Used Supply Likely to Tighten More; How Will Dealers Adapt?

McLEAN, Va.  - 

Dealers are already feeling the pinch of diminishing used-vehicle supply circulating back into their stores, but they might want to brace themselves, as it’s about to tighten even more, according to NADA Used Car Guide. This company reports that off-lease supply of three- to four-year-old vehicles, in particular, will likely be “bottoming out” late next year and early 2013.

Overall, analysts project there will be a constant draining of used supply for at least the next 12 months. So, dealers and OEMs will have to adjust, and NADA Used Car Guide suggested what some may do to counter the shortage.

“While a positive from a value retention standpoint, stock challenges faced by dealers will accelerate,” analysts indicated. “As a result, savvy dealers will increasingly diversify acquisition strategies — heavier reliance on upstream channels, increased communication with other dealers for exchange purposes, soliciting customer trades even if there isn’t a retail purchase, etc. — to locate those vehicles demanded by their respective markets.

“On the OEM side, we expect to see more short-term leases as well as targeted lease pull-ahead programs to support certified pre-owned programs,” they continued. And they later added: “In short, clean, late-model used vehicles — especially those with low-to-average mileage — will be viewed less as a commodity and more as a valued and desired asset near-term.”

Chuck Loubert, the used-car manager at Findlay Honda in Las Vegas, has thrived in the certified pre-owned arena and has managed to find CPO-worthy units in a supply-thirsty market by approaching customers in his service drive, reaching out to his non-Honda dealer contacts to buy Hondas and talking with exsisting customers.

If such a supply used downturn like the one NADA Used Car Guide forecasts does happen, Loubert will continue these strategies.

"Basically, I'll use all my  (dealer) contacts here in town. I'll work my service drive, and I'll work customer base," he said, also noting that if it's the right car "we'll pay more than we normally would to get the cars."

And in what may be encouraging news for dealers, rental returns are also likely to give dealers “late-model shot in the arm" when it comes to inventory sourcing, officials said.

Overall Returning Supply Trends

Continuing along, analysts offered more details about how challenging the returning used-supply situation may get.

Looking at the various avenues of used-supply returns, the latest Guidelines report suggests that the industry is “at the point where returning supply will take a sharp turn downward,” and some truck segments may see the biggest hit.

As the below NADA Used Car Guide graph indicates, the industry’s total returning supply in November will likely be between 5 and 10 percent less than January 2009 levels.

In the first month of 2012, it will be down 15 percent from the January 2009 level.

“While the continuation of the downward trend has been widely reported, the extent and extreme depth of the trough might come as a surprise to some, especially as it relates to certain truck segments,” analysts said in the report.

They then delved into more detailed expectations for used-car supply sources — off-lease and personal supply as well as rental supply — while also exploring market expectations.

Off-Lease, Personal Supply Declines

Beginning with the off-lease and personal supply element, one important thing to remember is that the auto industry downturn didn’t happen until the latter half of 2008. So, since it typically takes about three years for new purchases to flood back into the used market, the real pinch hasn’t been realized yet.

As such, the industry is on the cusp on the seeing the full effect of the lease slowdown.

“Although new-vehicle sales in 2007 fell by 2.5 percent relative to 2006, it wasn’t until 2008 that new vehicle sales turned dramatically for the worse, dropping by nearly 3 million units or a whopping 18 percent from the preceding year,” analysts pointed out.

“In addition, the bulk of the decline occurred in the latter half of the year. Keeping our three-year secondary market return in mind, these losses won’t be keenly felt until the latter half of 2011, which is precisely where we find ourselves today,” they added.

NADA Used Car Guide anticipates that there will be a 21-percent sequential decline in off-lease volume for 36- to 48-month-old units during the second half of this year.

That decline is more than three times as steep as the sequential softening spotted during the first half, where off-lease volume for these units was down 6 percent.

Again, trucks may see the biggest impact.

“Returning volume for truck segments will be especially skeletal, as high fuel prices and domestic OEM restructurings/bankruptcies in ’08 and ’09 conspired to bring leasing for large SUVs and pickups to a virtual halt,” editors explained.

So, it is expected that the monthly lease return level for three-year-old large SUVs less will erode to less than 100 units through the first quarter of next year, which is particularly alarming considering that during the previous 12 months, about 1,700 of these units returned to market each month.

This extreme shrinkage also means that prices for this particular segment won’t be as heavily impacted when fuel costs go up sharply.

“To put this into perspective, we estimate that if fuel prices were to return to $4 per gallon in 1Q of 2012 versus the current $3.70, used large SUV prices would decline 3-4 percent without the aid of falling supply,” analysts explained. “However, declining supply will pressure prices upwards by 6 percent between now and 1Q 2012, leading to a net upward gain when both factors are considered.”

They added: “In a more extreme case, if fuel prices were to reach $4.50 per gallon versus the current $3.70, this would pressure used large SUV prices down by 8-10 percent, and the net effect when both supply declines and fuel prices are considered would be a negative price move of 2-4 percent.”

How will other segments fare?

NADA Used Car Guide projects that they will see heavy lease return declines through 2012 but not as significant as the erosion in large truck supply.

Comparing the expected 3-year-old off-lease supply for first-quarter of 2012 against the amount in the first quarter of this year, large SUVs are likely to be down 97 percent, the biggest decline of any segment. Midsize SUVs are next (down 96 percent) followed by large pickups (94 percent).

Meanwhile, analysts anticipate luxury midsize cars will have the slightest decline (29 percent), with near-luxury midsize cars second from the bottom (39 percent).

Intermediate compacts are likely to see a 41-percent drop, with near-luxury compacts down 47 percent.

Looking at other segments, NADA Used Car Guide foresees the following drop-offs in lease returns: luxury large down 50 percent, luxury compact down 53 percent, intermediate midsize down 59 percent, midsize CUVs down 61 percent and midsize vans down 77 percent.

“As one might expect, returns for compact and mid-size cars will recover faster than other mainstream segments due to the fuel price-driven shift in demand of a few years ago, and luxury car supply will see its way through the trough the most unscathed,” officials pointed out.

Moving along, analysts did note that for personal supply units (three -to six-year-old cars), there likely won’t be as “dramatic” of a drop-off. However, the slide is expected to start sooner.

“While going forward the personal trend will be somewhat smoother than on the off-lease side, losses will be significant nonetheless as returning supply will drop by nearly 20 percent relative to 2009 through the end of next year, and another 10 percent through the end of 2013,” NADA Used Car Guide suggested.

The following graphs from NADA Used Car Guide provide more detail into expected off-lease and personal supply trends.

Rental Supply

While the off-lease projections probably seem quite daunting for dealers, NADA Used Car Guide did offer a bit of a silver lining in its rental supply forecast. There has been a consistent drop for the last four years, but NADA Used Car is expected almost a 200,000-unit increase for full-year rental returns this year.

This would make a double-digit improvement from 2010.

Looking at the September 2011 through January 2012, the usual suspects are likely to “dominate” rental returns: compact and midsize cars.

With more than 50,000 rental returns expected during this period, the Chevrolet Impala ranks No. 1 on the list, followed by the Toyota Corolla and Nissan Altima, respectively. Both of those are projected to have more than 30,000 rental returns.

What’s more, the bulk of the top 20 rental vehicles are likely to show double-digit gains from the year-ago period, including a 25-percent hike in volume for the Impala, a 45-percent surge for the Corolla and a 56-percent uptick for the Altima.

“While the majority of the models on this list will experience a year-over-year increase in returning volume, several — including the popular Hyundai Sonata, the Chrysler Town & Country, Dodge Charger and Ford Focus — will realize double-digit declines,” officials pointed out.

“Even though new rental registrations suggest a slight contraction year-over-year from September through January ‘12, overall volume will remain relatively stable; this should come as welcome news to dealers looking for a late-model shot in the arm.”

 

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