Webb Predicts Modest Improvement in Wholesale Supplies
ATLANTA — Despite contentions that the market could be challenged to generate adequate wholesale supplies due to drops in repossessions and off-lease vehicles, Manheim chief economist Tom Webb still sees positive signs in the wholesale supply market for 2010.
Webb shared the assessment during the Manheim Used Vehicle Value Index quarterly conference call late last week. Basically, he said that overall retail sales improvements for both new and used vehicles should aid the wholesale market this year.
"We believe that modest improvements in new and used-vehicle sales will prompt a significant increase in dealer consignment volumes and an overall increase in the level of ‘churn' in the market — the ratio of wholesale sales to retail sales," Webb explained.
"This potential increase in wholesale supply will not, however, have a depressing impact on pricing," he pointed out.
"Indeed, it will be the continued strength in pricing and retail margins that will enable dealers to more effectively manage their inventory, which, in turn, increases the level of wholesale activity," Webb went on to say.
Later in the call, analysts asked Webb to discuss price volatility in relation to the last two years, which have seen unprecedented swings. Webb reiterated that economic activity during the past 24 months has varied greatly from patterns developed over the past decade and beyond, thus creating "outliers" in factors such as pricing.
"There are some arguments theoretically to the extent that dealers can use wholesale supplies that are sitting there at auction as virtual inventory," Webb explained. "That could lead one to believe that the prices would be more sensitive to immediate changes to meet retail demand and put a bit more volatility out there. That might be a slight factor.
"But I think what's really driving the volatility that we've had," Webb interjected, "are the shakeup in the financial markets, big changes in gas prices and the significant reduction in wholesale supplies in many segments.
"With those factors eventually going away, I would expect more stability," he added.
Webb returned to the topic of off-lease units, one of the key factors he mentioned in his wholesale supply forecast for 2010. He shared preliminary data that indicated about 1.2 million lease originations occurred in 2009 with off-lease volume coming in close to 2.7 million.
However in 2010, and especially in the following two years, Webb spotted significant declines in off-lease volume, dwindling to a figure nearly half of what was expected for 2009.
Furthermore, his data didn't show lease origination topping 2 million by 2012.
Webb admitted that much of his analysis of how market volume and pricing would behave this year was still being finalized. He expected to share full-scale data and forecasts during the National Association Dealers Association Convention & Expo in Orlando, Fla., next month when the Manheim Used Car Market Report is released.
Nonetheless, Webb prefaced his future predictions by recounting how 2009 unfolded on the heels of another turbulent year.
"I began 2009 by saying, ‘Aren't we glad that year is over?' Certainly the same can be said today," Webb noted.
"I think we also need to recognize that the turmoil of 2009 did in fact uncover some gems that are worth saving," he continued. "Actually 2009 was good to the auction industry in terms of current financial performance but also in terms of committing our value proposition and stimulating trends that I think will be beneficial long term. One example is the rapid adoption of online channels.
"We certain sympathize with the financial stress and losses in many of our buying and selling clients," Webb added. "But we also appreciate the fact that a strong foundation has been laid for the survivors. … These problems, too, shall pass."
December Used Vehicle Index
Not lost in all of the discussion about what might occur in 2010, Webb revealed that the Manheim Used Vehicle Value Index finished the year at 117.5, a marginal move higher in December from the previous month.
However, when the December 2009 index figure was compared with the same month of the previous year, the increase was an astounding 19.9 percent.
What he believed to be a better representation of wholesale pricing in 2009 is annual averages. Viewing in that regard, the Manheim Index rose 5.1 percent last year.
As a result, that jump computed into the biggest increase in the 15 years Manheim has released the index.
"Limited wholesale supplies and slowly improving retail demand were constant forces throughout the year," Webb said.
Quarterly Review of 2009
Along with discussing the latest Manheim Used Vehicle Index, Webb broke down how last year unfolded, giving the economic and industry highlights that swayed prices and volume most.
Webb recounted how record tax refunds helped the industry during the first quarter. At the end of March, individual income tax refunds were up by $24.5 billion, or 14.3 percent, from their level a year earlier.
That boost of cash heading toward consumers resulted in what Webb described as rebounding used-vehicle retail demand, especially in reference to what he said was "a collapse in the market in late 2008."
As a result, Webb noted how wholesale used vehicle prices rose 4.3 percent in the first quarter of 2009 compared with the fourth quarter of the previous year.
"With new vehicle inventories high in the first quarter of 2009 — due to the plunging sales rate — wholesale pricing for late-model used vehicles was not as strong as it was in later in the year," Webb explained.
"Prices for end-of-service of fleet units were also less-than-robust in the first quarter as the subprime auto financing market was still in contraction," he continued.
"Price strength in the first quarter came from SUVs and luxury cars, since both were bouncing back from a rough finish to 2008," Webb added.
As 2009 entered into its second quarter, Webb pointed out the factor that came to the forefront. He said bankruptcies and brand discontinuation only had modest impact on residuals.
To explain this occurrence, Webb cited analysis by Manheim Consulting that showed "this was due, in large part, to high levels of inter-brand cross elasticity and an overall retail used-vehicle market that was allowing dealers to earn higher gross margins."
When it came to wholesale prices in the second quarter, the industry saw them rise 5.3 percent. Webb attributed the jump to fewer off-rental and dealer-consigned vehicles. Meanwhile, the rate of new-vehicle sales stumbled at a projected annual rate of less than 10 million, further pushing prices.
"There were clearly some buyers making the substitution from new-vehicle purchases to used-vehicle purchases," Webb stressed.
When the third quarter of 2009 came, one of the industry's most noteworthy events occurred — Cash for Clunkers. Webb explained how the federal program geared to sell new units boosted used vehicle values to the tune of 6.3 percent during the quarter.
"By drastically reducing new vehicle inventories before the model year changeover, Cash for Clunkers boosted prices for late-model used vehicles," Webb pointed out.
"In addition, the used vehicle department of franchised dealers — and even the operations of independent dealers — benefited from the ginning up of the overall market," he went on to state.
"A better retail lending environment (higher loan advances) also enhanced the profitability of used-vehicle sales in the third quarter of 2009," Webb added.
When 2009 rolled to a close in the fourth quarter, Webb witnessed a slowing of wholesale prices increases. He noted how prices crept up less than 1 percent compared to the average in the previous quarter.
"Prices fell in October as a payback for September's Cash for Clunkers gain, held steady in November, and then moved slightly higher in December," he explained.
"At year end, it appeared that wholesale pricing in some segments was pushing up against the natural limit imposed by new vehicle pricing," Webb added.
Percent Changes by Vehicle Age
Webb also shared an analysis of how prices changed in 2009 versus the previous year. As is widely known, prices went up whether the unit was in the previous model year or new, two to four years old, five to seven years old or even older.
According to his calculations, Webb determined that late-model used vehicles showed an annual price increase of almost 5 percent even though their average mileage was more than 12 percent higher. He noted that this was the only age segment that had a meaningful change in mileage.
"Naturally, due to the reduction in off rental units, this segment showed the biggest decline in volume," Webb pointed out.
When dealing with units from two-to-four model years past, Webb found the largest price gain — a little above 8 percent. He explained why that particular category saw the biggest jump.
"That increase, however, partly reflected a change in mix as the off-lease units in this segment tended to skew more toward luxury makes than in the past," Webb indicated.
The smallest price increase came within the batch of vehicles seven model years or older. Webb calculated a price increase of 3 percent. But he also revealed how it might have been greater with different industry circumstances in play.
"This is always a fairly stable segment, but if the buying dealers in this segment — primarily buy-here, pay-here dealers — had had greater access to capital in 2009, these older units surely would have shown a stronger price gain," Webb concluded.