Used car leasing gains traction in Western and Northern Europe as large fleet leasing companies focus on strengthening their B2C remarketing channels
An Overview
Traditionally, fleet leasing companies have sold their off lease vehicles in the B2B channel, i.e., through auctions and brokers. However, in the last two years, they have begun to focus on selling these used, off lease cars directly to end-users (B2C). In this pursuit, they have set up dedicated remarketing divisions. Among the first off the block was LeasePlan which started CarNext in late 2017, allowing users to buy or lease LeasePlan’s off lease vehicles through this B2C channel. In 2019, other global fleet leasing companies, including Arval, Alphabet, ALD and PSA, introduced B2C selling/leasing of used cars in Belgium, the Netherlands, France, Germany, Finland and the UK. This trend is as a strategic response to saturation in the fleet leasing market, with participants targeting an increase in their remarketing revenues through B2C sales.
Additionally, small independent leasing companies and start-ups have begun to offer used car leasing by sourcing quality off lease vehicles from large fleet leasing companies. Newer vehicles are perceived as having better quality standards and being more durable. OEMs are currently offering warranty terms of up to 7 years, unlike the 2-3 year warranty period that was offered a decade ago. Companies are now looking to capitalise on the extended life cycle of these vehicles through second lease.
Business Model
Currently, credit/cash are the most preferred funding options to acquire used cars. This is followed by financial leasing and models like the UK’s personal contract purchase scheme that offers superior financial flexibility when acquiring used cars. With used cars now packaged as operational leases, end-users benefit by being able to acquire cars with advanced vehicle features, albeit at a significantly lower price. Used cars leases come with all the standard features of an operational lease, including:
- Maintenance cover
- Residual cover
- 24×7 emergency support
- Replacement car in case of prolonged maintenance issues
Pricing
Pricing model is similar to that of a full service/operational lease of a new car but prices are significantly cheaper since the first user has already borne the cost of depreciation. In Europe, monthly lease rates (operational leasing) of a used car are cheaper by up to 34.0% on average, when compared to a new car of the same model. Currently, SMEs, self-employed professionals, and ex-company car users are identified as prospective customer segments by service providers.
In certain parts of Northern Europe, the difference in monthly lease rates between a new vehicle and a used vehicle could be as low as €30/month, meaning buyers are likely to opt for the new vehicle. However, regulatory factors such as stricter emission norms and higher car taxes will increase the overall total cost of ownership (TCO) of a new car, resulting in a widening price gap between new and used vehicles. This will boost the attractiveness of used car leasing.
Challenges & Trends
The higher risk of maintenance issues and residual value estimation are among the top challenges faced by used car leasing providers. However, careful sourcing of vehicles could mitigate these risks. Vehicles aged less than four years coming off leasing contracts and demo vehicles from dealerships are considered to be ideal choices. These vehicles come with clear track records of usage, mileage, accidents and repair. In 2019, an estimated 6.4 million quality used vehicles were available in Europe.
With the objective of expanding their user base, leasing providers have started offering more flexible contracts, such as shorter contract durations and the option to swap the vehicle, among others. Meanwhile, used car leasing is perceived as a low profit margin business due to the higher administrative effort involved. For the same revenue, corporate leasing requires relatively lower administrative effort. Service providers are attempting to address this challenge by digitizing the entire customer purchase experience. As part of such efforts, they are incorporating strong online quote generators into their websites. Major companies have already enabled online credit checks and a few companies are planning to introduce e-contracts that will enable shorter processing times, as early as 2020.
For instance, Lizy, a new start-up supported by the D’Ieteren group, was launched in 2018 to offer flexible leasing of used cars in Belgium. D’Ieteren is the largest car distributor in Belgium and also the largest importer of Volkswagen cars in the country. In an interview with Frost & Sullivan, the company’s CEO Sam Heymans says, “We source off lease vehicles from our parent company D’Ieteren Lease, negating the challenge of sourcing quality used cars. Our target customers are SMEs and entrepreneurs who look for increased flexibility in contract terms. While Lizy manages the digital platform to on-board customers, D’Ieteren manages the vehicle contracts. This helps us keep operational costs in check and price our offerings competitively. Following our success in Belgium, we are actively seeking partners for expansion across Europe, mainly in the UK, Spain and Germany.”
Similar practices are followed by large companies like LeasePlan that facilitates 90% of its CarNext business online. In 2019, it introduced the CarNext mobile app for short-term (3-6 months) used car leasing in the Netherlands, Portugal and Spain to help customers simply summon a car to their doorstep.
Strict emission laws have dampened the growth of used car leasing in certain parts of Europe. As the UK continues to tighten its car policies with ultra-low emission zones and vehicle bans, it will become challenging to predict residual values. This will discourage service providers from offering operational leases for used cars as they will have to deal with the disposal of the 6-8 year old car after the second lease term ends. However, some participants believe that electric vehicles (EVs) offer strong market potential over the next 2-3 years. When domestic market discourages used car leasing growth of certain models, service providers import vehicles to countries with relatively relaxed car polices. For instance, Bil i Nord, a large dealer in the Nordic region, imports used Volvo cars from Sweden and sells them in leasing formats to individuals in Norway.
Future Outlook
Global fleet & leasing companies are expected to intensify their focus on remarketing off lease vehicles in the B2C channel. They will continue to set up or expand their dedicated remarketing divisions— LeasePlan’s CarNext, ALD’s Origin, PSA’s Spoticar and FCA’s Clickar, for example—with operational leasing portfolios in Western and Central Europe. These players are backed by access to information on service, maintenance & repair (SMR) records of their off lease vehicles, enabling them to better predict maintenance concerns and residual values.
Meanwhile, remarketing of vehicles in the B2B channel will also continue as outright purchase is still the major funding option to source used cars. Leasing players will continue expanding their partnerships with auction houses and online marketplaces like Auktion & Markt, AutoScout24 and Autowereld. There is no question of companies giving up the B2B remarketing channel in the near future as global leasing companies lack local expertise in most markets.
In 2018, there were 9,700 active used car leasing contracts in the operational leasing format. This is expected to double by 2020, growing at a CAGR of 33.4% to reach 41,000 contracts by 2023. Growth will be strongest in the Netherlands, Belgium, France, Spain, Germany and Italy. Though used car leasing is being introduced by fleet leasing companies to open new revenue streams, there are still no clear answers to the vital question of how profitable this channel will be in comparison to B2B remarketing.
