Given the gains in available inventory — particularly the flood of off-lease units hitting the market — used-car sales are likely to continue rising, says David Lim, vice president and equity analyst at Wells Fargo Securities.
In other words, supply begets sales opportunity.
And that opportunity is particularly evident, he said, in the standalone used-car retail outlets launched by several of the publicly traded dealership groups in recent years.
“A lot of these guys are moving in that direction, and I think it’s a good outlet,” Lim said in a late December webinar from the American International Automobile Dealers Association.
The thinking is, he said, franchised dealers would get first crack at these off-lease units, and then they can choose to sell them as certified pre-owned within their existing franchised stores or sell them as late-model non-CPO at the used-car outlets.
“I guess the question at hand is, from an execution standpoint, can they make money off of the separate rooftops?” Lim said. “That’s to be determined on how successful they are, but from a theoretical standpoint, it makes a lot of sense.”
The latest of the pubic retailers to move into this space (as of press time) is Penske Automotive Group, which in January closed its purchase of a Northeast-based standalone used-car retailer (CarSense) and signed an agreement to purchase another in the U.K. (CarShop).
CarSense, the U.S. purchase, has a no-haggle model focuses on late-model units. It has five stores throughout the Pittsburgh and Philadelphia metro areas, including southern New Jersey.
“It’s a really smart move, of course,” Autotrader senior analyst Michelle Krebs said in a December phone interview shortly after the CarSense deal was first announced. “Roger (Penske) doesn’t make any dumb moves.”
It’s a particularly deft maneuver by Penske given some of the supply and demand factors that Krebs shared.
It’s certainly not the first time a dealership group has made this kind of move.
Sonic Automotive and Asbury Automotive Group each have used-car standalones in EchoPark Automotive and Q auto, respectively, while AutoNation has plans to roll out its own.
“It’s all about the fleet that’s out there and the cars that are coming (back into the market), whether trade-ins or lease programs,” said Mark Scarpelli, the 2017 chairman of the National Automobile Dealers Association, in a December interview.
“There’s a supply of them, obviously. And in our case, it’s brand-building, whether you’re an independent dealer or a large dealer group,” he said. “It builds loyalty and brand-building to some of those dealer groups that you had mentioned and it’s also an opportunity to hone and drive home certified pre-owned sales. It’s just another avenue to sell that automobile to the buying public.”
Used-car supply is only going to continue growing, particularly as off-lease volumes ramp up in coming years, Krebs said.
Meanwhile, consumer demand for used cars is going to be strong because of the “affordability issue” in the new-car market, Krebs said.
In fact, affordability — or lack thereof — has been one of the biggest disruptors to the new-car market, she said.
Yes, urbanization, the buying habits of millennials and car/ride-sharing all have had some impact, and Krebs and her colleagues are keeping close watch on these trends. But they haven’t had the same kind of impact that affordability issues have.
Given the growth in U.S. population, Krebs said, the new-vehicle market should be stronger than it is.
There were about 210 million adults in the U.S. in 2000, a year where 17.4 million new vehicles were sold, according to Cox Automotive, which cited Automotive News and the U.S. Census
In 2015, there were 248 million U.S. adults and 17.5 million new-car sales.
Put differently, they said, it took 38 million more people to reach essentially the same sales total.
The company’s data set takes it a step further and shows that if new-car sales per capita in 2015 had been even with the level in 2000, there would have been 20.5 million new-car sales last year.
But that, of course, didn’t happen.
The new-car market, Cox Automotive emphasized, has an affordability issue.
According to its data set, 57 percent of non-vehicle owners say they don’t have a car because they can’t afford to buy or lease one.
Krebs points out that median income has not risen and the cost of living has “grown exponentially.”
In fact, nearly three-fourths (72 percent) claim their everyday expenses have increased.
Citing the U.S. Census, Cox Automotive indicates that median income in 2014 ($53,657) was only marginally higher than median income in 1990 ($52,623).
Krebs points out that incomes have gone up 21 percent since 1967, but over the same time span, there has been a 596-percent increase in the cost of goods.
Meanwhile, income has actually dropped 7 percent in the last 15 years, she said, with the cost of goods going up 37 percent.
Granted, Krebs added, the price of cars has not shown the same level of increase, but their growth has outpaced that of incomes.
And all of the above tends to impacts the affordability of a new car and tends to make the used car “more desirable,” Krebs said.
Cyclical nature of market
AutoNation chairman, chief executive officer and president Mike Jackson spent most of the company’s third-quarter conference call in October explaining why the dealer group is embarking on an aggressive used-vehicle expansion project, one that includes standalone pre-owned stores
Jackson said the seed for AutoNation USA — the name of the standalone pre-owned store program — took root and began to germinate about five years ago. And it stemmed from what’s happening in the new-vehicle space.
“You have to take into consideration that the new-vehicle market is definitely cyclical with one to three phases: growth, plateau and decline,” Jackson said. “Now, you can be in plateau quite some time, but plateau brings a whole other set of issues.
“So if I go back five years ago, anticipating that plateau would eventually arrive, I said I need a strategy that we can take much more of our destiny in our own hands and continue to grow the business,” he continued. “Now to be able to do that successfully, I felt we needed two foundational elements. One was a brand that was well known in the marketplace already. And a digital capability that we knew could deliver sales. So we’ve done both of those steps successfully with the AutoNation brand. And with our AutoNation Express launch, it now delivers almost 30 percent of our sales from those sites.
“So having taken that step as preconditions, in order to give us the confidence that these stores would turn profitable quickly, we knew we needed a value equation for the consumer and an outstanding experience,” Jackson went on to say. “We know the customer craves fairness and transparency and price. And that means they need to be One Price. So then we said, well the brand has to be in alignment between our existing franchise business and this extensive business; therefore, we have to One Price our existing pre-owned business. That started already this year, as a conditional element, and has gone extremely well, and we will have all AutoNation franchise pre-owned One Price sometime at the beginning of next year, but certainly by the time the first AutoNation USA Stores open.”
Along with those online activities, AutoNation USA locations are going to be standalone pre-owned vehicle sales and service centers. Those facilities also will offer AutoNation-branded parts and accessories.
“These AutoNation USA stores have a customer care component,” Jackson said. “We wanted a value story there. We do very well taking care of cars that are new-to-5-years-old, 6 years old, 7 years old, and then there is a big drop-off. So we want to attract that market, but we need a value equation. So, we’re a significant purchaser of products already today. So we went through major suppliers and negotiated exactly what the consumer would want and are launching AutoNation-branded parts and accessories.
AutoNation confirmed that it’s using $500 million in capital to get AutoNation USA going.
“We’re highly confident of the degree of trust from the customer because of the AutoNation financial products that we’d already launched,” Jackson said. “Again, we went through the major suppliers. Say we have a profound understanding what the consumer wants, here’s the value equation we have to meet, but now the customer has to trust the product and so it has to be branded AutoNation. And we see already that the adoption rate in all the AutoNation-branded stores is approaching 95 percent of the AutoNation customer care products.”