What lengthening new-car turn times might do to used-car performance

CARY, N.C. - 

Industry observers see trends in the new-vehicle space that are making the delivery of new metal more challenging and, as a result, likely to impact how efficiently dealerships can turn their used-vehicle inventory.

Analysts from Autotrader, Edmunds and Kelley Blue Book all shared data and insights with Auto Remarketing on Wednesday that pointed to possible challenges for franchised dealerships that might face the challenge of finding buyers for their new models — which in some cases are taking the amount of days to turn not seen in almost eight years.

Meanwhile, off-lease volume continues to grow with units ripe to be retailed as certified pre-owned is on the rise.

“(New-vehicle) inventory is starting to swell, which is concerning considering that we’re still months away from the peak summer selling season,” Edmunds executive director of industry analysis Jessica Caldwell said in a message to Auto Remarketing.

Caldwell indicated days to turn has reached its highest level since July of 2009, and new vehicle inventory was up 9 percent year-over-year in February. Edmunds offered this metrics regarding days to turn in February:

• Subcompact cars had a days to turn of 102 days.

• Large cars had a days to turn of 86 days.

• Midsize cars had a days to turn of 82 days.

• Industry average was 74 days.

“The automakers are in a tricky spot: aggressive incentives are already starting to eat into profits and residuals, but it takes discipline to pull back the production reins in what’s still a fairly strong market,” she said.

And what about the CPO department?

“The used vehicles that will feel the squeeze are off-lease and otherwise near-new used,” Caldwell said. “We know those particular types of inventories will climb due to high lease rates so having an abundance of new inventory will create more pricing pressure for those vehicles. The older used vehicles have short supply with higher demand so those should not feel the squeeze from climbing new-car inventories."

Kelley Blue Book senior analyst Alec Gutierrez acknowledged during a conference call on Wednesday that “we are seeing inventory build up across the spectrum” as he put new-vehicle days’ supply at close to 80 days, up from about 70 days a year ago. Gutierrez indicated automakers are slapping more than $3,500 on the hood in incentives to get new models rolling over the curb; a trend a bit surprising since February typically is a slow month for new-car sales anyway.

“You see where inventory levels are at and I think manufacturers are making a concerted effort to try to get the numbers down to some extent,” Gutierrez said. “You would think in February with the expectations and with respect to seasonality, we all know this is a slow month. This would be a month where you could expect to pull back on incentives a bit and a little bit of reduced performance, and it wouldn’t really break anyone’s expectations. 

“But I think at the end of the day, consumers have seen rising incentive levels,” he continued. “We know that typical consumers are going to be in the marketplace typically for 60 to 90 days if not more ahead of their purchase. If they’re keeping tabs on incentive activity and trying to time their overall decision of when to head to the dealership to finalize the deal, a sudden cutback in incentives could certainly sway that to wait or seek an alternative.

“To some extent, incentives remain high because they have been high. Until we see a meaningful impact on overall inventory levels and days’ supply, it’s going to be a slow ramp back down with incentives. And at this point, we’re still seeing the trend head upward,” Gutierrez went on to say.

So if incentives are going to stay high, what’s that trend going to do to dealerships’ used-vehicle prospects?

“With days’ supply where it is and the incentive load at $3,600-plus per unit, there’s most definitely going to be a trickle-down effect impacting the used-car side,” Guiterrez said. “In fact, when we look at overall performance of late-model inventory at auctions across the U.S., we’re seeing about a 2 percent reduction in terms of what dealers are willing to pay at auction year-over-year. If you look at it in terms of retained value, the auction value as a percent of vehicle’s original MSRP, you’re seeing more like a 3-point reduction.

“Although transaction prices on the new-car side remain very strong, that overall incentive load coupled with high days’ supply, not to mention increasing supply on the wholesale side from off-lease inventory returning in greater numbers month in and month out, we are seeing not insignificant downward pressure being applied on used-car values,” he continued. “That trickle-down effect is certainly taking place and it’s something we expect to continue in the months ahead.”

During Wednesday’s conference call, Autotrader senior analyst Michelle Krebs pointed out that there were “healthy” shopping activity on dealership websites last month. She also mentioned the latest analysis from the Conference Board placed consumer confidence at the highest level since 2011 with a strong sentiment of people likely to make a vehicle purchase.

But should it be a new model or a certified unit?

“From a consumer point of view, it’s going to take a little bit more studying to which is the better deal, the off-lease vehicle and sold as a certified pre-owned versus a new one that’s heavily incentivized,” Krebs said.

“Of course, there are two different stories there, too,” she continued. “The price drops have been most significant on traditional cars and less so since truck prices have been stronger as are sport utility vehicles. (The used-car market) almost a mirror image of the new-car market.”

While there might be a glut of new-vehicle inventory gumming up the system now, Krebs advised that the industry keep watch of what happens as the first quarter unfolds.

“I think we should be careful. January and February are lowest sales volume months of the year,” Krebs said. “I think we should pay attention to March and later in the spring. Those months are the strongest and we’ll get a much stronger indication of where 2017 is headed.” 

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