Franchised Used-Car Sales Do Better

ORLANDO, FL Franchised dealers are selling more used vehicles than before and for more money per transaction, reversing a trend in which pre-owned prices had softened because of heavy incentives on new cars in recent years. New-car dealers sold 3% more used vehicles 16.4 million units in 2005 compared with 2004, according to Manheim Auctions' 2006 Used Car Market Report. That includes units sold from

ORLANDO, FL — Franchised dealers are selling more used vehicles than before — and for more money per transaction, reversing a trend in which pre-owned prices had softened because of heavy incentives on new cars in recent years.

New-car dealers sold 3% more used vehicles — 16.4 million units — in 2005 compared with 2004, according to Manheim Auctions' 2006 Used Car Market Report. That includes units sold from lots that are owned by dealers but separate from their franchised operations.

A total of 44.14 million used units were sold in the U.S. last year, including those sold by independent used-car dealers and in private-party transactions, according to Manheim.

For franchised dealerships, the average used-car transaction price was $11,750 in 2005, up from $11,524 in 2004, but nearly $900 less than the 1999 average of $12,630, a 10-year high, according to Manheim data.

In 2005, franchised dealerships showed almost a tripling in net profit per used vehicle unit retailed, according to the National Automobile Dealers Assn. Average net profit was $258 for used units last year (compared with $104 in 2004) and $97 for new units (compared with $176 in 2004).

“At franchised dealerships, declining new-car margins meant a greater focus on used vehicles,” Tom Webb, Manheim's chief economist, says at the National Automobile Dealers Assn. convention here. “New-car gross margins have been falling for some time, due to the reduced spread between sticker price and dealer invoice.”

By contrast, used-vehicle grosses have held steady, says Webb, as better merchandising and increased sales volumes have “offset the competitive pressure of the new-vehicle marketplace.”

“Only three times in the last 11 years have dealers made more money per unit selling new vs. used units,” says Hal Logan, Manheim's senior vice president-strategic planning.

The last time was in 2002, when used-vehicle prices dropped because of heavy manufacturer incentives on new cars and a glut of off-lease vehicles hitting the pre-owned marketplace.

Webb says used-vehicle profits vary widely, depending on a dealership's ability to maintain brisk inventory turns and achieve gross margins on vehicles and accompanying finance and insurance products.

Dealers increasingly utilize a variety of electronic remarketing channels and technologies to buy and sell used-vehicle inventories, he says. New software products systematically show dealership used-unit sales, margins and turnover by models, trim lines, ages and colors.

Trade-ins remain an important source of used cars for franchised dealerships, where about 60% of new-vehicle sales and 40% of used-vehicle sales include a trade-in, according to the Manheim report.

“Trade-ins represent a potentially lucrative source of used inventory if the dealer is able to accurately appraise the vehicle,” Webb says.

Auctions are the second-largest source of franchised dealers' used-vehicle inventories, growing from 26% in 2004 to 33% in 2005.

Employment growth and greater credit availability supported both used-vehicle sales and pricing, Webb says.

Paul Taylor, NADA's chief economist, agrees. He notes that nationwide about 200,000 workers a month are joining or returning to employment rolls.

When it comes to purchasing a vehicle, most of those people consider used units over new, Taylor says.

Dealers who specialize in selling used vehicles to credit-challenged customers posted strong results in 2005, Webb says.

“Subprime lenders found themselves in a sweet spot, where a past recession had created customers with blemished credit while at the same time a currently strong labor market created customers with a greater likelihood to repay,” he says in the used-car report.

Accordingly, repossessions declined in 2005 as subprime lenders experienced significantly lower defaults. Total repossessions fell from 1.5 million units in 2004 to 1.34 million in 2005, according to Manheim.

Meanwhile, higher wholesale used-vehicle prices spurred lender recovery rates of vehicles marked for repossession.

“New-vehicle buyers are sensitive to the cost of credit, whereas used-vehicle buyers are sensitive to the availability of credit,” says Webb. “In 2006, we expect auto financing rates to rise, but for credit availability to remain good.”

He says the economy looks good for 2006, “but it will be a transition year when currently under-performing sectors will have to pick up the slack created by the long-anticipated, and finally arriving, slowdown in housing.”

He says such a shift in economic growth drivers could bruise new-car sales but likely won't hurt the used-car market.

“The only caution to remarketers would be that, in a year of economic transition, the growth might not be smooth and certainly not assured,” says Webb.

TAGS: Dealers Retail
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