NEW ORLEANS — The greatest threat to franchised dealers' used-vehicle operations comes from within the dealership.

So says Tom Webb, chief economist for Manheim Auctions and lead author of its annual Used-Car Market Report.

The internal culprit? Dealerships' new-car operations. That's where 0% financing and cash incentives averaging nearly $3,500 a vehicle on domestic models create problems for the used-car lot yonder.

Why? Because many shoppers, who would otherwise buy a used vehicle (carrying a potentially better profit margin), instead are lured into buying new vehicles — or buy used ones at reduced prices.

Moreover, it's often easier to get financing on a new vehicle than a used one, “especially if you are using the incentive as a pseudo down payment,” says Webb.

Used-car prices have suffered from incentives. Those rose 11% in 2004. Used-car prices began softening after auto makers began offering generous new-vehicle incentives in 2001.

Webb says the price softening had less to do with an off-lease vehicle glut around then. That situation abated as the number of vehicles coming off lease declined (2.8 million in 2004 vs. 3.5 million in 2003).

Independent used-car dealers fared better than the used-car operations at franchised dealerships in 2004 because the independents stock older vehicles “selling at a price point less sensitive to new-car prices,” says Webb.

New-car dealerships' used-vehicle selections usually are late models or “nearly new,” another factor in the intramural sales competition within franchised stores.

“The competition between new- and used-car departments depends on how manufacturers compete for market share,” says Webb. “Analysts say there may be a reduction in new-vehicle sales, but prices may be higher. When manufacturers have an 80 days' supply of new cars, it hurts used cars on the lot.”

Manheim CEO Dean Eisner warns dealers about keeping slow-selling used cars on the lot too long. “After 30 days, the longer you keep them, the harder they are to sell and the more they depreciate in value,” he says. “It is not going to get better.”

It is better to take a loss on slow movers, clear them out and replace them with vehicles that do sell well, based on a data analysis of local market demands, Eisner says.

Manheim's 10th annual Used-Car Market Report cites key industry trends, including:

  • Despite a summer slowdown in job growth and a new-vehicle market that enticed many would-be buyers from the used-vehicle market, pre-owned vehicle sales of 42 million units in 2004 changed little from levels of the past four years.
  • For the first time in more than a decade, the auction industry in 2004 saw a decline in units sold. It was no surprise, rather an expected consequences of 700,000 fewer vehicles coming off lease in 2004 compared with 2003. There will be 320,000 fewer this year. Total auction sales dropped 3% last year, to 9.64 million units.
  • Repossessions fell 6% to 1.5 million units in 2004 after lenders tightened standards. Webb foresees an increase in repossessions “simply because a lot of paper is out there.”