Dealers capitalize on boom in used-vehicle sales

LAS VEGAS — A few years back, some industry observers looked at the looming wave of off-lease vehicles ready to hit the used side of the business and figured values would take a hit.

So far, that hasn't happened. Instead, a kind of equilibrium has been reached, in which demand has kept up with supply.

"As far as I'm concerned, used is red hot," Andrew Stowe, senior director of vehicle valuations at J.D. Power, said at Used Car Week in Las Vegas. "This is where you want to be."

Dealers, for the most part, seem to agree. But they also know they have to capitalize on the strong market while they can, as factors such as affordability drive buyers away from new vehicles, which have been carrying little if any profit margins, anyway.

Some dealers, such as James Boening, executive director of Ourisman Lexus of Rockville in Maryland, are bullish on used. "We're pricing people out of the [new] market," Boening told Automotive News. "So I think used has a trajectory that's long."

According to the National Automobile Dealers Association's dealership financial profile, the average selling price of a new vehicle was $36,402 in the first half of 2019, compared with $35,249 in the first six months of 2018. The average used-vehicle selling price has been rising, too: It was $20,835 through June of this year for franchised dealers, compared with $20,390 in the same period a year earlier.

In another analysis of the average franchise dealership's financial profile, NADA found that through the first nine months of 2019, average new-vehicle department sales were down 1 percent, to $25.9 million. Average used-vehicle department sales during the same period rose 3.7 percent, to $15.2 million.

Dealers have been shifting their inventory more in favor of used-vehicle sales, which typically still carry a profit margin and allow retailers greater control of their destiny. Stowe said J.D. Power puts the new-to-used sales ratio for franchisees at 0.94 year to date in 2019, compared with 0.87 last year and 0.83 in 2017.

Amid a robust used-vehicle market, there is an advantage that franchised dealers have over others: certified pre-owned vehicles. The market is perfect for more focus on manufacturer-backed CPO sales, and only franchised dealers can get to them, Boening said. CPO sales are expected to post a ninth straight year of record growth in 2019. Boening said he expects another record year in 2020.

But finding quality inventory continues to be a challenge, and it is not expected to get any easier.

Larry Dixon, senior director of valuation services at J.D. Power, said used-vehicle sales are unlikely to rise dramatically from the 39- to 40-million-unit range in the next couple years. "So if you look at it, in that respect, you have more dealers competing for a finite supply," Dixon said.

Off-lease vehicle returns are expected to peak at 4.1 million this year and stay at or near that level in 2020, according to Cox Automotive. At the same time, used values are not expected to take a big hit.

"It's kind of proven that supply's only one side of the equation," said Anil Goyal, executive vice president of operations at Black Book. He said the average depreciation rate for used vehicles is expected to be about 15 percent this year and slightly increase to 16 percent in 2020.

Joe Halovanic, vice president of RVI Group, a provider of residual value insurance, said the company does its own supply-and-demand indices and prior to this year, there was an undersupply of used vehicles on the market.

"Obviously you've got more coming back now, but we're not getting to an oversupply situation by any of our metrics," he said. "What we're getting to is right at an equilibrium point."

Even with a record number of vehicles coming off lease, Ray Sanabia, general sales manager at Cavender Toyota in San Antonio, said finding good inventory means exhausting all possible strategies — whether it's through digital channels or boots on the ground. "We just need everything. We need it all," Sanabia said, adding that competition has been especially fierce for quality used vehicles for about the last two years.

John Hairabedian, president of HGreg.com, a Canadian online-focused, pre-owned retailer with stores in Miami, said used vehicles are as "unique as a fingerprint."

"So there's not a one-way, fix-it-all type of solution to be able to acquire inventory, and you've got to embrace multichannel acquisition strategies," Hairabedian said.
There is "no silver bullet" when it comes to grabbing the right used vehicles, he added. "Sourcing is going to become a challenge as we go forward."