Losing money on used cars? Yes and no

Dale Pollak, speaking at the Cox Automotive press conference during the NADA Show, didn't mince words.

"This is my 49th consecutive NADA. This year, I'm seeing something I never thought I'd see," said the visionary behind vAuto's suite of products to help dealerships find and price used vehicles to achieve rapid yet profitable inventory turns. He cited data, from the National Automobile Dealers Association, which showed that the average U.S. light-vehicle franchise dealership lost $2 on every used vehicle it retailed in 2017.

"The greatest challenge to the viability of the dealership franchise system is margin compression," Pollak said. The problem has been acute in new-car departments for years, but used vehicles had remained a solidly profitable operation, as software such as vAuto's had offset consumers' increasing price awareness in the era of Internet vehicle research.

No longer, said Pollak. The need for dealerships to have data-driven used-car strategies is greater than ever.

Accounting also plays a role. Those factory incentives for buying off-lease cars generally go in the ledger under new-car operations, along with other factory payments, not into used-car profits.

Moreover, "last year was a super special case," said Jonathan Smoke, Cox Automotive's chief economist. Hurricanes in Texas and Florida threw dealerships a curve. Ahead of the hurricanes, he said, "Dealerships bought inventory assuming a normal market, then had huge demand from people with limited, or no, insurance checks."

Due to that demand, used-vehicle prices started running up in late August and hit an all-time high in October, Smoke said. "Dealers lost some vehicle sales at the end of the year, and lost momentum due to prices going up as they did," he said. "The used-vehicle market is driven by price-conscious consumers. Consumers can't stretch that much if prices go up 8 percent year over year, as they did in October. Dealers were caught" and margins suffered.

"I don't anticipate this amount of change [in used profits] as being as substantial in 2018, but there's no question that the price pressure long term is a reality," Smoke said.

Patrick Manzi, senior economist for NADA, agreed. "There is just a lot more choice out there, and there are also a lot more used-specific retailers out there that are really bringing competition to the new light-vehicle dealers," he said.

Even before last year's special circumstances, Smoke said, used-car departments "were skating on very thin margins," as shown by that $65 per retail sale net profit in 2016.

That continues. "Our dealer sentiment survey continually shows that there's strong pressure to lower their prices. There will always be pressure on the gross margin," Smoke said.

Part of the problem in that minus $2 is that "this is a dangerous industry in which to focus on averages," he said. "The best-in-class dealers are performing far better than the average."

Overall, he added, dealerships are "doing much better on used than the data would suggest — and much worse on new than the data would suggest."

Hannah Lutz contributed to this report.