Shifts in used-vehicle market cut into proceeds, trigger resets

Shifting market conditions are starting to pressure auto retailers' used-vehicle business plans and profits.

Inflation and higher interest rates are prompting many consumers to seek lower-priced used vehicles. And getting more of those vehicles to stock dealership lots is proving a challenge. Those are some key factors that have led to a softer-than-expected first half in the used-vehicle business for both traditional dealership groups and the industry's upstart online used-only retailers.

Public retailers notably saw per-vehicle profits on used cars tumble sharply this spring, and some pulled back on growth goals for their used-only ventures. Online used-only retailers have scrambled this year to slash costs because consumers' vehicle-buying activity didn't match last year's frenzied levels, leading to plunging per-vehicle profits and deeper net losses across the board. Private dealers, too, are wary of the squeeze. Though several noted the used business remains robust, they are monitoring the market closely to see whether demand fluctuates more.

It's a striking contrast from a year ago, when used vehicles were appreciating in value. The changes have executives at some of the public dealership groups looking to bolster their inventories with more affordable vehicles.

"We're seeing demand shift to lower price points," Group 1 Automotive CEO Earl Hesterberg said late last month. That shift is happening most prominently among middle-class consumers and those buying mass-market brand and used vehicles, Hesterberg said (Editor's note: An earlier version of this story misattributed the last sentence to someone else. It has been corrected to attribute to Hesterberg).

Michigan dealer Aaron Zeigler called vehicles priced from $10,000 to $15,000 "the hottest part of the market right now."

Last summer, the particulars of a used vehicle didn't matter: There were plenty of buyers for each one, so they sold quickly, said Tom Moore, COO of Morgan Automotive Group, which has 56 dealerships in Florida. Morgan's per-vehicle gross profit on the used side is flat compared with last year and down about 7 percent from what the group budgeted for, Moore said.

Moore said consumers, wary of inflation and higher interest rates, have become pickier. As a result, the used business is not nearly "as robust as it was in 2021, but it's still really good," he said.

Consumers who were "impulsively buying" six months ago are more deliberate in their selection now, Asbury Automotive Group CEO David Hult said late last month.

"Of all the segments, I would say [used is] the one where it's trying to find its footing to move forward," Hult said. Still, he deemed Asbury's used business healthy in the second quarter.

Public dealership group executives said they are taking stock of buyers' renewed focus on affordability. The shifts have led some to pivot on their used-only strategies.

Sonic Automotive's review of its EchoPark used vehicle-only stores was widely viewed as an evaluation for a possible spinoff. The review ended without further action. Executives cited market conditions and timing and also backed off 2025 revenue and other financial targets for EchoPark. The review was launched a year ago in that frothy environment.

Penske Automotive Group CEO Roger Penske said late last month that used-vehicle affordability challenges hurt customers of the company's CarShop standalone used business more than those at its franchised dealerships. CarShop lost money in the first half after previously turning a profit because of the high cost of acquiring vehicles.

Higher transaction prices are "just taking some people out of the market," Penske said.

In the U.S., vehicles that once sold at CarShop's preferred price point of $20,000 became more costly to acquire, meaning their price tags had to move to $30,000 territory, Penske said. It considered lower-value vehicles — those between $8,000 and $12,000 — but decided those are wholesale vehicles, not ones to retail.

Sonic President Jeff Dyke said late last month that the retailer is seeing demand for vehicles up to 8 years old. It started to include such older vehicles in EchoPark's inventory earlier this year after having difficulty securing 1- to 4-year-old vehicles.

Demand now has dropped for "a $640 monthly payment for pre-owned, and that's what you're getting when you're selling a 1- to 4-year-old car right now," Dyke said.

Though per-vehicle profitability at Lithia Motors dropped 11 percent in the second quarter, CEO Bryan DeBoer called the resulting average gross profit of $2,955 "still considerably higher than normalized states, and we still see that as quite healthy."

Franchised dealers also are seeing consumers shun more expensive models in favor of lower-priced used cars.

"The part of the market that we've noticed that slowed up is the big trucks and heavy SUVs, and we attribute that to rising gas prices," said Zeigler, president of Zeigler Automotive Group, which is based in Kalamazoo, Mich., and has 35 dealerships in Michigan, Indiana, Illinois and Wisconsin.

But he and some of the public groups have found that value-line used vehicles are difficult to source.

"We would be selling a lot more if we could buy a lot more," Group 1's Hesterberg said. "Like all used cars, they're scarce, but the lower-priced used cars are the most scarce."

Shifts in used-market conditions have also troubled Carvana Co., Vroom and Shift Technologies, all of which reported second-quarter losses.

Carvana, the largest of the three, moved into cost-cutting mode after recording a nearly $1 billion loss in the first six months of 2022. The company's gross profit per vehicle sold via its online platform plunged 44 percent to $1,131 in the second quarter.

Shift said last week that the business conditions of recent months caused company leaders to conclude that a growth plan would be extremely difficult to finance. Shift now plans to eliminate 650 jobs through the remainder of the year. It also announced a planned merger with used-vehicle consignment company CarLotz as both look to realign for profitability.

Only Vroom escaped a second-quarter drop in per-vehicle gross profit, which rose 36 percent to $2,166. That's because the company changed its approach after a 48 percent drop in per-vehicle gross profit in the first quarter, deciding to trade off sales volume for higher profits. Vroom also cut 337 positions. (Editor's note: an earlier version of this story used an incorrect figure for that percentage drop in per-vehicle gross profit).

Wholesale used-vehicle prices that kept rising to record levels in 2021 and peaked in early 2022 have since shifted back to a semblance of seasonality.

"Typically, in the summertime, those vehicles decline in price dramatically," Morgan Automotive's Moore said. "They didn't do it last year, but this year they have."

So far, there's not much indication that a larger downturn in retail prices is coming for used vehicles, though, said Jonathan Banks, J.D. Power's vice president for vehicle valuations. J.D. Power reported a 3 percent decline in prices in July for used vehicles of up to 8 years old — not much of a drop, considering how incredibly high prices have gotten, Banks told Automotive News.

"They're not going up, but they're just not really dropping at a rate that is alarming," he said.

The market's shifts have led dealers to reexamine their strategies.

Zeigler's group usually tries to turn inventory every 60 days. As used vehicles appreciated, it moved away from that practice because "they were worth more than when we bought them," Zeigler said.

But they haven't appreciated in the past 90 days, he said.

"Now we've switched," he said. "We're reducing our inventories a little bit, and we're starting to turn them a lot faster."

Moore doesn't expect late-model used-vehicle retail prices to shift into cooldown mode anytime soon, not with new-vehicle supply still so low.

Said Moore: "All the OEMs predicted they'd be building more new cars by now, and it's gotten worse."

That leaves retailers on the hunt for more affordable used vehicles to sell as some attack costs and reassess their longer-term prospects.

Melissa Burden, John Huetter, Jack Walsworth and George Weykamp contributed to this report.