Dealers anxiously await off-lease vehicles:
Dealers anxiously await off-lease vehicles
The off-lease supply of compact and midsize SUVs is expected to rise 50 to 60 percent in 2016, says NADA Used Car Guide analyst Larry Dixon.
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Coming to your lot
The number of off-lease vehicles returning to the market is forecast to grow substantially.
2015: 2.6 million vehicles
2016 est.: 3.1 million
2017 est.: 3.6 million
2018 est.: 4 million
Source: Cox Automotive
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Automotive News
March 28, 2016 - 12:01 am ET
For several years, Yegor Malinovskii found it difficult to find quality used vehicles at reasonable prices.
The market president of Berlin City Auto Group in Portland, Maine, searched everywhere. He tried the service drives of his eight dealerships in Maine, New Hampshire and Vermont, and cold-calling people who had listed their vehicles for sale on Craigslist.
But relief is on the way for Malinovskii and other dealers who are in a similar circumstance. The spigot of off-lease and other used vehicles is getting ready to open, big time.
At a time when new-vehicle sales may be growing more slowly, dealerships hoping to turn more to used-car sales will find plenty of supply. But dealers will need skill to successfully take advantage of the increased supply.
"I'm saying "yes'!" said Malinovskii, at the prospect of a more plentiful pool of used vehicles. "If we get an influx of vehicles from the leasing side, that is a tremendous plus."
Yegor Malinovskii, market president of Berlin City Auto Group in Portland, Maine, is eager to get off-lease vehicles: "The right inventory and pricing it right will allow you to retail at a higher turn rate."
Berlin City Auto Group is part of Summit Automotive Partners, of Centennial, Colo., which ranks No. 39 on Automotive News' list of the top 150 dealership groups based in the U.S., with retail sales of 21,413 new vehicles in 2015.
Since about 2011, the overall supply of used vehicles has been lean. That was because new-vehicle sales fell and leasing all but dried up during the Great Recession of 2008-09, while the federal Cash for Clunkers program removed older used vehicles from the market.
But that is in the industry's rearview mirror. New-vehicle sales, including those sold through leases, came roaring back in 2010-15.
This year, vehicles sold during the rebound are predicted to return to the market in bigger numbers, giving dealers more choices and lowering used-vehicle prices.
That's fine with Malinovskii.
His dealership group turns its used-vehicle inventory an average of 15 times per year. Some of his eight stores turn their inventories 20 times per year.
The stores are also very much involved in the automakers' certified used-vehicle programs of the brands they represent. And Malinovskii is gearing up to lease used vehicles to his customers.
Having "the right inventory and pricing it right will allow you to retail at a higher turn rate," Malinovskii said. "Hitting that higher rate means you need a constant supply of inventory. That's why we we're running into challenges. The supply isn't here."
Summit Automotive Partners, of which Malinovskii's group is a part, sold 12,657 used vehicles in 2015.
Webb: Nearly 4 million will hit market by ’18.
More to come
Tom Webb, Cox Automotive chief economist, estimates that about 3.1 million off-lease vehicles will return to the market industrywide, up from almost 2.6 million in 2015. That pool of vehicles is expected to grow to almost 3.6 million in 2017 and almost 4 million in 2018.
That doesn't include more retired rental vehicles, more trade-ins as a result of strong new- and used-vehicle sales and a rise in repossessed vehicles, which are climbing in tandem with subprime loans.
ADESA Chief Economist Tom Kontos predicts that overall used-vehicle prices will fall 3 to 5 percent per year this year and again in 2017, as the increased supply more than catches up to retail demand.
But so far, that hasn't happened. In February, the overall average used-vehicle price rose 0.3 percent to $10,202, compared with February 2015, according to ADESA data.
Consumers' demand for light trucks has surged in the wake of cheap gasoline. That has led the average price of light trucks to rise 5.4 percent year over year to $12,030, ADESA's data show. But the average price of cars dropped 6.3 percent to $8,506. Compact cars, which sold well when prices at the pump were higher, took the biggest hit with their average price falling 8.5 percent to $6,650.
Kontos advises that it is "best to brace yourself for softer used-car values." But so far this year, he notes, "The markets have been strong and we've absorbed the growth pretty nicely and CPO has helped."
Kontos: Expect prices to soften.
Automakers, and by extension their captive finance companies, hope dealers will find new driveways for the flood of off-lease and other used vehicles by selling them as certified. The captives stand to lose money when the actual wholesale value of a retired lease vehicle they financed falls short of the residual value that was set at the time the vehicle was leased.
J.D. Power and Associates' Power Information Network estimates that certified sales will grow this year to 2.9 million units, up from 2,553,548 in 2015, as calculated by the Automotive News Data Center.
Mickey Anderson, chairman of the Toyota National Dealers' Advisory Council, said sales of certified used Toyota and Scion brand vehicles are strong. In fact, in 2015 it was challenging for dealers to find enough vehicles to meet customer demand for CPO cars and trucks.
He believes that Toyota certified sales will grow this year in lock step with the number of certifiable off-lease vehicles.
"We dealers benefit when there is an abundance of used cars. It drives the cost down," said Anderson, whose Baxter Auto Group of Omaha, Neb., owns three Toyota dealerships. "While we'll have more supply, we'll be lucky to have enough supply to meet demand."
Though prices of used cars are expected to face more downward pressure from the supply of off-lease vehicles than prices of trucks, small and midsize SUVs won't escape unscathed, predicts Larry Dixon, an analyst at NADA Used Car Guide.
Anderson: “Dealers benefit when there is an abundance of used cars.”
"In 2016 versus 2015, [for] midsize SUVs and compact SUVs, you're looking at a 50 to 60 percent increase in off-lease supply," he said. "Even though the demand for those two utility segments remains strong, that kind of increase won't occur without some downward pressure on prices."
At Crest Auto World, in North Conway, N.H., 90 percent of the new and used vehicles dealer Chris Weiss stocks are pickups and SUVs. But he keeps a watchful eye on the mix of off-lease and trade-ins within his used-vehicle inventory.
His Chevrolet and Chrysler, Dodge, Jeep and Ram dealerships are located in the heart of ski country, so many of his customers demand 4x4 capabilities.
But because both Chevrolet and Ram have been very aggressive with leases on their new full-size pickups, he is concerned that he could be faced with a lot of similarly equipped used Chevy Silverados and Ram Express and Ram SLT trucks coming back off-lease within a 12-month period.
Also presenting a bit of a dilemma is what he calls a "fair number" of customers who want to trade in their small cars, say a Toyota Corolla, on the lease or purchase of a Jeep Cherokee or Chevy Equinox 4x4. Weiss doesn't want the Corollas, but takes them anyway.
"I know it's going to be a difficult vehicle to sell. I don't represent that franchise so I can't sell it as certified and I'm going up against a million Corollas sold," said Weiss, who owns his dealerships with his father.
"It's a highly competitive market, so it makes it very difficult for me to sell that vehicle and that difficulty is reflected in my trade value."
You can reach Arlena Sawyers at asawyers@crain.com.