Dealers get creative to find desirable used cars amid tighter supply

When searching for used-vehicle inventory through wholesale avenues, Ricart Automotive Group would typically cast a net about 200 miles in any direction from its Columbus, Ohio, base. That meant finding cars as far away as Pittsburgh, Indianapolis or Detroit.

But the scarcity of attractive used vehicles has caused the group to use a bigger net. Its search area now has a radius of 400 miles — stretching potentially to Philadelphia; Raleigh, N.C.; Nashville; and St. Louis.

"That's what you've got to do to find the vehicles that you know your customers like to buy," said CEO Rhett Ricart.

When the pandemic and the ensuing chip shortage reduced new-vehicle supply, many consumers switched from new to used models and snapped up the best inventory. Now, the supply of used models remains constrained, both by the loss of production in recent years and by the reduction in leasing as a share of that smaller market.

In response, dealers are getting creative to find the inventory they need. In some cases, they're even scaling back used-vehicle operations to match the current state of the market.

Cox Automotive estimates 8.1 million fewer new vehicles were sold in the U.S. from 2020 through 2022 compared with 2017 through 2019. That resulted in fewer trade-ins entering the market, further complicating a tight supply situation, said Jason Stroda, general manager of Marshall Motor Co. in Salina, Kan.

It also meant dealers "just lost one of our main avenues for the best used cars we could get, which is something that's off a lease," Stroda told Automotive News.

Typically, a consumer who chooses to lease a new vehicle agrees to a two- or three-year term to "rent" it. Vehicles returned instead of purchased at the end of those lease contracts populate the used-vehicle market with late-model, lower-mileage inventory.

But this established leasing pattern was disrupted the past few years.

Case in point: In 2019, the leasing share of new-car sales reached a peak of about 1 in 3. Now, it's about 1 in 5, Cox Automotive Senior Economist Charlie Chesbrough told Automotive News last month.

In a commentary published last October, Chesbrough said the effects of the pandemic-driven slowdown and changes in leasing would "significantly impact" used-vehicle supply through mid-decade. The number of lease maturities from 2023 to 2025 is expected to be 2.5 million fewer than the total maturities from 2020 to 2022.

That gap in supply will slowly move down the timeline, iSeeCars Executive Analyst Karl Brauer said.

"It's like a snake that eats something giant," he said. "That bulge doesn't ever really go away. It just slowly moves down the snake. That's what we're in."

But supply issues don't stem only from a lapse in off-lease vehicles.

Critically, the speed at which vehicles return to market has changed. Some consumers have chosen to hold on to their cars longer, whether it's because new ones haven't been readily available to purchase during the last few years or because they want to avoid the steep prices that define this era. Rental car companies increasing the length of time vehicles spend in their fleets also accounts for some tightness, particularly of the used vehicles shoppers want most.

Dealers say the hardest cars to find at auctions for the right money that produce a profit margin are clean 2- to 4-year-old vehicles, said David Long, executive general manager of Hansel Auto Group, which has eight dealerships in Santa Rosa and Petaluma in California.

Public dealership groups have noted a dearth of certain used vehicles, too.

On Penske Automotive Group's second-quarter earnings call in July, CEO Roger Penske said the company closed a standalone CarShop store in Arizona because of low supply in the U.S. And Sonic Automotive Inc. said scarcer late-model inventory informed the company's recent decision to pare back the footprint of its used vehicle-only operation EchoPark.

"Today you're just not able to buy enough inventory in the 1- to 5-[year-old] segment to support as many stores as we have," Sonic President Jeff Dyke said last month on the group's second-quarter earnings call. "So we pared down to the number of stores that we knew we could buy inventory for."

Tighter supply could push dealers to further adjust the number of vehicles they acquire from traditional inventory channels, said Corina Diehl, CEO of Diehl Automotive Group of Butler, Pa.

"Because we have 13 different franchises, it seems we're getting a good mix," she said. "That's what's happening within our stores. We trade, and we have an internal auction with our stores, so we were able to mix up the inventory."

Hansel Auto's Long said dealers who have figured out how to snag good vehicles from multiple channels — or even build out their own acquisition operations, such as used-car buying centers — are not necessarily strapped for inventory.

"The best place to go is where the fish are," he said. "The fish are private party."

Even so, that can be tricky, Long said, as consumers can post their vehicle online and easily sell it to the highest bidder.

Dealerships and groups that lean into the direct-from-consumer route must outbid used vehicle-only retail giants such as CarMax Inc. and Carvana Co., which have the advertising dollars to promote their online vehicle appraisal and offer features on a wider scale.

Buying off the street stands to pick up more steam.

Ricart, a former chairman of the National Automobile Dealers Association, said his group purchased about 100 vehicles off the street in July, up from 12 per month pre-pandemic.

Franchised dealerships that aren't finding other avenues to acquire inventory could be in trouble, Long said.

If they still source heavily from auctions, there is less clean volume to choose from, he said. And prices are "through the roof" for vehicles that may end up not being something they can recondition and sell at retail for enough profit, Long said.

Dealers have certain channels from which they prefer to source vehicles, much like how folks have a favorite music station, Long said. But sourcing from a healthy mix of channels — not just one avenue like auctions — can ease inventory pains, he added.

Bleaker used-vehicle supply comes as dealers also work to reconcile their operations to a macroeconomic environment characterized by wholesale pricing volatility and demand dampened by higher interest rates.

Sticking to a smaller supply of 30 to 45 days is an increasingly important practice for franchised dealerships as floorplanning expenses have grown, Long said. Dealers want to avoid overstocking used vehicles to minimize the risk of values falling before they can sell them, Ricart said.

That mindset has evolved since 2019, when dealers usually kept supply between 60 and 90 days.

"That is not the norm" now, Ricart said. "They're too expensive."

Some dealers have slowed their used-vehicle acquisitions because they're worried about the market constricting, said Stroda, the GM in Kansas.

"As new-inventory volume increases, the used market decreases," he said. "A lot of people are trying to hedge that by just not even buying used cars."