It's Not Just the New Vehicles

A few weeks ago, at an auction in the Northeast, 23 fullsize Chevrolet Suburban SUVs passed through the lane. Not one received a bid. A dealer who was present says everyone was looking at the ground, not wanting to make eye contact with the auctioneer.

That story probably is playing out in auctions all over the country. Everywhere you look, news about the auto industry seems bleak for 2008 — including the used-vehicle market. In the past, when new-car sales were down, dealers would turn their attention to used cars to offset their losses.

That's not the case thus far in 2008. Margins have declined, in part, because of the hit on the residual values of trucks and SUVs, which are down by as much as 50% for some models.

According to Manheim Consulting's Used Vehicle Value Index compiled by Chief Economist Tom Webb, wholesale prices year over year through July for pickup trucks were down 23.6% and 26.1% for large SUVs.

Those numbers were up slightly from June, a dynamic Webb predicted. At the same time he cautioned the uptick in value should not be interpreted “as a sign of a corresponding improvement in the retail environment.”

Dealers should expect the retail used market to continue to be challenging, because volumes and margins will continue to shrink, Webb says.

In other words, don't expect it to get any better any time soon.

Brad Preble, vice president for Carr Chevrolet Inc. says that, while the used market for large vehicles slowed down, “it wasn't the wholesale shift you would have expected. We didn't really lower our inventory, but we did lower the cost.”

Suburbans and Tahoes are still hot sellers for his dealership, which is located in the Portland, OR, area, albeit at a significantly lower price than before.

Carr is ranked fourth on the Ward's Dealer Remarketing 150, a ranking of some of the top franchised-dealer used vehicle departments based on used-vehicle revenue.

CNW Market Research estimates franchise dealers saw their used vehicle sales decline 3.8% through the first six months of 2008. Meanwhile, used vehicle margins dropped almost a full percentage point for the public dealer groups during the same period.

Although Webb predicts the market will remain challenging, recent numbers from Black Book, a used vehicle-pricing guide, show large vehicles may be regaining somewhat.

The Black Book Three Month Rolling Average market trend report, which tracks the values of two year-old (2006 model year) vehicles, indicates trucks, vans and SUVs continue to depreciate at higher than normal rates.

During the past three-month analysis period, May 1, 2008 through July 31, 2008, domestic trucks, vans, and SUVs have fallen 14.39%, while their imported counterparts dropped 12.41%.

Domestic and imported cars continue to fare better, with depreciation rates at a modest 4.18% and 4.2% respectively. From a dollar perspective, the overall truck market declined almost $2,300 per vehicle, while cars depreciated much less, at just over $725 per vehicle.

“Even though some of the segments' levels of depreciation were greater than ‘normal,’ we have seen pieces of the market showing signs of improvement and stabilization,” says Ricky Beggs, vice president and managing editor for Black Book.

“We feel this is a reflection of the dealers and consumers realizing that prices had dropped to levels of affordability, and that gas prices were not likely to go to $5 or $6 per gallon, at least for the near future,” he says.

Downturns are nothing new, but this one is different, says Preble, because dealers invested in and expanded so much in their businesses — especially with technology — just to keep up with increasing sales volumes. All of the increase costs might be hurting the bottom line because the technology hasn't really increased margins.

“Technology was making our lives easier, not necessarily better,” Preble says. “It's just shifted how we do business.”

While almost every other segment is down, wholesale prices for compact cars are up 16.1% year over year according to Manheim's index.

On one hand, that's good news for dealers, but the profit isn't much for those vehicles. Despite the minimal profitability, dealers are competing vigorously to get those vehicles.

Tony Albertson, a consultant with NCM and Associates and a Ward's columnist, says dealers that are staying on top of the online auctions are more successful at getting the right inventory.

“I'll walk into stores and see the used-vehicle manager with three screens showing three different auctions. They'll be there all day,” Albertson says. “The dealers making the quicker decisions are the ones who are successful.”

Jim McKnight, president of Online Solutions for Manheim, says the growth on the online side of the business is “explosive.”

The online simulcast auction has seen 25% growth over last year. Online auction sales make up 47% of the buying mix for Manheim now. Meanwhile 8% of the company's customers only buy cars using an online auction.

According to Albertson, dealers need to stay on top of the basics going into the end of the year. “You have to keep a watch on the inventory levels,” he says.

Dealers need to be creative and look outside their areas to try to move the inventory. For example, several dealers on both coasts are stuck with a lot of large inventory right now and can't seem to move it. There just isn't a market for trucks and SUVs in those areas. But in areas such as Texas, dealers can sell those vehicles and probably are looking for them.

Also, dealers need to know the pricing on the street in their geographic areas. Prices change daily now, and most dealers usually are a couple of weeks behind, if not longer, on keeping up.

Another area most dealers can improve is the number of days it takes to recondition used vehicles. According to Albertson, it takes the average dealer as long as two weeks to recondition used vehicles.

Agile dealers take only two or three days. It makes a big difference when prices are changing daily. A lot of dealers are getting burned and don't realize it.

Meanwhile, Carr Chevrolet is focusing on continuously training its employees, Preble says. It may be trite, but constant review of the sales processes and appraising processes helps to keep the staff focused.