penetration of larger dealers mitigated the decrease in the profit margin, but once the recession hit, profitability fell across the board. IBISWorld believes that the profit margin will drop from 6.6% in 2005-06 to 4.8% in 2010-11. This result will still be better than profit margins on new cars, and new car dealers will continue to expand into the used car market. Ageing population The vehicle parc has been ageing in the UK, although the government scrappage incentive in 2009 wiped off almost half a million old vehicles from the fleet. Similarly, the proportion of older cars sold has been rising over the past five years. In 2006, about 46.7% of used vehicles sold were aged less than six years. By 2010-11, this proportion is forecast to fall to 42.3%. During the recession, vehicles aged three years or less lost the most market share as they are seen as substitutes to new cars. In 2009, cars aged nine years and over were the only age used car sales by age, 2010-11 Age group Share 0 to 3 years 19.8 3 to 6 years 22.5 6 to 9 years 23.1 9 years and over 34.6 SOURCE: IBISWORLD group to record an increase in sales, albeit a very small one. This was mainly because they are cheap, which appealed to consumers during the downturn.

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 8 Industry Performance Industry Outlook The UK economy has been showing signs of improvement in 2010 but the road to recovery will be paved with uncertainty and high debt levels. There are fears of a prolonged downturn due to too high debt levels in the UK as well as in mainland Europe, which could impact on the health of the domestic economy. As a result of these concerns, consumer and business sentiment are expected to be mild over the next three years. Potential car buyers, still fragile from the recession, will be frugal in their expenditure and more conscious about savings levels and their ability to repay debts. Even though the unemployment rate is forecast to peak in 2011-12, it will remain high throughout the next five years, which will further drive consumers to think twice about purchasing big-ticket items, and businesses about carrying out capital expenditure. This will benefit used car dealers in 2011-12 and 2012-13 as consumers will choose to purchase a used vehicle rather than a new one, particularly in the absence of any government scrappage incentive to buy a new vehicle. IBISWorld believes that over the five years to 2015-16, revenue of the Used Car and Light Motor Vehicle Dealers industry will rise by 0.4% annually to 12.65 billion. This result will partially offset the decline caused by the recession. However, the demand of used cars and light commercial vehicles is expected to start declining again in 2014-15 as consumers shift back to their old buying habits. Improvement in motor vehicle technology, changes in attitudes towards driving and car ownership and the slow population growth rate are long-term issues faced by car dealers, whether new or used. The replacement cycle has lengthened over the past decade as cars now last longer, but also because British citizens have been driving less due to high fuel prices. This will adversely affect the demand for used cars. Additionally, by 2015-16, conditions in the economy will be more stable and less uncertain, which will promote consumers to shift back to the new car market, further aggravating the fall in demand for used cars. Supply shortage Used car dealers will face supply issues over the next few years, particularly in 2011-12 and 2012-13. The scrappage incentive that ran from May 2009 to March 2010 led to a decline in supply of old vehicles (10 years and above) from the market. About an estimated 400,000 old vehicles were scrapped under the programme, old vehicles that could have been resold. At the same time, declining new car sales during the recession meant that households and businesses are holding on to existing vehicles for longer, further aggravating the supply issue. The supply of ex-fleet vehicles which are usually aged under three years old in particularly is forecast to decline in the first couple of years of the outlook period. Companies postponed the replacement of fleet vehicles during the downturn and given that the business environment will continue to be uncertain in the immediate future, they will not replace vehicles until things improve markedly. When they do, the vehicles will be older than three years old, hence the shortage in supply within the near-new segment. The supply shortfall in the near-new segment will drive the price of those used vehicles up and if demand is too much, used car dealers could risk losing customers to new cars. IBISWorld believes that initially, customers of near-new cars will be more likely to buy slightly older (three to six years) vehicles, which will push the price of used cars up and improve the profitability of used car dealers. However, if the shortage of supply continues once consumer finances improve, used car dealers will undoubtedly lose customers to new car

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 9 Industry Performance Supply shortage continued dealers. Customers of vehicles aged 10 years and over, which as mentioned will also be suffering from a shortage in supply, will be more likely to buy a slightly less old car (six to nine years) in the short-term. Product mix With supply shortages expected in the future and the automotive sector as a whole undoing changes in product mix, used car dealers need to be wary of which cars and light commercial vehicles they have in stock over the next five years. IBISWorld believes that cars aged between six and nine years will gain the most market share, mainly due to the supply shortfall and both ends of the age spectrum. Petrol cars will continue to lose popularity over the five years to 2015-16, particularly the older and less fuel-efficient ones. This will pose a threat to car dealers who do not stock near-new fuel-efficient vehicles. They will lose potential customers to the new car market, where alternative-fuel vehicles are expected to gain ground in the near future. The automotive sector in the UK is also backed by government assistance, such as the automotive assistance programme, which will promote the development of environmentally friendly vehicles. These vehicles will take a while to enter the used vehicles inventory and as a result, used car dealers could lose some potential near-new car customers to the new car market. The number of establishments in the industry is forecast to rise by 3.0% annually over the five years to 2015-16, mainly due to increasing in 2011-12 through to 2013-14. Once the used car market starts stalling again, establishment numbers will decline. Large car dealerships are expected to get bigger through mergers and acquisitions. They will also be in a better position to alter their product mix to account for the supply shortfall and increase their stock of older vehicles in order to meet demand. The profitability of the industry will increase from 4.8% in 2010-11 to an estimated 5.6% by 2015-16 mainly due to more profitable large dealers and improvement in demand conditions compared to the recessionary period. Profitability will not be as high it was pre-recession though, primarily because of smaller used car dealers fighting for market share. They will have difficulty in maintaining profitability.

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 10 Industry Performance Life Cycle Stage Industry value added is forecast to fall over the 10 years to 2010-11, while GDP will grow The growth in establishment numbers will slow down in the next five years The market for used vehicles is dwindling % Growth of profit/gdp 30 25 Maturity Company consolidation; level of economic importance stable Quality Growth high growth in economic importance; weaker companies close down; developed technology and markets Key Features of a Mature Industry Revenue grows at same pace as economy Company numbers stabilise; M&A stage Established technology & processes Total market acceptance of product & brand Rationalisation of low margin products & brands 20 15 10 Quantity Growth Many new companies; minor growth in economic importance; substantial technology change 5 0 Shake-out used Car and Light Motor Vehicle Dealers 5 Decline Crash or Grow? Shake-out Potential Hidden Gems Future Industries Time wasters hobby Industries 10 10 5 0 5 10 15 20 25 30 % Growth of establishments

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 11 Industry Performance Industry Life Cycle This industry is Mature Merger and acquisition activity, particularly among the larger major players, has been rising over the past decade. Most major players have expansion plans consisting primarily of acquiring failing car dealerships. Even though the number of establishments is forecast to rise by 2.7% annually over the ten years to 2010-11, this will mainly be due to major player expansion and the ease of entry into the industry. Even though the industry has entered maturity, there is still scope for growth, particularly within the niche segments such as specialist sports cars and alternative-fuel vehicles. However, those segments account for a relatively small proportion of sales and are not significant enough to keep the industry in a growth phase. The attractiveness of relatively high profit margins, compared to new cars, will see the number of establishments rise early in the five year period to 2015-16, although they will start declining again once companies realise that the market is getting smaller. Industry value added is expected to drop by 2.1% annually over the ten years to 2010-11, mainly due to the severity of the recession and falling used car value. This performance will be below that of the economy, as GDP is forecast to grow over the same period of time. The underperformance of the industry was not only due to the recession though. The market for used vehicles, especially petrol-run used cars, has been slow even prior to the downturn. It is expected to remain slow over the next five years as consumers hold on to their cars for longer.

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 12 Products & Markets Supply Chain Products & Services Demand Determinants Major Markets Globalisation & Trade Business Locations Supply Chain Key buying industries Z99 Consumers in the UK British residents are the major buyers of used cars. Key selling industries G45.111 New Car and Light Motor Vehicle Dealers in the UK Used car dealers often obtain trade-in vehicles from their new car sales department. O84.110 General Public Administration Activities in the UK Ex-fleet cars from government departments and businesses are supplied to used car dealers. Z99 Consumers in the UK Used cars can also be obtained directly from consumers. Products & Services Every year, close to eight million used cars and light motor vehicles are sold in the UK. The majority of them are nine years old or over, with petrol being the most common fuel type found in used cars. The motor vehicle parc declined for the first time first time in 2009 since the 1940s, due to falling new and used car sales. The 2009 scrappage incentive led to a fall in the average age of used vehicles as close to 400,000 cars aged at least ten years old were scrapped. During the recession, most segments saw sales crash as British residents stopped buying both new and used cars The luxury and sports car segment did relatively well during the downturn. The recession led to rising repossessions of near-new luxury vehicles, which increased the supply of relatively cheap and nearnew vehicles within the segment. In other words, they turned out to be bargains to those who could still afford high-end cars. Similar, used sports cars, which are typically demanded for recreational rather than commuting purposes, were a bargain. IBISWorld believes that this trend will continue in 2010-11. Mini cars typically have engines with a capacity of less than 1.0cc and are usually cheaper and more fuel-efficient than larger vehicles. Used mini cars were one of the worst performing sub-segment in 2009, mainly because consumers chose to purchase a new mini or supermini car instead. Although the mini and supermini car segment recorded the highest proportion of used sales in 2009, it faced significant competition from new sales due to the scrappage incentive. Supermini vehicles (for example, the Ford Fiesta) are bigger than minis with engine capacity of between 1.0 to 1.4cc. Their share of sales is forecast to rise to 31.6% in 2010-11 from 28.4% in 2009, mostly due to the expected collapse in new car sales following the ending of the scrappage incentive in March 2010. Light commercial vehicles refers to vehicles weighing up to 3.5 tons which are used primarily for commercial purposes. This segment was resilient during the recession as businesses turned to the used vehicle market to save costs. However, it did not flourish as business activity was down across the entire economy, which negatively affected demand. The lower medium segment, which includes motor vehicles with engine capacity of between 1.3cc to 2.0cc will account for 27.8% of used sales in 2010-11, down from 23.8% five years ago. The underperformance of this segment was mainly due to consumers shifting towards smaller used cars. This trend will continue into the next five years. The executive and other segment includes all other vehicles including: specialised vehicles such as ambulances. Trends in used cars typically lag behind new car sales. Over 70% of used car sales are petrol cars, but this is mostly due to the fact that older cars are more likely to run on petrol than on other types

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 13 Products & Markets Products & Services continued of fuel. The dominance of used petrol cars has been declining over the past five years, and during the recession, sales of used diesel vehicles and AFVs actually rose. Consumers are well aware of the fact that fuel-inefficient old vehicles add to fuel bills. As a result, they looked to purchase more environmentally friendly used vehicles during the downturn. IBISWorld believes that this trend will continue even as the economy improves in the next five years. Products and services segmentation (2010-11) 5.3% Luxury and sports cars Multi-purpose vehicles 5.8% Executive and all other vehicles 6.5% Four-wheel drives 8.3% Upper medium cars 4.5% 31.6% Mini and supermini cars Total 12.4bn 10.2% Light commercial vehicles 27.8% Lower medium cars Major Markets There are two main markets for used cars: the commercial market and the private market. The commercial market is fairly small and mainly made up of businesses buying second-hand light commercial vehicles. Companies that buy fleet vehicles buy them new and are not in the market for used vehicles. In fact, ex-fleet vehicles are often supplied to used car dealers who then put them up for sale to the private market. The commercial used car market has been fairly resilient throughout the recession as businesses looked to the used market to save costs. Demand from commercial buyers is expected to remain steady as the economy starts improving, but will decline once normalcy returns. The private market consists of individuals aged at least 17 years, the minimum driving age. There are about 35 million full car driving licence holders in the UK and this number has been rising steadily over the past five years. About 75% of households have at least one car, with about 30% owning two or more cars. In other words, the market for cars is a large one, although the non-replacement car market, that is when individuals purchase an additional car without replacing any existing car, is reaching saturation. It is not too surprising to learn that the number of used cars sold will fall by 1.6% annually over the five years to 2010-11. The market demographics of private used car buyers have not changed much over the past five years. The top two buying groups (those aged 35 to 44, and 25 to 34) have both gained some share during the period, mainly due to thriftiness brought about by the recession. This led many individuals to purchase a used car rather than a new one. Additionally, near-new used vehicles proved to be popular within both age groups, as they represent value for money. The 35 to 44 age group are traditionally new car buyers, but the recession led them to think twice about expensive purchases, thereby promoting the demand for used cars.

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 14 Products & Markets Major Markets continued The 17-24 age group is also significant buyers of used cars as individuals within that age group are often buying their first car, which is more often than not, a second-hand one. However, the group lost share during the recession as they put off buying a car or even passing their driving test altogether. The 65 and over market for used cars has been rising over the past five years due to an ageing population. The 55 to 64 age group saw some growth during the recession, particularly when it comes to used specialist cars, which proved to be a bargain. Major market segmentation (2010-11) 10.6% Consumers aged 17 to 20 10.2% Consumers aged 55 to 64 22.4% Consumers aged 35 to 44 11.3% Consumers aged 65 and older 12% Commercial market 21.3% Consumers aged 25 to 34 Total 12.4bn 12.2% Consumers aged 45 to 54 Globalisation & Trade International trade occurs at the manufacturing level and is not accounted for at the retail level. Trade is quite important for new car dealers but not as much for used car dealers. The majority of used vehicles are sourced domestically and sold to British residents. Small independent dealers are generally private companies owned by Britons, while most of the large franchised dealerships are also domestic companies. The main exception is Sytner Group, which is owned by US-based Penske Automotive Group. Some of the other major players, such as Pendragon and Inchcape, operate dealerships outside of the UK. All in all though, there is little globalisation within the industry due to the nature of the product being sold.

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 15 Products & Markets Business Locations 2011 SCOTLAND 8.1 NOrTHErN IrELAND 3.0 NOrTH EAST 3.4 NOrTH west 10.8 yorkshire 8.5 used car sales Cold Zone (<10) <25 <50 Hot Zone (<100) Not applicable wales 5.4 west MIDLANDS 9.4 SOuTH west 9.3 EAST MIDLANDS 8.0 EAST OF ENGLAND 8.6 LONDON 8.4 SOuTH EAST 17.1

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 16 Products & Markets Business Locations The chart shows the volume of used vehicle sales in the UK by region. The geographic location of sales in this industry follows population and income trends as well as other ownership trends. For example, London is typically underrepresented, compared to its share of the population, within the automotive sector due to high-density living and reliance on public transport. Owning a car is seen to be impractical in London and about 40% of Londoners do not own a car, compared with the UK average of 25%. However, London is home to high-income earners and they are likely to purchase near-new vehicles in the more niche markets such as luxury vehicles. Contrary to London, the South East is generally over-represented within the automotive sector compared to its share of the population. The region has many features conducive to growth such as being located close to London and being home to hi-tech industries. As a result, the South East is a high-income earning region, with 80% of residents owning at least one car. Unlike London, the South East is larger in geographical size and Percentage Distribution of used car sales vs. population 20 16 12 8 4 0 East Midlands East of England Used car sales Population London North East North West Northern Ireland Scotland South East South West Wales West Midlands Yorkshire less densely populated, which promotes car usage. Used car buyers in this region are more likely to purchase near-new vehicles, sports cars and other high-end vehicles. Other regions are more or less in line with what their share of the population might suggest.

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 17 Competitive Landscape Market Share Concentration Key Success Factors Cost Structure Benchmarks Barriers to Entry Market Share Concentration Level Concentration in this industry is Low The top four players in the industry will account for close to 30% of industry revenue in 2010-11. Concentration has been rising over the past five years, as major players acquire and take over smaller or failing dealerships. Major players and the larger players typically operate both new and used dealerships and have a wide range of cars, with stores across the UK. The remaining players are typically small familyowned independent dealers who only account for a very small part of the industry each. Key Success Factors IBISWorld identifies 250 Key Success Factors for a business. These are the most important for this industry Maintaining a good reputation Reputation is a key success factor as having a bad reputation can ruin a company in this industry. Word of mouth also helps to drive business. Ability to be located where customers are Being located close to customers is important, but dealers also need to be in an area that is not already overrun by other dealers. Dealerships need to be in locations that are easy to get to but, also in opportunistic locations such as motorway exits. Providing superior customer service Customer service, such as handy opening hours will open the door to more customers. Stocking a wide variety of vehicles Stocking a wide range of vehicles will ensure that any customer will find what they want. However, specialist used car dealers can succeed by specialising in niche markets. Having competent salespeople Used car dealers need to employ staff who can close sales and bring repeat customers. Having an internet presence Dealers with a physical location still need to have websites and provide their portfolio online, as potential customers often browse the web for ideas before buying a used car. Cost Structure Benchmarks The profitability of selling used cars is generally higher than selling new cars. In 2010-11, the profit margin of this industry is expected to be 4.8%, a fall from 6.6% five years ago. The decline in profitability will be caused by a variety of factors including: higher employment costs, lower prices, intensifying competition and dropping sales. Once the economy improves, the profitability of this industry will increase. However, it is not expected to be as high as before due to higher competition. There will be more dealers fighting for market share and profit in a market which will be sluggish over the next five years. The uncertainty around demand for used cars, as well as the supply of vehicles led to increases in inventory costs over the past five years. Purchases is made up of all costs associated with purchasing used cars for resale, including inventory and any related finance costs. They are expected to account for close to 75% of revenue in 2010-11. Labour costs are forecast to account for about 5.8% of revenue and have been rising over the past five years, mainly due to the recession. Employment and wage cuts undertaken in 2008-09 and 2009-10 were not enough to offset the decline in revenue, which pushed labour costs up. They are forecast to fall in 2010-11 as revenue improves. The average industry wage is expected to grow by 0.6% annually over the five years to 2010-11, to about 19,500. Depreciation accounts for about 1.1%

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 18 Competitive Landscape Cost Structure Benchmarks continued of revenue, mainly due to costs association with large retail spaces required by used car dealers. Other costs include taxes, advertising, marketing, transport, insurance and other services required by car dealers. Profit rent utilities Depreciation Other wages Purchases Industry Costs and Average Sector Costs 00.21.1 100% Industry Costs 4.8 12.1 5.8 74.8 (2010-11) Profit Average Costs of all Industries in sector (2010-11) 4.8 Profit 1.2 1.3 41.0 53.1 Barriers to Entry Level & Trend Barriers to Entry in this industry are Low and Steady There are low barriers to entry when setting up a used car dealership, particularly when compared to setting up a new car dealership. A new entrant can enter by buying an existing dealership or by starting one up from scratch. As a general rule, the former method is easier but not necessarily cheaper. Still, overall set-up costs are lower than they would be for a new car dealership and only a minor barrier to entry. Existing competitors can be a hindrance. Because entry barriers are low, there may already be multiple used car dealerships within a local area. Existing dealers will already have a reputation, which can further negatively affect the new entrant. barriers to entry checklist Competition Concentration Life cycle stage Investment requirements Technology change Regulation & policy Industry assistance Level Medium Low Mature Medium Low None Low Building a good reputation takes time and newcomers will have to compete against established and trusted used car dealers, which will mitigate sales. Other than that, there are few barriers to entry in this industry.

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 19 Major Companies Pendragon plc Arnold Clark Automobiles Penske Automotive Group Inchcape Retail Other Major players (Market share) Inchcape Retail 5.8% Arnold Clark Automobiles 6.7% 72.5% Other Pendragon plc 8.4% Penske Automotive Group 6.6% Player Performance Pendragon plc Market share: 8.4% Pendragon is a franchised motor car dealership operating mainly in the UK, with some stores in the US state of California. The company sells new and used cars and commercial vehicles and is also involved in the leasing of vehicles. Pendragon operates the following brand stores: Stratstone (luxury vehicles such as Aston Martins), Evans Halshaw and Chatfields (commercial vehicles). The company s strategy is to grow through acquisitions and to differentiate themselves from competitors by providing an integrated service (for example, hiring services as well as dealership management services, all under one roof). About half of Pendragon s UK used car sales is generated by Stratstone. Evans Halshaw accounts for about 49%, while only 1% of used car sales are from Chatfields. Over the five years to 2009, revenue grew by a mere 0.1% annually, mainly due to the decline in 2008 and 2009. Prior to the recession, revenue was rising mainly due to acquisitions and strong used car demand. In 2006 for example, Pendragon acquired Reg Vardy plc and its 97 car dealerships across the UK. The company also acquired other businesses during that year and 24 Dixons dealerships in 2007. The company s troubles started in 2008 due to the global financial crisis and Pendragon recorded losses during the year. In 2009, Pendragon operated 276 franchises, employed over 10,000 staff and saw revenue fall by 23.3% to 3.19 billion. The decline in revenue was mainly due to the downturn in the UK economy and car market, with both new car and commercial vehicles registering significant drops. Revenue from used vehicle sales amounted to 962.7 million in 2009, a 15.5% drop on the previous year. Due to cost-cutting measures and the closing down of unprofitable dealerships, Pendragon was able to make a net profit of 0.8 million, reversing the massive losses it made in 2008. Pendragon believes that future profitability lies within the used car, rather than new car segment. The company is expected to gain market share through acquisitions in the next five years. Pendragon financial performance year* revenue ( million) (% change) NPAT ( million) (% change) 2004 3,173.2 N/C 31.6 N/C 2005 3,284.5 3.5 27.5-13.0 2006 5,058.5 54.0 50.1 82.2 2007 5,060.2 N/A 43.2-13.8 2008 4,162.4-17.7-155.3 N/C 2009 3,191.7-23.3 0.8 N/C *year end December SOURCE: ANNUAL REPORT

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 20 Major Companies Player Performance Arnold Clark Automobiles Market share: 6.7% Arnold Clark is a private and family-run company headquartered in Glasgow, Scotland. The business sells new and used motor vehicles and typically has over 10,000 cars in stock. Arnold Clark also offers servicing, bodyshop, rental and repair services. The company operated 122 outlets across the UK in 2009 and sells over 200,000 cars each year. In 2008, revenue amounted to 2.21 billion. IBISWorld believes that used car sales generated about 800 in revenue in that year. Being a privately-owned company, information about the business is limited. Revenue grew by 8.6% annually over the five years to 2008, while net profit declined by 12.8% annually. The rise in revenue was primarily due to aggressive expansion strategies over the past decade. In 2008, the company opened its largest dealership in Stafford, which can hold about 1,000 vehicles and created jobs for 200 new employees. Even though Arnold Clark was not immune to the recession, it intends on opening four new branches in 2010, in Dumfries, Workington, Carlisle and Penrith. The branches are being acquired from the GK group, another car dealer. Arnold Clark will gain market share during the year as a result of the acquisitions. Arnold Clark financial performance year* revenue ( million) (% change) NPAT ( million) (% change) 2004 1,591.3 N/C 40.6 N/C 2005 1,669.8 4.9 38.6-4.9 2006 1,873.4 12.2 52.7 36.5 2007 2,083.9 11.2 51.1-3.0 2008 2,210.2 6.1 23.5-54.0 *year end December SOURCE: ANNUAL REPORT Player Performance Penske Automotive Group Market share: 6.6% Industry Brand Names Sytner Group Limited Formerly United Auto Group, Penske Automotive Group (PAG) owns and operates about 156 franchises in the US and 148 internationally, primarily in the UK. The company offers a range of 40 vehicle brands, with approximately 96% of their revenue coming from the combined sales of luxury brands such as Audi, BMW, Cadillac and Porsche. PAG struggled to keep revenue up in 2008 and consolidated revenue declined by 18.2% in 2009 to US $9.50 billion (approximately 6.07 billion). PAG noted that difficult financing conditions negatively affected their businesses since late 2008. However, the fourth quarter of 2009 (three months to December) brought a glimmer of hope, with sales starting to show signs of recovery. PAG reported that UK sales, new and used, rose by 30% during the last quarter, although it was increasing off a low base. Sytner Group Limited PAG s presence in the UK is through Sytner Group Limited, headquartered in Leicester. The group was founded in the 1960s by Frank and Alan Sytner and specialised in the sales of BMW and specialist used vehicles. In 2002, Sytner group was acquired by Penske Automotive Group. The company continues to focus on the sale of new and used prestige and specialist cars today. It operates about 138 outlets in the UK and employs over 5,000 staff. Being a privately-held company, financial information about Sytner Group is limited. Over the four years to 2008, revenue rose by 9.6% annually, while net

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 21 Major Companies Player Performance continued income fell by 4.0% annually. This above-average performance was primarily due to acquisitions and expansion strategies. The most significant one in 2008 was the purchase of five dealerships from Richard Alexander Limited, which was then in administration. The acquisition saved 300 jobs. Despite poor economic conditions, Sytner Group continued to acquire businesses into 2009. As reported by its parent company PAG, Sytner s sales are already started to recover, with UK revenue up by close to 40% during the three months ended December 2009. Sytner group financial performance year* revenue ( million) (% change) NPAT ( million) (% change) 2004 1,569.2 N/C 23.7 N/C 2005 1,630.4 3.9 21.2-10.5 2006 1,978.7 21.4 34.0 60.4 2007 2,401.0 21.3 23.5-30.9 2008 2,262.1-5.8 20.1-14.5 *year end December SOURCE: ANNUAL REPORT Player Performance Inchcape Retail Market share: 5.8% Inchcape is a motor vehicle dealer with operations in the UK, North Asia, South Asia and emerging markets such as Russia and China. The company operates several vertically integrated businesses including: vehicle, financing and insurance, servicing and part retailing. The company s strategy is to expand its businesses across the most profitable geographical locations. Inchcape operates 128 franchised retail centres across the UK, selling brands such as KIA, Ford, Audi, Mini and BMW. IBISWorld believes that used car revenue in the UK amounted to an estimated 700 million in 2009. Over the four years to 2009, revenue rose by 5.6% annually, while net profit after tax decreased by 7.7% annually. The majority of the gain in revenue was felt in 2007 due to expansion strategies, mainly in emerging markets such as Russia. The decline in profit was the result of competitive pricing strategies, which forced prices and profit down. On the flip side, Inchcape did not fare so well during the crisis. Revenue amounted to 5.58 billion in Inchcape retail financial performance year* revenue ( million) (% change) NPAT ( million) (% change) 2005 4,488.1 N/C 126.6 N/C 2006 4,842.1 7.9 173.9 37.4 2007 6,056.8 25.1 176.4 1.4 2008 6,259.8 3.4 51.4-70.9 2009 5,583.7-10.8 92.0 79.0 *year end December SOURCE: ANNUAL REPORT

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 22 Major Companies Player Performance continued 2009, a 10.8% decline on the previous year, while net profit was recorded at 95.0 million. Retail car sales in the UK amounted to 2.01 billion (a 10.9% fall) in 2009 and a trading profit margin of 2.1% was generated. Like-for-like sales (which exclude the effects of acquisitions and other one-off events) decreased by 3.9%. This result was slightly above the industry average, mainly due to the government scrappage incentive but also due to a resilient service business. Other Companies The other larger players in this industry are typically car dealers with significant new car sales businesses as well as used car sales businesses. However, the industry is also made up of small family businesses, often with only one or two locations. These smaller dealers typically only specialise in used vehicles sales and do not generate a significant amount of revenue compared to larger players. They do not have much market power. Two of the larger other players are discussed below. Lookers plc Estimated market share: 4.5% Lookers is a motor vehicle retail business operating 120 stores around the UK. Marques sold include: Aston Martin, Lexus, Citroen and Seat. The company also operates an independent aftermarket parts division. The company fared well during the dismal year that 2009 was for car sales, recording about 61,400 new motor vehicle sales. Group revenue amounted to 1,749 million in 2009, while revenue from the sale of used cars amounted to 542.7 million, down by 2.5% on the previous year. Mercedes-Benz Retail Group Estimated market share: 3.5% Mercedes-Benz Retail Group is a group of over 40 dealers primarily located in London, Manchester and Birmingham. The dealership sells new and used Mercedes-Benz passenger cars, Smart cars as well as commercial vehicles and is a division of Mercedes-Benz UK. The retail group was founded in 2001. In 2008, the group sold about 17,400 new vehicles and 30,300 used vehicles. Revenue amounted to 1.15 billion, representing a 7.9% decline on the previous year, while a net loss of 157 million was recorded. The company believes that its negative performance was primarily due to the economic downturn in the second half of 2008.

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 23 Operating Conditions Structural Risk Index Investment Requirements Structural Risk Index Used Car and Light Motor Vehicle Dealers Economy Revenue Volatility Barriers to Entry Industry Relax Points Exports Imports Revenue Volatility Industry Pressure Points Barriers to Entry 47.6 52.4 Levels of Assistance Score Score Revenue Volatility Barriers to Entry Competition Competition Life Cycle Stage Life Cycle Stage Exports Exports Levels of Assistance Imports Levels of Assistance Imports IBISWorld has scored key elements of industry structure on a scale of 1 to 9 the higher the figure, the greater the risks to businesses operating in the industry. Operating conditions in the Used Car and Light Motor Vehicle Dealers industry are less risky than in other industries in the economy. The industry structural risk index totals 47.6 points compared to 52.4 points for the economy as a whole (100 points equates to extremely poor operating conditions). Investment Requirements Level The level of investment required is Medium The labour to capital ratio in 2010-11 will amount to 5.27:1, which implies that for every unit of capital employed, 5.27 units of labour are required. Competent salespeople are required in order to close sales and provide superior customer service. Good sales people can help bring in more business through word of mouth and by building a good reputation for the dealership. As a result, labour is important. On the flip side, capital costs as measured by depreciation are also significant. This is mainly because dealerships, whether new or used, require large spaces as well as fixtures and fittings. These costs are quite significant for used car dealerships as their revenue is not as high as new car dealerships. As a result, capital expenditure as a percentage of revenue is much higher for used car dealers than new car dealers. Capital intensity Capital units per labour unit 1.0 0.8 0.6 0.4 0.2 0.0 Economy Wholesale and Retail Trade; Repair of Motor Used Car and Light Motor Vehicle Dealers Dotted line shows a high level of capital intensity

www.ibisworld.co.uk Used Car and Light Motor Vehicle Dealers in the UK May 2010 24 Operating Conditions Investment Requirements continued Tools of the Trade: Growth Strategies for Success New Age Economy recreation, Personal Services, Health and Education. Firms benefit from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labour skills are key to product differentiation. Investment Economy Information, Communications, Mining, Finance and real Estate. To increase revenue firms need superior debt management, a stable macroeconomic environment and a sound investment plan. Labour Intensive Capital Intensive Traditional Service Economy wholesale and retail. Reliant on labour rather than capital to sell goods. Functions cannot be outsourced therefore firms must use new technology or improve staff training to increase revenue growth. used Car and Light Motor Vehicle Dealers Change in Share of the Economy Old Economy Agriculture and Manufacturing. Traded goods can be produced using cheap labour abroad. To expand firms must merge or acquire others to exploit economies of scale, or specialise in niche, high-value products.