Get Ready for Soft Year in '07

After a year of record level sales, auto remarketers were optimistic, yet realistic, about 2006 numbers. Last year's sales did show weakness, but there were many pockets of strength in the industry

After a year of record level sales, auto remarketers were optimistic, yet realistic, about 2006 numbers. Last year's sales did show weakness, but there were many pockets of strength in the industry, says Thomas Webb, Chief Economist of Manheim Auctions.

Wholesale vehicle prices moved higher in December for a third consecutive month, standing at 113.5, a gain of 0.5% for the month but a decline of 2.2% from December 2005, according to the Manheim Used Vehicle Value Index.

Webb says wholesale prices were at a “cyclical high” at the start of 2006, allowing the industry to come out 1.6% higher than 2005, even though the index declined during much of the year.

A number of dealership groups report strong numbers, he says, such as CarMax, which booted a 13% increase in same store used unit sales for its quarter ending in November.

“We wouldn't be surprised to see good numbers from the other publicly traded dealership groups when they report full year results in late January and early February,” Webb says. “One indication of that would be the increase in certified pre-owned (CPO) sales. December results for all manufacturers have not yet been released, but it appears that 2006 will be another record year for CPO sales.”

Tom Kontos, chief analyst for ADESA Corp., which runs a chain of auto auctions, says CPO sales are the key to success. Despite CPO's popularity, Kontos says dealers need to “brace themselves and work a little harder” in 2007.

“We might be cautiously optimistic, in light of the fact that the economic expansion we've been enjoying since 2001 has slowed in recent quarters,” he says. “Most economists, including myself, are expecting that 2007 will be a slower growth year, though I don't see that being recessionary in any way.”

He noted that in any given month throughout 2006, sales were off from that same period in 2005.

While remarketed vehicles remain the popular choice over new units, James Bell, publisher of IntelliChoice, says competition is getting tighter. With low interest rates and large incentives, customers are moving away from leasing.

“Off lease vehicles are a premium source for remarketing vehicles,” he says. “That's been the complaint — they could sell all the CPO vehicles they get, they just don't have enough of them.”

American manufacturers, he says, are starting to bear a resemblance to the European model, where no single manufacturer will have the largest sales.

“Customers are getting choices,” Bell says. “If you have a customer in your lot, work to develop a good relationship with them over just (selling) a car. You can't count on (loyalty). Every customer that comes in needs to be treated special.”

Experts Offer Remarketing Advice

For dealers looking to change their game plan in 2007, the experts offer this advice:

  • Profitability will diminish when cars sit on a lot longer than 45 days. “If you're unsuccessful in reselling a car in that period of time, you should definitely give some thought to wholesaling and replacing it with a vehicle that can turn more quickly,” Kontos says.

    Purchase vehicles in a “retail-ready condition.” Certified pre-owned cars are a plus.

  • “They don't require (much) work when it comes back to the used-car lot, which allows the dealer to put it on the front line,” Kontos said.

  • Include CPO vehicles in inventories.

“It gives customers peace of mind and trust that the dealer wants to establish with the customer and it's also very good business for the dealers,” Bell says.

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