“The used car market has been way overvalued for the past 36 months and I think it’s time for it to pop.”
I started hearing this and similar comments from dealers in early February — a time of year that dealers are typically more upbeat about their used vehicles prospects, given the spring and early summer selling season are right around the corner.
The dealer concerns flow from a few macro-and micro-observations, including increased supplies and retail demand pressure.
Industry analysts note that new vehicle lease volumes have been on a steady climb since 2009. Many of these deals carry two- and three-year terms, and lease return rates are on the rise. At the same time, dealers note increasing numbers of rental fleet cars appearing in auction lanes. Taken together, these trends mean dealers will see more late-model units available in the wholesale and retail markets, creating greater value volatility in both.
Few analysts or dealers expect manufacturers to ease up on the attractive financing, lease and incentive options they offer to sell more new vehicles. These days, I wouldn’t be surprised if most consumers believe they could get into almost any new car for a monthly payment of $300 or less. This backdrop makes it more difficult for dealers to acquire, price and sell used vehicles and meet their margin expectations — particularly with late-model units in segments where the pricing differential between new and used models is nearly negligible.
I share these market supply and demand dynamics as a cautionary sign that we’re likely to see a greater deal of wholesale and retail volatility than we have in recent years. For much of that time, the challenge chiefly has been sourcing cars amid constrained wholesale supplies and high acquisition costs, and retailing them with a sufficient profit margin. Now, it appears we’re transitioning to an era when the sourcing challenge is more nuanced and subject to retailing risks that flow directly from our manufacturer partners.
I should add that this emerging era isn’t really new; it’s just been a while since dealers have had to contend with this current mix of market conditions. The following are three best practices to help dealers navigate the imminent market risks and volatility as they acquire, price and retail used vehicles:
1. Mind the market days supply on every car.
Velocity® dealers aim for a 65–70-day market days supply for their inventories. They achieve this benchmark by paying close attention to the market days supply on every car they acquire for retail. They understand that a vehicle with a high market days supply will face a greater degree of retail competition than those with a lower market days supply.
Given the wholesale supply dynamics noted above, dealers will need to pay extra-close attention to this important metric as they acquire used vehicles. In some markets, the influx of off-lease and rental units can turn a car with a 75-day market days supply into a 120-day market days supply car in a hurry.
2. Assess retail demand dynamics.
This assessment used to be a used vehicle manager’s best guess. Today, however, technology and tools readily show how retail demand is trending for specific vehicles. For example, vAuto’s Provisioning tool assigns a letter grade to real-time consumer demand and interest to help dealers recognize if the retailing potential for specific used vehicles is on the rise or on the wane. Such market insight will become increasingly critical as dealers contend and compete with ever-changing incentives and offers on new vehicles.
3. Align retail prices to current market conditions.
While at the recent National Automobile Dealers Association (NADA) convention in Orlando, I asked dealers how often they examined their asking prices for used vehicles. Inevitably, the dealers who evaluated their retail prices at least once a week reported fewer problems with aging cars and diminished profitability. Interestingly, dealers also noted that their pricing adjustments went both ways — up when cars were gaining online traction with potential buyers, and down when cars appeared to be losing ground to competing units or their time in inventory necessitated a get-it-out-of-here calibration.
The key pricing take-away is this: Monthly or semi-monthly price evaluations and adjustments are insufficient for dealers to keep pace with changing market dynamics and achieve maximum profitability in used vehicles.
Beyond these three best practices, I will add a fourth goal for dealers who want to minimize the profit-harming effects of increased market volatility — at least half of your used vehicle inventory should be less than 30 days old. This standard of retailing efficiency means your cars have less exposure to changing market conditions and you’ll largely avoid the game of costly, corrective catch-up that often plagues dealers who let market volatility overtake them.