By Dale Pollak
Last week I mentioned dealers who expressed less optimism than their peers about a strong used vehicle market this coming spring. These dealers were saying things like:
“I’m taking every used vehicle deal I can. I’m not holding out for gross because I believe the supply will be there to replace it. I’m trying to get out of what I bought at the high values today.”
“The thresholds of high-dollar vehicles, those above $18,000, will be highly volatile. I’m running from late model cars like those with high market days supply.”
I took the comments as a cause for investigation. I questioned industry analysts and other dealers, asking what they thought about the spring selling season.
The end result: The caution these dealers expressed about this year’s spring-to-early-summer selling season appear fairly well-founded. My queries affirm the three market forces that dealers believe will create inventory acquisition and retailing challenges in the coming weeks and months:
1. Increased Used Vehicle Supplies: Alec Gutierrez, senior market analyst for Kelley Blue Book’s KBB.com, thinks there could be as many as 300,000 additional off-lease cars entering the market this year—even more if lease return rates continue to gather more steam. The influx stems from an estimated 2.7 million shorter-term lease deals written in 2009 and 2010 (roughly 1 million and 1.7 million, respectively).
Gutierrez agrees with dealers that the impact from this influx of used vehicles could be felt after many have bulked up their inventories in anticipation of spring sales.
2. Softening Used Vehicle Values: The lease return- and rental fleet-fueled influx of wholesale used vehicles will likely trigger a “correction” in wholesale values. The key questions are “how big will the correction be?” and “when might it occur?”
3. Competition from New Vehicles: The pricing parity Gutierrez notes explains why the Midwest dealer is “running away from” late model cars unless their market days supply and cost to market metrics pencil out.
Taken together, these emerging market dynamics are prompting some dealers to act now and adjust their used vehicle inventory management and retailing strategies.
Dale Pollak, founder of vAuto, Inc, can be reached at [email protected] or visit him on his blog at Dale Pollak.com.