Why Dealerships Should Tap Into the Booming Used Car Market & How to Get Started
The COVID-19 pandemic has created pent-up demand for vehicle purchases. With the migration from urban to suburban areas, people need cars more than ever. Meanwhile, accumulated household savings, fiscal stimulus and low interest rates all serve to create a favorable buying environment.
New vehicle supply will remain constrained for the rest of 2021 and into 2022 due to the ongoing global semiconductor shortage. Recovery in travel and hospitality jobs will help boost the lower-income job recovery—a demographic that’s more likely to buy a used car over a new car. Also, it will be some time before the masses will be comfortable using public transportation or ride-sharing services again, so consumers will likely view vehicle ownership as the safest method of transportation.
In any given year, the used vehicle market is approximately twice the size of the new vehicle market, but over two-thirds of transactions are taking place outside of the dealership franchise network, whether through private sales or independent used car dealerships.
This creates a tremendous opportunity for franchise dealers to boost unit sales volumes through used car sales. At the same time, gross margins on used cars are typically well into double digits and come with additional back-end profit potential through ancillary products such as warranty and assurance, which can add several more percentage points in profit.
These profit margins typically expand when there is softness in wholesale prices, since the decrease is typically not fully passed onto retail consumers. Also, de-fleeting from rental, executive and commercial buyers will lower vehicle returns—which feeds the used vehicle market—for the foreseeable future, and that will continue to support used vehicle pricing.
An accelerating trend
The COVID-19 pandemic has accelerated a trend that’s been in play for a while now. In 2019, well over 3 million used cars were sold compared with less than 2 million new cars. In the wake of the pandemic, used vehicle sales have been rebounding stronger than new cars by several percentage points, which is expected to continue over the next couple of years as the rest of the job market rebounds (a trend typical of most recessionary environments). Right now, though, we’re still seeing a lot of activity for prime- and super prime-rated customers buying new vehicles, which reflects the uneven prospects of the current job market and the economy in general.
A pivot to sell more used cars will also help to shift a dealer’s vehicle mix to more light trucks, which have become the focal point of consumer light vehicle demand and are the most affected by the current semiconductor shortage.
What can franchised dealers do?
With the used market dominated by person-to-person and independent dealer transactions, how can franchised dealers make inroads into this potentially lucrative market? Among other things, dealers can:
-
Work with your respective OEMs to develop incentives for existing clients to come off lease earlier—for example, with no or minimal penalty, or the ability to upgrade or downgrade their vehicle while maintaining a similar payment structure
-
Make it easy for customers to return vehicles through remote pick-up or drop-off; provide temporary courtesy vehicles when needed
-
Leverage business development center or customer relationship management tools and analytics to continually work your customer database and place timely reach-outs to customers to bring them off lease earlier and into a different vehicle
-
Develop an approach for opportunistic buying at wholesale used vehicle auctions
-
Keep a pulse on seasonal supply and demand of wholesale used vehicles. Typically an influx of used vehicles is at auction near the start and end of a given year, resulting in cheaper relative prices compared to other times of the year
-
Ensure your dealership is up to speed on inventory management. Know which vehicles are in demand, higher-turning and producing lucrative profit margins
-
Work with your financing partners to provide sufficient used floorplan financing. This can be a carveout of existing unused new vehicle floorplan financing or a separate financing facility. If you’re using an operating line of credit, advance rates are typically 20% to 25% lower, and pricing typically 15-25 bps higher
-
Align scorecards and train your staff to focus on used sales along with finance and insurance sales. Rewarding staff and equipping them with the tools they need to excel in these areas will help accelerate a shift to selling more used cars
Whether a franchised dealer is seeking a way to backfill the near-term shortage in new vehicle supply or a longer-term growth area, there’s still time in the current environment to take advantage of the benefits of higher used vehicle sales. In doing so, a dealer can meaningfully grow and better stabilize future earnings for years to come.
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Ryan Ricci, MBA, CFA
Vice President, Credit Structuring & Leveraged Finance | Automotive Finance | Canadian Commercial Banking
The COVID-19 pandemic has created pent-up demand for vehicle purchases. With the migration from urban to suburban areas, people need cars more than ever. Meanwhile, accumulated household savings, fiscal stimulus and low interest rates all serve to create a favorable buying environment.
New vehicle supply will remain constrained for the rest of 2021 and into 2022 due to the ongoing global semiconductor shortage. Recovery in travel and hospitality jobs will help boost the lower-income job recovery—a demographic that’s more likely to buy a used car over a new car. Also, it will be some time before the masses will be comfortable using public transportation or ride-sharing services again, so consumers will likely view vehicle ownership as the safest method of transportation.
In any given year, the used vehicle market is approximately twice the size of the new vehicle market, but over two-thirds of transactions are taking place outside of the dealership franchise network, whether through private sales or independent used car dealerships.
This creates a tremendous opportunity for franchise dealers to boost unit sales volumes through used car sales. At the same time, gross margins on used cars are typically well into double digits and come with additional back-end profit potential through ancillary products such as warranty and assurance, which can add several more percentage points in profit.
These profit margins typically expand when there is softness in wholesale prices, since the decrease is typically not fully passed onto retail consumers. Also, de-fleeting from rental, executive and commercial buyers will lower vehicle returns—which feeds the used vehicle market—for the foreseeable future, and that will continue to support used vehicle pricing.
An accelerating trend
The COVID-19 pandemic has accelerated a trend that’s been in play for a while now. In 2019, well over 3 million used cars were sold compared with less than 2 million new cars. In the wake of the pandemic, used vehicle sales have been rebounding stronger than new cars by several percentage points, which is expected to continue over the next couple of years as the rest of the job market rebounds (a trend typical of most recessionary environments). Right now, though, we’re still seeing a lot of activity for prime- and super prime-rated customers buying new vehicles, which reflects the uneven prospects of the current job market and the economy in general.
A pivot to sell more used cars will also help to shift a dealer’s vehicle mix to more light trucks, which have become the focal point of consumer light vehicle demand and are the most affected by the current semiconductor shortage.
What can franchised dealers do?
With the used market dominated by person-to-person and independent dealer transactions, how can franchised dealers make inroads into this potentially lucrative market? Among other things, dealers can:
-
Work with your respective OEMs to develop incentives for existing clients to come off lease earlier—for example, with no or minimal penalty, or the ability to upgrade or downgrade their vehicle while maintaining a similar payment structure
-
Make it easy for customers to return vehicles through remote pick-up or drop-off; provide temporary courtesy vehicles when needed
-
Leverage business development center or customer relationship management tools and analytics to continually work your customer database and place timely reach-outs to customers to bring them off lease earlier and into a different vehicle
-
Develop an approach for opportunistic buying at wholesale used vehicle auctions
-
Keep a pulse on seasonal supply and demand of wholesale used vehicles. Typically an influx of used vehicles is at auction near the start and end of a given year, resulting in cheaper relative prices compared to other times of the year
-
Ensure your dealership is up to speed on inventory management. Know which vehicles are in demand, higher-turning and producing lucrative profit margins
-
Work with your financing partners to provide sufficient used floorplan financing. This can be a carveout of existing unused new vehicle floorplan financing or a separate financing facility. If you’re using an operating line of credit, advance rates are typically 20% to 25% lower, and pricing typically 15-25 bps higher
-
Align scorecards and train your staff to focus on used sales along with finance and insurance sales. Rewarding staff and equipping them with the tools they need to excel in these areas will help accelerate a shift to selling more used cars
Whether a franchised dealer is seeking a way to backfill the near-term shortage in new vehicle supply or a longer-term growth area, there’s still time in the current environment to take advantage of the benefits of higher used vehicle sales. In doing so, a dealer can meaningfully grow and better stabilize future earnings for years to come.
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