Bark's Bites: As the Market Compresses, Dealers Look to Used Cars to Save Them
Dearest TTAC readers,
I’ve come to know you incredibly well over the last seven years. I realize that what I’m about to tell you is somewhat akin to waving a dripping piece of red meat in front of a starving, caged tiger. But, like Bane, I am here for you, the people, and I’m willing to suffer abuse at your hands because the truth will ultimately set you free.
I also know that because much of my source material for this blog post was given to me anonymously and confidentially by one of the most influential dealers in the country, you’ll scream something like “I WANT TO SEE YOUR DATA,” but such is life, guys. I can’t show his numbers to you. I’ve substituted some data from the National Auto Dealer Association’s Mid-Year report for 2018 (the final 2018 report isn’t available just yet). You’ll see the correlation.
Now, let’s get into the meat waving bit, shall we. Breathe deeply, and jump in with me as I tell you this:
In 2019, car dealers are happier than ever to sell you a used car instead of a new one. This could make buying used a bad proposition. Here’s why.
In order to write this piece, I called one of my oldest, dearest frenemies in the car biz. We don’t agree on everything, but I often ask for his guidance on those rare occurrences where I seek consensus. He’s been doing this racket for decades, holding nearly every title in the franchise car industry along the way — including “Owner.” He’s resisted the urge to sell out to one of the giants like AutoNation or Sonic, and has satisfied himself by owning just a rooftop or two and keeping his hands directly on every part of the stores. He’s also in high demand as a consultant for those same giants, who look to him for insights almost daily.
Of course, I can’t pay his huge fees, but as long as I agreed not to name him or get too specific, he was happy to talk to me about the state of the new and used car business. And the first thing he told me?
“I can’t make money on new cars anymore,” he said. “The market compression is ridiculous, and the OEM (stairstep) programs have so many hoops to jump through that it just isn’t worth it to try. The co-op funds are impossible to get — you can only use their pre-approved vendors, and they won’t let you bid against them for keywords or airtime. The Tier II ads that I’m helping pay for are running right now for (heavily discounted 2018 inventory). I haven’t had one of those in inventory since December.
“So I opted out. I’m getting out of the new car business. I’m finally going to sell the (brand) store and just do pre-owned cars. I’ve got a used car superstore opening up next month, and we’ll carry 500+ pieces of low-priced inventory, all of which I’ll sell at a front-end profit.”
Here’s the thing — while I would have disagreed with him as recently as three years ago, what I’m seeing on my side of the business indicates that he’s absolutely right to get out while he can. The OEMs are continuing to squeeze and squeeze dealers until there’s nothing left. GM slashed their Standards for Excellence dealership employee bonuses by 33 percent in 2018, and from what I’ve heard, they’re going to do it again for 2019.
NADA data supports my friend on this one, too. Overall dealership profits are trending downward, and they have been since 2015. 2019 projects to be the worst year for average franchise dealership profit since 2012. However, used-car department profits are on the rise — 2019 is going to be the most profitable used-car year in history. In fact, the average used-car department is accounting for more profit than the rest of the dealership combined.
But it’s not just the initial profit that is scaring my contact away from new-car sales. It’s the quality.
“New cars are literally too good. They last too long. Not to mention the fact that the length of the average car loan is approaching six years now, so everybody’s underwater for years. If I sell you a new car today, I can’t sell you another new car for a long, long time. It’s going to be at least six years, and maybe closer to 10. Don’t get me started on leasing — that’s not the answer. I don’t make a dime on leasing. You’ll be back in 36 months? Great, I can lose money on you then, too — and your car is under warranty the whole time, so I can’t even service you. No, thank you.
“But if I sell you a five- to eight-year-old car today, you’ll probably be back in three years for another one, and I get to sell the note again, too. I can also sell you an warranty (which is about 100 percent profit), and if you don’t buy it, that’s okay — I’ll get your service business anyway.”
NADA backs up my pal on this, too. The average price of a used car has now crept up over $20K for the first time in history, thanks to a glut of lease returns and a shortage of older used cars, thanks to the industry’s sales downturn from 2009-2012. ( This is my “I told you so” moment.) Used transaction prices are higher in relation to new transaction prices than ever, too.
Long story short — used-car dealers can make more money, turn more inventory, make more on service, and not have to deal with regional reps knocking on their doors every two weeks.
What does it all mean for you? Well, it means that buying used is more expensive than it’s ever been — not just in raw dollars, which is to be expected thanks to QE X eleventy billion, but in comparison to new. Buying a new car is going to be a better deal throughout at least 2019, as the industry is predicting a slowing (which has already come to fruition in the first two periods of the year) and dealers are panicking. There will undoubtedly be more cash on the hood of slow-selling models, deeper dealer contributions, and aging inventory on lots across the country that will need to be discounted to sell.
In other words, in comparison to used, buying new is a better deal than ever, especially if your plan is to ride it out until the end of the car’s usable life. Buy new, negotiate hard, and you’ll likely come out ahead.
[Image: © 2017 Sajeev Mehta/The Truth About Cars]
HotPotato on Mar 02, 2019
The weirdness of the used car market seems driven partly by the business-model problems of new-car dealers, you're saying? While there will always be the jackass buyer that loves dealers because he fancies himself a great negotiator, for most buyers and sellers the collapse of the current dealer arrangement can't come fast enough. Tesla's factory store system is one alternative. Moving the when thing to the internet is another. You can automate everything from comparison shopping, to test drives (click for home delivery of a tester: free for 30 minutes or low-cost rental up to 3 days), to handling the trade (inspector comes to your house, completes a checklist, dealers bid on it), to getting the exact car you want (spec it online and get options for factory order, closest new inventory match, closest used inventory match), to getting the best financing deal (banks instantly make their best lease and finance offers). First company to roll all those services into one wins. I can also see a nationwide new/used online/megastore hybrid model: basically CarMax but with new cars too.
DenverMike on Mar 02, 2019
New cars are less and less a necessity, or gotta have, every year that passes. They're less wanted too, and suck in many ways. Lots of backlash against them also, with designed/built-in obsolescence, timebomb electronics, transmission rebuilds that come with a finance officer, to name a few. Meanwhile the parts aftermarket, remans, etc, are blowing up exponentially btw. "Trucks" paint a clearer picture. Even though the segment is hanging tough, the popularity of refurbished (cosmetic/mechanical) pickups has never been stronger, with companies specializing in the craft. Consumers have no problem dropping $30K or more on 15 or 20 year old pickups, easily paying 2X what the book for. You could say some are better than new, bulletproofed, tuned, pre emissions diesels, customized, built to order and whatnot, yet still half the cost of new, or less. Not just for play, but for serious work too. Car or truck, there's never been so many better choices than just plain old "new".
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