USED VEHICLES are the Future of Dealer Profits

We’ve seen the future, and it’s used vehicles. Right now dealers and consumers are struggling through this pandemic. A majority of dealers are operating with just a skeleton crew in fixed ops, and most sales departments are closed. This won’t last forever. So what’s next?

You have to keep your eyes on the prize.

I suspect there will be a big boom in car sales and service fulfillments once we’re allowed back into the world again. Knowing the dealers’ fierce entrepreneurial spirit, this recovery will help them regain momentum! As positive used vehicle trends continue, used and CPO vehicle sales will be THE most influential factor behind the resurgence, especially when paired with low interest rates and even lower gas prices.

There were 17.1 million light vehicle sales in 2019, having exceeded the industry projection of 16.8 million. To make that even better, there were over 39 million used vehicle sales in 2019, projected now to improve further in 2020 by 6 percent, even though new vehicle sales are projected to be 16.8 million.

That said, according to several industry sources, it has become well known that retail consumers are gobbling up the less expensive used vehicles as prices on SUVs and pickups have increased over the past seven years. We also have to consider the loyal sedan buyers who can only find the best car selections for sale when shopping CPO and used vehicles.  There were 215,959 certified pre-owned sales in January, making it the best January for CPOs in 10 years.

In addition, a significant factor in used vehicle sales growth are leases. In 2019, 4.1 million vehicles came off a lease, but in 2020 there will be 5.34 million off-lease vehicles. These are high content vehicles costing 30-to-40 percent less than similar new vehicles. These cars will create an abundance of quality CPO and used vehicles for sale in the market.

Note that branded dealers sold 20.3 million used vehicles in 2019 of the 39 million total, up from 20.0 million in 2018. Of those, 2.3 million were CPO, paced in part because three-year-old residuals are holding well at 49 percent.

What are some outside influences aiding in the used vehicle sales increase? The “new force” in the market today is millennials. These 24-39 year olds have formidable student loan debt, often making home and new vehicle purchases unattainable. Millennials are now 30 percent of the population. This generation is now the largest in the country, meaning they are the largest group of consumers and are projected to make up 40 percent of vehicle consumers in the near future. They buy differently – doing lots of research, figuring out the best bang for their buck. We all know that “like new” used vehicles are truly the smarter buy because new cars depreciate so quickly…. But there are other reasons!

We must recognize that extended-term vehicle financing has caused a discernable increase in negative equity, which has impacted the used vehicle retail market favorably. In 2009, only 7 percent of auto loans given by credit unions included negative equity. In 2019, that number was 18 percent! Why? As new vehicle prices increased, so did loan term lengths to make payments manageable. Plus, new vehicle interest rates continue to increase while OEM incentive levels (trunk money) have decreased. This drives the price of new vehicle ownership up, creating a greater margin advantage for used vehicles for dealers and putting used vehicles in the lap of millennials and low-end new vehicle buyers! We know that new vehicle margins are a third of used vehicle profit margins.

We can’t forget the OEM movement away from cars as the market has shifted drastically to trucks, despite the facts that sedans make up 39 percent of vehicles on the road and 50 percent of sedan owners still want a sedan. The Domestic OEMs have discontinued most car models, especially Ford. People who prefer a car over an SUV or truck will likely start trending more toward used car sales to find a vehicle that suits their desires.

Because of COVID-19 many people are out of work, but they will still need cars, creating an even higher demand for affordable used options. Used vehicle sales (and of course fixed operations) have become ever more important to dealer profitability! The dealers have more control over retail and wholesale prices, as well.

Be proactive!  Diversifying your operations by owning a (separate) used vehicle/CPO facility would clearly take your profits to a whole new level! Currently, new vehicles dealers only sell used-to-new vehicles at a ratio of .5 to 1. I’m watching for to that change among the industry leaders to .75 to 1 or more this year! If you haven’t been focusing on the ever-expanding used vehicle and CPO volume, now is the time to make that shift. Your competitors are jumping on this opportunity in droves! The success of your dealership could depend on it. You snooze, you lose!

When you want to add a separate used car or CPO store to your dealership family (now recommended by several prestigious brands), whether you own one store or 10, we have the perfect listing for you. Email me at gordon@gwmarketingservices.com or give me a call at 508-395-2500 to discuss this option.