Resetting Management's Future Resale Expectations
July 13, 2012
Today’s used-vehicle resale values are extremely strong, as dealer demand continues to exceed wholesale supply. It’s not that demand is substantially greater for used vehicles; rather, demand is strong because the inventory of used vehicles in the wholesale market is very low. Nowadays, every fleet manager is a hero in the eyes of management by getting top dollar for out-of-service fleet vehicles. However, this may be a dangerous perception, especially when resale values begin to soften in the not-too-distant future.
As the saying goes, all good things will eventually come to an end. So, too, will be the case with today’s abnormally high used-vehicle resale prices. The high resale values we are experiencing today are an anomaly caused by a decrease in used-vehicle inventory in the wholesale market, resulting from the extremely low sales of new vehicles during the 2009-2011 time frame. For instance, in 2009, annual new-vehicle sales fell to 10.3 million units from 16.9 million the preceding year. As a rule of thumb, 60 percent of new-vehicle sales result in a trade-in. The sizeable contraction in new-vehicle sales also resulted in a significant drop in used-vehicle trade-ins. This was compounded by fewer off-lease units entering the used-vehicle market and a substantially lower volume of rental cars being remarketed at wholesale auctions.
Similarly, the decreased volume of new medium-duty trucks sold from 2009-2011 created a constricted inventory of used trucks in the wholesale market. Although business activity may be improving, it remains sluggish in certain industry segments, prompting fleets to extend the service lives of units currently in operation, keeping these trucks out of the used market. The key business segments that drive medium-duty purchases are vocational applications, construction, and government. All three of these segments continue to struggle in today’s lackluster economy and, when units need to be replaced, many view the prudent approach is to buy used, especially for vocational and construction applications.
Over-Inflated Resale Prices
In the final analysis, it is the shortage of used vehicles that is the primary factor fueling today’s strong resale values. The strong used-vehicle market will continue beyond calendar-year 2012, but many remarketers believe resale prices have peaked and there will be a gradual softening of prices as wholesale inventory increases.
“Our longstanding view is that used-vehicle prices have prob-ably seen their cyclical peaks,” said Tom Kontos, executive VP for ADESA Analytical Services. “Tight supplies may be easing, as dealers take more trades on rising new-vehicle sales, and used-vehicle prices may be approaching a ceiling relative to new-vehicle prices. Thus, there currently appears to be more downward than upward pressure on used-vehicle prices. Still, used-vehicle supply remains relatively tight and retail used-vehicle demand remains strong, so prices are not likely to fall precipitously.”
Within this context, are you educating your management that today’s high resale values will ultimately decline? The last thing you want is to be management’s future scapegoat for declining resale values. When resale values decline, as they eventually will, management must understand that it is as a result of market forces – not a result of your inactions. Now is the time to let management know, if you haven’t already done so, that these artificially high resale prices will ultimately decline as used-vehicle supply increases and reaches equilibrium with buyer demand.
The rule-of-thumb estimation is that today’s resale values are approximately 10- to 15-percent inflated. Over time, there will be a gradual softening of used-vehicle prices as the inventory of supply increases. This will be driven by improved new-vehicle sales and a corresponding increase in trade-ins. Most remarketing analysts predict used-vehicle supply will begin to gradually increase starting in CY-2013. For instance, the RVI Group, a residual value insurance company, also believes that in the near future we are likely to see an extended decline in wholesale resale values. The RVI Group projects a 0.3-percent year-over-year drop-off during 2013, followed by a 1.2-percent dip in 2014. A 1-percent softening in used prices is expected for 2015 and a 0.3-percent downturn is projected for 2016.
However, the used-vehicle market is susceptible to many un-controllable variables, such as consumer credit availability, fuel prices, employment rates, etc. The question is will the decline in resale values have a “hard landing” that results in a sharp decline in prices, or a “soft landing”? The greatest probability for a hard landing is if there is a dramatic improvement in the national economy, further stimulating new-vehicle sales. A soft landing would be a gradual downward trending to a lower used-vehicle value-retention, coinciding with a more gradual increase in new-vehicle sales. Fleets need to take this into account when planning their 2013 fleet buy. “With these softening used values, future project-ed residual values of the units going into fleet service this fall will not be as strong as the projections of the past three years, thus, placing another challenge to the fleet budgets, an increased monthly lease expense,” said Ricky Beggs, VP, managing editor for Black Book.
A Win-Win Situation
Although opinions vary as to when the equilibrium between supply and demand will occur, everyone agrees residuals will soften. You need to prepare management for this impending adjustment in resale values. It is dangerous for management to be-lieve future resale values will continue to match those of today. Fleet managers need to “reset” management expectations. Even if resale values do not decline appreciably, management will contin-ue to view you as a remarketing hero. It is a win-win situation.
Let me know what you think.
Author: Mike Antich | Posted @ Friday, July 13, 2012 12:00 AM