It wasn’t the strongest of starts to the year for used-vehicle sales, but the first quarter closed with the pre-owned market poised to remain at peak levels.
The annualized rate of used-car sales in March was more than 39.5 million*, beating year-ago figures by roughly 200,000 units, Cox Automotive manager of economic and industry insights Zo Rahim said during a conference call on Cox Automotive’s Q1 Market Review.
(*This is a measure of annualized numbers, which provides a trailing 12-month view of sales, Cox Automotive clarified. This is different than the seasonally adjusted annualized rate, commonly referred to as SAAR)
There were 38.6 million used-car sales in 2016, followed by 39.4 million in 2017 and an estimated 39.5 million in 2018, according to the data provided by Cox Automotive.
It is forecasting 39.5 million used-car sales again this year, followed by 39.2 million in 2020.
“Like new, we started the year soft for used-vehicle sales but have since rebounded as we kick off the spring selling season and demand comes into the market,” said Rahim. “It is important to note that we expect total wholesale volumes to be down slightly this year, so supply constraints will impact used sales more than demand.
“The used-vehicle market is not expected to grow in 2019, as we peak into a plateau,” Rahim said. “But keep in mind, we expect 2019, like 2018, to be the strongest used environment of this expansion.”
In his Auto Market Weekly Summary to open April, Cox Automotive chief economist Jonathan Smoke wrote, “Tax refunds are powering a strong used-car market, especially for affordable vehicles.”
The forecast was even more robust over at Edmunds. It pegged 2018 used-car sales at 40.2 million, a sum it anticipates will climb.
“Used vehicles have finally emerged as a compelling alternative to new, and market factors in 2019 will only increase their appeal,” Edmunds said in its Used Vehicle Outlook 2019 report. “Growing new-vehicle transaction prices and an oversupply of used vehicles have expanded the savings advantage in pre-owned vehicles.
“Additionally, consumers give up less going the used route since late-model cars are rich in technology and come in the body styles,” it said.
Edmunds later added: “While the new-vehicle market is expected to fall below 17 million sales for the first time in five years, we expect used-vehicle sales, which crossed 40 million units in 2018, to strengthen and grow.”
Edmunds was projecting late last month there would be 3.7 million used-car sales in March, up from 3.5 million in February. The resulting SAAR would be 39.2 million, compared to 39.3 million a month earlier.
In an analysis of first-quarter car sales, National Automobile Dealers Association senior economist Patrick Manzi discussed pricing and payment differences between new and used cars.
Citing January’s NADA Average Dealership Financial Profile Series report, new-car transaction prices were up 3.3 percent year-over-year at $36,410, he said. Granted, used-car transaction prices for franchised dealers are up, too: In January, they were $20,797, a 4.3-percent hike, Manzi said.
But he noted that, “The average monthly payment gap between new and used vehicles continues to increase, which will likely result in more consumers shifting to the used market.”
Later, looking at key trends for the remainder of the year, Manzi said: “Inventory levels of off-lease vehicles are expected to peak in the coming months, but there will still be a steady supply over the next few years. As prices continue to climb on the new-vehicle side, more and more consumers will consider the used-vehicle market.
“The Fed has signaled that we may not see any interest rate increases in 2019. This will help slow the monthly payment creep that we saw in 2018. Payments will still likely increase throughout the year because of rising vehicle costs, but we won’t have the added pressure of cost increases coming from rising interest rates,” he said. “We have seen credit standards tightening in recent months with a larger share of auto loans being made to more credit worthy customers. We expect that this will continue throughout the year as well.”
Along similar lines, Edmunds points out in its outlook report that the gap between new- and used-car prices has grown at the same time that their difference in interest rates has declined.
There was a 56-percent difference ($11,398) between the average price of a new vehicle and that of a used vehicle back in 2013, Edmunds said. Last year, that difference was 62 percent ($13,705).
Meanwhile, the gap between the respective interest rates of new vehicles and used vehicles has declined each year since 2012, Edmunds said, falling from 4.0 percentage points seven years ago to 2.7 percentage points last year.
“The historically low interest rates of the post-recessionary period have slowly come to an end,” Edmunds said in its report. “New-car interest rates jumped 17 percent (or 0.8 point) in 2018 — rising from an average interest rate of 4.9 percent in 2017 to an average of 5.7 percent in 2018.
“Rates for used vehicles have risen at a slower clip, with interest rates increasing 9 percent in the same period,” it continued. “Although average rates for used vehicles will always be higher than for new, the lack of subsidized finance programs in the new-car market has narrowed the gap between interest rates for the two segments.”
At the recent NADA Show 2019, I spoke to several dealers about their 2019 used-car strategies, and that story was published in Auto Remarketing.
Included in that article were comments from used-car expert Tommy Gibbs of Tommy Gibbs & Associates, who shared some pre-show highlights of this then-upcoming used-car workshop.
For this article, I interviewed two other used-car management experts for their perspectives on 2019 used-car challenges, to which I’ve added more of Gibbs’ remarks.
In addition to Gibbs, the other experts are Joe Lescota of Joe Lescota Management Education & Training Co., used-vehicle training experts; and Ed French, president of AutoProfit, an automotive profit performance company, and a member of the board of directors for TruWorth Auto, an independent used-car operation with dealerships in Indianapolis and Kokomo, Ind.
A theme emerging from their remarks address management discipline, inventory balance and change.
“Moving forward this year, people need to practice greater discipline, reevaluating packs, pay plans and salespeople recruitment,” Gibbs said by phone, “and tracking the gap between the Internet price and final transaction price. Better dealers have a small difference — $100 to $150, but others from $500 to $600. This is give-away profit.”
This gap closes as managers train their sales people on how to justify and sell the price (and value) when the customer comes into the showroom.
“The consumer has done his or her homework on the Net before they come in — that’s why they’ve shown up, so let’s hold the line as best we can,” Gibbs said.
A well-balanced inventory helps here, French said in a phone interview.
“A balanced acquisition strategy gets unbalanced due to time constraints for searching for inventory, the pressure to fill the lot with the kinds of cars that time shows were bad decisions, because they were easy to acquire,” French said.
“For example, I can buy cars from rental car sources because they’re easy to source, but those cars won’t usually sell at a high profit. Acquiring cars that return higher profit takes work. Frankly, the used-car business is an easy one if we have the right inventory and the right people.”
Lescota, who connected via online messaging, encouraged managers to break from tradition.
“Dealers cheat themselves out of profit by permitting management to focus efforts on fast moving merchandise while allowing older units to sit. When I inquire about aged units, I’m told, ‘I can’t afford to take those to the auction. I would lose a ton of money on them,’” he said.
“That doesn’t make sense when those units are losing value (depreciating) daily, and their initial cost on the books remains the same. Aging cars are the most expensive units in stock; management is attempting to hold out for higher grosses. I also hear managers explain, ‘Oh, we write those down each month.’
“Yes, I tell them — but a write-down is a loss,” Lescota said.
Noted Gibbs: “This discipline also means dealers acknowledge when mistakes are made on acquiring the car, pricing it or holding it too long. If you overpay or put too much into the trade, or the car is bad, it takes discipline to call them what they are.
“Discipline is about doing trade walks to identify problematic vehicles, so you can get them out of there fast. Managers also hold onto cars for 50 to 60 days, and when those cars eventually sell, the dealer is lucky to make anything on them. The discipline is to find a retail buyer before the car gets to 40 days,” Gibbs said.
While agreeing sourcing is and will be a challenge in 2019, these experts also reframed the situation favorably.
“The highest profit margins are on used vehicles traded in rather than purchased from auction. One of the first places I look for inventory is dealer’s opportunity to trade. All too frequently, dealers are missing trades by not focusing on the acquisition portion of the selling transaction,” Lescota said.
“I analyze two numbers: the opportunities to trade percentage and, second, look-to-actual-acquisition (look to book). If new-vehicle sales slow down in 2019 as forecast, dealers will have to be more diligent in maximizing every selling opportunity. Trade-ins offer higher value to potential buyers, because there is a clear history behind that vehicle. It’s much easier for a salesperson to sell the ‘emotion’ of the trade vehicle,” Lescota said.
Gibbs agreed sourcing is really a question of the right cars.
“Nice cars will always be hard to find,” he said. “Tell me about a time in history when that was not so!”
Getting cars from acquisition to the frontline faster is a theme dealers talked about on the exhibit floor at the recent NADA convention, and, Lescota told me, dealers who speed up this process free up margin.
“If it takes longer than 48 to 72 hours to prep a vehicle for sale, an evaluation must be made as to the effectiveness of that process. Dealers must look at their inventory as cash rather than a car,” he said. “This cash must continually work, and that means increasing turn to maximize profitability in a highly competitive used-vehicle market.
“Question whether there is sufficient staffing in the recon center, whether the used-car manager is keeping up with recon processes and why there are parts on hold, and so on,” Lescota said.
Related to Gibbs’ comment about holding the gap and selling value, Lescota said the used-car manager should look at a $1,000 recon investment as additional profit, not an expense.
“Why is the vehicle worth what is asked by the dealer? Reconditioning is a selling tool,” Lescota said.
Some of these challenges, French said, stem from well-entrenched ideas and work patterns.
“We’re still struggling with senior management’s perception of used-car operations,” he said. “These ideas have improved significantly in the last few years as margin compression, flattening SAAR and other indicators have focused dealers on paying attention to the used-car side of the business. Dealers have to migrate to used cars or fixed operations to support their net profit to return on sales.
“So, because it’s hard to change legacy patterns, which is human nature, disruptors have entered the market and succeeded because they aren’t burdened by heritage practices. CarMax, the first significant disruptor, forced change on the way dealers do business. Now Vroom, Fair and Carvana are disrupting other aspects of the used-car business.
“I always make this commentary to 20 groups: It is hard to throw out or change a process that has made you a millionaire; the disruptors have no legacy to protect, but go after what the consumer is demanding, asking, ‘Why wouldn’t we do it that way?’,” French said.