4 Factors to Consider as Opportunity Rises (Again) in Used Vehicles

It’s a tempting moment in the used vehicle market for dealers to stock up on vehicles, knowing that both wholesale and retail prices are currently on the rise, and there will be money making opportunities in the weeks ahead with the cars you acquire and stock today.

In fact, the current dealer-favorable moment in used vehicles looks very similar to what we experienced this past spring, when wholesale values took off and retail prices soon followed. Today, some dealers may be thinking that now’s the time to make up for the opportunity they missed, or didn’t fully exploit, earlier this year.

But I would caution every dealer that while the current rise in wholesale and retail prices will most definitely bring opportunity, this opportunity won’t be as rich or widespread as we experienced in the spring and summer months. Consider the following:

1. The current rise in wholesale and retail prices isn’t as rapid and steep compared to last spring. Back then, it was like wholesale and retail prices took off like a rocket. Today, it’s more like the steady climb of an airplane leaving the runway.
2. The current rise in wholesale and retail prices isn’t occurring across every vehicle segment at the same rate. Last spring, it was uncanny how the rising tide value appreciation effectively lifted all vehicles across all segments. Dealers could pretty much stock anything, and as much of anything, as they wanted. Vehicles would sell quickly and produce gross profits we haven’t seen in a decade or more. Today, things are different. This past summer, we saw wholesale and retail prices cool off at different rates across different vehicle segments. For example, SUVS and trucks, which were red hot in the spring and early summer, saw larger drops in wholesale and retail values as the market cooled compared to compact vehicles, where wholesale and retail prices went the other direction. The upshot: While wholesale and retail prices are currently rising in total, we are also seeing more nuanced and varied dynamics within specific vehicle segments. This reality means the opportunity and risk for vehicles you acquire and own depends on the vehicle segment more than it might have earlier in the year.
3. Late-model used vehicles face greater risk from new vehicles today than they did earlier this spring. Back then, everyone knew new vehicles weren’t coming. New vehicle buyers flipped to late model used vehicles, and every dealer scrambled to find cars to satisfy and sell these buyers. The story’s a bit different today, depending on a dealer’s franchise partner. Generally speaking, factories have been allocating their still-scarce supplies of microchips to the SUV and truck models they know are in highest demand and will produce the highest profits. Some of these vehicles are now coming back to the market. They’re not arriving in droves. Still, these new vehicles could temper demand for the same/similar late model used vehicles in the same segments.
4. Retail demand isn’t as robust today compared to last spring. This reality shouldn’t come as a surprise to anyone in the car business. Retail demand typically rises in the spring and subsides in the final months of every year. While retail demand remains good, it’s not as universally strong across all vehicle segments like we experienced earlier this year. Add in the pull-away effects fresh new vehicle inventory may create for used vehicle-minded customers and you’ve got a retail demand forecast that’s less bright and more segment-specific than it has been in recent months.

I share these current used vehicle market conditions to serve as check valve on the desires of dealers and used vehicle managers to take advantage of what appears to be a repeat of last spring’s selling frenzy. Current conditions do, in fact, represent an opportunity for dealers to relax their age policies, reduce the degree of price reductions they might otherwise make for vehicles that haven’t sold and, in some cases, ease the discipline they’ve exercised to balance their current inventories to their rolling 30-day total of retail sales.

But I would caution that such opportunistic moves should be guided by a deeper understanding of what’s happening in the vehicle segment the vehicle in front of you represents. I would ask several questions—Are wholesale and retail prices on the rise or decline in the segment and, if so, by how much and for how long? Is the Market Days Supply for the segment, and the vehicle in question, going up, staying the same or going down? Is the number of retail shoppers in the market for your car, and its segment, on the rise, staying the same, or declining in your market?

Once you’ve found satisfactory answers to these questions for each vehicle and its segment, you’ll be better positioned to know whether it makes sense to give specific vehicles in each segment more time as retail units, to raise or cut prices on select vehicles in the segment that you already own and/or to acquire more vehicles in a segment because you believe there’s an opportunity.

You can bet that the richest spoils of the current market opportunity will go to dealers who have the discipline to ask the questions, the right technology and tools to provide the answers they need and the will to use the insights to guide their decision-making.  It’s also true that such success will come at the expense of other dealers who chase the opportunity without regard for the more nuanced, segment-specific nature of the current market.