Threat of slimmer used-car profits, supply allows for little slack in 2024, dealers say

Franchised automobile dealers generally saw used-vehicle gross profit margins slip year over year in the first half of 2024. That's despite consumer demand for those cars and trucks remaining healthy — with some caveats.

Sales in the first half for most dealers were strong, but consumers are more specific about the makes, models and monthly payments they can afford over a continued stretch of high interest rates, according to franchised dealership and auto retail group leaders who spoke with Automotive News in June and July. Dealers also reported better consistency in price depreciation at wholesale auctions — a shift from fluctuations caused in the last three years by new-vehicle supply and demand irregularity.

But dealers also specified they are buckling down for other snags. Those include higher costs to acquire inventory and a scarcer supply of the prime 3-year-old used car.

Average gross profit per used vehicle across the industry fell to $1,264 year to date, down 21 percent from the same period in 2023, according to J.D. Power. It fell 13 percent to $2,549 when including finance and insurance profit.

The return of new-vehicle production and better availability for consumers continues to put downward pressure on used prices and grosses, said David Paris, director of product and market intelligence at J.D. Power.

"We're seeing dealers giving up some of their sky-high profits that they had been making back in 2022 in order to get some of these vehicles sold because there are new alternatives among the lots now," Paris told Automotive News. "There are incentives there as well."

Dealers said turning the vehicles efficiently — acquiring and then either selling them to retail customers or at auction before values fall — remains critical for preserving used-car margins in 2024.

Forming a solid exit plan for acquired inventory is the "only way" to operate a used-vehicle department today, said Jim Farkas, executive manager of Preferred Auto Dealerships of Grand Haven, Mich.

"Buying something that you feel is right without having the data to support it is the wrong way to go about purchasing a used vehicle," Farkas told Automotive News.

The group's used-vehicle sales were up 12 percent year over year in the first half, while gross profit per used vehicle was down 8 percent, Farkas said. Those margins remain elevated over prepandemic figures, he added.

Farkas doesn't foresee any large-scale issues in the new-vehicle market that could impact the used side. What's clear to him, though, is consumers are willing to drive farther to get the used vehicle they want instead of settling. Dealerships that are making it easier to sell vehicles at greater distances have an advantage.

"If you're not competitive in the marketplace, margins are going to compress and compress even more," Farkas said. "If you're not keeping a fast turn on used cars, you could have a poor operating used-car department."

"Used cars have been challenging," said Matt McGovern, CEO of his namesake McGovern Automotive Group, a fast-growing retailer.

The Newton, Mass., group tries to buy vehicles at a lower cost to market than three to four years ago, when there weren't enough cars and the group had to go beyond its buildings to stock up, Chris Benvie, director of marketing and pre-owned operations for McGovern, told Automotive News.

"We've come well down on that," he said.

McGovern makes an exception to acquire Toyota, Honda or Subaru vehicles at auctions to certify. Those command more dollars at retail, Benvie said. In some cases, it obtains vehicles online via OVE, a Cox Automotive platform, and from other dealerships.

The group also works to offset challenges by repurposing trade-ins internally rather than sending them to auctions. Consumers sometimes trade in vehicles to the group's Ferrari or Porsche dealerships that don't fit the mixes there but are otherwise good inventory for one of McGovern's other stores, Benvie said.

The group's Porsche dealership in July acquired a 2017 Nissan Maxima with 60,000 miles via trade-in, and it likely would've sold for $16,000 if sent to an auction, Benvie said. Instead, he passed it to another of the group's dealerships for that same $16,000. The car was serviced and sold "for a fair profit" in 14 days. The advantage: McGovern Automotive saved auction and transport fees and assumed that profit instead of another dealership, he said.

Trade-ins are the most valuable source of inventory for Serra Automotive of Fenton, Mich. Getting a steady stream requires maintaining good relationships with clients to find their next vehicle, said Matt Serra, the group's president.

"We work hard with our [dealer] partners on how to improve that capability, and then from there, we've got great leaders and operators throughout the organization that can go source cars from various auctions and things like that," Serra told Automotive News.

Serra Automotive's same-store used-vehicle sales are up 6 percent year over year, he said.

For many shoppers, a 3- to 4-year-old used vehicle meets affordability and reliability expectations, said Jeremy Robb, senior director of economics and industry insights at Cox Automotive. Dealers are starting to contend with less of that highly desired inventory, he told Automotive News.

Fewer of those vehicles will flow back into the used market in the second half of 2024 — a major trickle-through effect of the pandemic's curtailing of new-vehicle production in 2020 and 2021. Lease maturities averaged down 6 percent year over year in the first half of 2024, according to Cox. The company estimates that dearth will intensify, as lease maturities average down 13 percent in the third quarter and 19 percent in the fourth quarter.

Another implication: The lack of coveted vehicles will create difficulty for dealerships that need such vehicles for certified pre-owned programs.

"Franchised dealers selling certified pre-owned have not seen as many of those types of vehicles that they can put into those programs for the last couple of years, so they've been expanding age ranges of vehicles they would look at," Robb said.

Some consumers also shunned traditional used-vehicle financing in favor of all-cash deals in the first half of 2024, Preferred Auto's Farkas said. For Preferred Auto, which has five franchised dealerships and a used-vehicle store in Michigan, cash deals increased 5 percent in that period. That could hurt F&I product sales.

The average used-vehicle loan term spanned nearly 70 months in the second quarter, according to Edmunds. The average annual percentage rate rose to 11.5 percent from 11 percent year over year, while the average monthly payment for a used vehicle fell $17 to $552.

"They're just not going to pay the interest and people are sitting on cash," Farkas said.

Consumers recognize used-vehicle retail prices are falling, said Allen Turner, owner of his namesake Allen Turner Automotive Group in the Southeast. But both high interest rates and negative equity are putting off some consumers, he told Automotive News.

Turner's group, which includes dealerships in Florida and Alabama, won't feel the effects of the leasing drop-off during the pandemic as much as others might. Leases account for just 6 percent of its vehicle sales, he said.

Marshall Motor Co., a Stellantis dealership in Salina, Kan., recorded an 11 percent year-over-year increase in its used-vehicle sales in the first half of the year. Demand is present and benefits the dealership, which sells an average of 53 used vehicles per month, General Manager Jason Stroda told Automotive News.

Even so, the store's average gross profit per used vehicle inclusive of F&I was down 14 percent year over year at the end of June — the result of rising costs to acquire vehicles, Stroda said.

Supply of off-lease vehicles drying up makes sourcing difficult, he said. In anticipation of tighter supply, the dealership in April added two more buyers to source used-vehicle inventory from Facebook Marketplace and other vehicle listing sites. It is actively advertising to buy customers' vehicles — a practice many dealerships use, Stroda said.

His inventory buyers also monitor used-vehicle trends. Stroda said one buyer told him July 10 that the market could get softer in the next 30 to 90 days as the latest new model-year vehicles become available.

Julie Walker contributed to this report.