Second-hand car business on high speed in India amid Covid-19 pandemic

The pandemic has accelerated the second-hand car business to the point of a demand-supply imbalance

Used car sales overtook those of new cars some years ago, but the economic slowdown and then the pandemic have accelerated that trend. So much so that for the first time, there is a demand-supply gap in this market. 

In the April-November period of FY21, new car sales shrank 26.14 per cent, whereas used car sales grew 22 per cent. And, as car-makers still struggle to run assembly lines to capacity and their dealers to push models from their showrooms, used car sales teams have seen demand surge past supply. 

The reasons are related: Slower purchase of new cars means that there are fewer old cars coming into the market for exchange. The exchange segment, which used to account for 26-27 per cent of new car sales, has dropped to 6-7 per cent. On an average, a new car depreciates anywhere between 30-50 per cent in three or four years. This is also the age bracket where customers prefer to buy cars. But the “shortage” in the exchange business has meant that the average age of used cars has increased from five or six years to nine years. 

The country’s largest car-maker, Maruti, for example, saw an eight per cent drop in the replacement segment. Maruti’s used car arm sold 184,112 units in 2020 (April to December) against 3,240,011 units in the same period last year. But the enquiry level jumped to 1,751,928 from 1,653,264 in 2019.

“People are moving away from public transport and shared mobility, and the desire for personal mobility has increased. But the uncertainty on income and jobs lead people to conserve cash,” said Shashank Srivastava, executive director, marketing and sales, Maruti Suzuki. A recent report by Ernst & Young stated that around 57 per cent of the car buyers were likely to buy a pre-owned car. 

Inevitably, the shift has attracted the organised sector in a bigger way to an area earlier dominated by unorganised players. The organised players’ share in this market has increased to 25-27 per cent from 18 per cent last year, with buyers seeing security in warranties and certifications that they offer. 

Mahindra First Choice Wheels, part of the Mahindra Group, reported a 20 per cent growth in sales in the July to December period over the same period last year, and the company’s managing director and CEO Ashutosh Pandey targets growth of 25 per cent in 2021-22. The company sells around 14,000 vehicles through its network every month. 

Despite the pandemic, it has opened over 80 stores, taking the total to over 1,000 stores across the country. 

The pandemic has also seen a demand shift towards entry-level cars and used cars, which is bound to help such companies. Meanwhile, the changing demand-supply dynamics in used cars has led to a six to seven per cent price increase, Srivastava added. 

Interestingly, luxury car-makers are reporting a surge in this segment, too. Santosh Iyer, vice president, sales and marketing, Mercedes-Benz India, said this is the ninth year of the company’s pre-owned (POC) business and to date it has sold over 21,000 pre-owned cars. 

“Our POC business has grown by 20 per cent y-o-y and it outperforms the new car sales under the current challenging circumstances,” said Iyer. The company sold more than 350 pre-owned cars through its online store after the pandemic and it expects this number to grow in 2021. 

Used cars remain a viable alternative for a large section of first-time customers, especially in a challenging economic environment, Pandey pointed out. This trend is a lot more predominant in small-town India, which is why Mahindra is rapidly making tracks for remote cities such as Beri (Haryana), Betul (Madhya Pradesh), Purnea (West Bengal) and Ghatol (Rajasthan).

Pandey noted the price difference between used and new cars has widened, especially after the BS-VI implementation, which increased the prices of new vehicles. A five-year-old vehicle, which ran for 50,000-60,000 km, would cost only 50 per cent of the new vehicle now.

The other factor that is helping the surge in demand is that financiers are more open to financing used cars purchases, unlike in the past. 

The surge is benefiting all players. Sameer Malhotra, chief executive officer, Shriram Automall, one of the largest platforms for pre-owned vehicles, said they used to sell 4000-5000 cars every month last year. This year, the number has almost doubled to 10,000. Realisations also rose by 5-7 per cent per car owing to the demand-supply mismatch. 

Gajendra Jangid, co-founder and CMO, Cars24, one of the largest online transaction platforms for pre-owned vehicles in India, said compared to pre-Covid levels, traffic has increased 4X.   

First-time buyers have increased from 45 per cent of total buyers in the pre-Covid era to 55-60 per cent post-Covid. “First-time buyers mostly prefer hatchbacks, so monthly sales of these cars on our platform have almost doubled over pre-pandemic times,” Jangid added. In fact, Cars24’s business recovered to 100 per cent in August 2020 and saw it enter the coveted unicorn club in November 2020.