Following a year of record-level sales, remarketing dealers are optimistic, yet realistic, about 2006 returns.

Sales last year showed weakness, but there were many pockets of strength in the industry, Thomas Webb, chief economist of Manheim Auctions, says.

According to the Manheim Used Vehicle Value Index, wholesale vehicle prices moved higher in December for a third consecutive month to 113.5, a 0.5% gain for the month but a 2.2% decline from year-ago.

Webb says wholesale prices were at a “cyclical high” at the start of 2006, allowing the industry to push 1.6% ahead of 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 saw 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 their 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 notes 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.”

U.S. auto makers, Bell says, are starting to bear a resemblance to the European model, where no single manufacturer will have the largest sales. Communication, he says, is key.

“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.”

For dealers looking to change their game plan in 2007, the experts offer some simple 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.” CPO 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 says.
  • Always offer CPO vehicles to the customer. “It gives customers piece 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.

egenoff@wardsauto.com