LA QUINTA, Calif. and DETROIT -
Dealers know that competition for retail used-vehicle sales and profits is fierce, and keeping expenses manageable and transaction prices competitive is a never-ending battle.
But despite that, many dealers are betting on a strong economy and strong used-car sales this year, and some are even adding stores or refurbishing or replacing existing ones.
“Overall, I think the economy is pretty strong, and I don’t see any severe swings up or down in 2018 — that’s what I’m hoping for and gambling on,” said Mark Weida, owner of Street Smart Auto Brokers in Colorado Springs, Colo., explaining why he’s bullish about 2018.
“I think consumer confidence is stronger than it has been in a while,” he added.
Weida retails about 50 used units a month at the store he opened in 2011 and believes his second store, which opened in November, will yield 30 to 40 unit sales per month when it fully ramps up to speed.
Todd Caputo, owner of Sun Chevrolet in Chittenango, N.Y. — who also just invested over $8 million to replace one of his two stand-alone used-car stores, said, “I think it’s going to be a really good year for retail used-car sales. Interest rates might go up a little bit but not that much.”
Caputo retails about 500 used vehicles a month at his three locations.
Here are other trends worth tracking in 2018 and why, according to Weida, Caputo and industry watchers who monitor the retail used-vehicle market. Some of the comments were made on the sidelines of Used Car Week in La Quinta, Ca., in November.
The inventory story
It’s been said before, but we’ll say it again: A lot of off-lease cars and trucks are slated to return to the market in 2018. How many?
About 300,000 more than returned in 2017, bringing the total to 3.9 million units, Cox Automotive predicts.
That’s good news for dealers, especially independent dealers who may not have had many opportunities to buy late-model used vehicles, said Tom Kontos, chief economist at KAR Auction Services Inc.
He predicts that the additional used-vehicle volume in the marketplace will lower prices by 2 percent to 3 percent in 2018.
“Since there is so much inventory that the grounding and non-grounding (like-brand franchise) dealers will take a pass on buying, it gives independents room at the table,” Kontos said.
But independent dealers who are looking for 5- to 8-year-old vehicles, the bread and butter of many used-car lots, might be disappointed, said Patrick Brennan, senior vice president, Industry Solutions Marketplace at Cox Automotive.
Those vehicles are scarcer because fewer were sold as new during the recession and in the years immediately afterwards.
“So that’s challenging when they look for cars,” Brennan added.
Caputo decided his used-vehicle inventory this year would include more small SUVs and crossovers, such as the Chevy Trax, Equinox and Terrain and fewer sedans, such as the Cruze, Malibu and Impala.
He said he’s been pretty successful finding those trucks in the past, but with so many more coming off-lease and incentives from the manufacturer to buy them, the prices have already dropped about 10 percent compared to early 2017. And he believes prices will fall even more.
“There are literally thousands of them coming off lease, and the prices are going to go down,” said Caputo. “They (the manufacturers) know there is a tidal wave coming, and they are trying to dispose of them as quickly as possible.”
Dale Pollak, founder of vAuto, said a troubling trend for dealers is that used-vehicle sales are strong, but profits are “uncharacteristically” weak because of margin compression.
Dealers can buffer margin compression by selling more used vehicles, more quickly and redirecting more of their promotional and advertising dollars to the Internet where 90 percent of used-vehicle buyers shop for vehicles, Pollak said.
Dealers also need to do a better job recruiting, hiring, training, supervising and retaining employees, he added.
“Any inefficiency in a margin compressed market is going to be magnified,” Pollak said.
Third-party Internet sites
When a dealer buddy told Weida that his cost to list used-vehicles for sale on a major third-party classified site doubled from about $1,200 month to $2,500 when the buddy renewed his subscription, it was a bit disconcerting, Weida said.
He has vowed to closely monitor prices he pays to list vehicles on various third-party sites.
“Dealers are trying to scramble and figure out where we should put our dollars,” said Weida, a former new-car dealership general manager.
“That’s a challenge for all of us. Most of us as independents know what we’re up against versus the new car dealer; we have to be less expensive. If (our vehicle prices are the same as prices found at new-car dealerships) most people will buy from the franchise dealer.”
There will be a generous number of certifiable off-lease vehicles in the market to support CPO programs in 2018, but it will be up to dealers to certify them. And many dealers make their decision based on how much marketing support manufacturers pour into their programs. That may present a problem because manufacturers are more focused on new-vehicle sales, which are sliding, than CPO, said Larry Dixon, senior director, valuation services at J.D. Power.
Dixon also pointed out that a few years ago the number of certified vehicles retailed was virtually equal to the number of vehicles coming off lease.
But CPO sales for 2017 — up an estimated 0.1 percent to 2,645,718, units according to Autodata Corp. — is considerably lower than the 5 percent increase in overall late model used-vehicle volume, he said.
“Will CPO sales decline in 2018? It’s certainly possible given the slowing rate of growth we’ve observed over the last couple of years,” Dixon said.