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11 June 2021

Discounts Drive Down Revenues at Auto Trader

Auto Trader, the online marketplace for new and used cars, has reported better-than-expected sales and profits. However, it is not positive news overall, with total trade revenues down 31% year-on-year to £225m. One might think that the fall in sales is due to the financial uncertainty and lower job security felt by the general population, but this is not the main cause. For the most part, the general population is not the main customer of Auto Trader but is, essentially, the product.

The way Auto Trader operates is by providing a platform that brings together buyers and sellers, with the latter paying fees to advertise their vehicles. Trade customers such car retailers, dealerships and fleet managers have the most cars to sell and so are the largest customer group, whereas private sellers (the aforementioned general population) only made up £6.3m of revenues, which was down 24% on the previous year.

Looking at this in depth, the main cause of the lower revenues derived from Auto Trader’s strategic decision to offer around four months of free advertising to its customers. Because retailers and dealers contribute the most to sales, they also pay the most in fees, so it is not surprising that these discounts caused a 32% fall year-on-year in retailer derived revenues. This strategy is expected to generate positive outcomes in the future by retaining customers in difficult times, increasing customer loyalty and preventing trade sellers switching to cheaper platforms in the long term.

Because of this better-than-expected performance and the retention of the customer base throughout the pandemic, the future could be bright for Auto Trader. With more of the population moving out of cities into suburban areas, the demand for personal transport is likely to be boosted, with the return to the workplace also contributing to this demand. On the other hand, a long-term issue that will continue to filter through to the automobile markets is the semiconductor shortage which is causing many large manufacturers to scale back production output of new vehicles, which potentially lowers the advertising revenue outlook for Auto Trader.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
 
 
Discounts Drive Down Revenues at Auto Trader
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