3 Reasons Dealers Are Feeling Blue About Used Vehicles

I appreciated the Automotive News headline for a story about Cox Automotive’s latest Dealer Sentiment Index: “Comedown from favorable market making dealers pessimistic.”

The story highlights Index findings that suggest dealers are feeling pretty blue about their new/used vehicle businesses—and, in some cases, bluer than they’ve ever been.

In used vehicles, for example, Cox Automotive reported that dealers’ regard for the sales environment reached an all-time low. Here’s an excerpt from the report:

“The used-vehicle sales environment worsened in Q4 and continues to be viewed as poor by most automobile dealers in the U.S. In Q4, the overall used-vehicle sales environment index score dropped to 39, down from 44 in Q3 and below the 42 recorded a year ago. Excluding the Q2 2020 trough, the Q4 used-vehicle sales environment score hit an all-time low.”

Yikes. That all seems pretty grim unless you consider the following three factors that shape dealers’ current outlook:

1. Dealers track the health of their businesses on a month-to-month basis. In used vehicles, recent month-to-month comparisons haven’t been great. Used vehicle sales last month were off 7 percent compared to October, and down an overall 2 percent year-over-year. Things might seem bleak, but let’s remember: Dealers are still achieving solid used vehicle sales volumes overall, and used vehicle profitability remains far above pre-pandemic levels. The problem is that dealers enjoyed a pretty good party in used vehicles in 2021 and 2022, and now we’re feeling the downside, or the “comedown” as the headline put it.
2. There are a multitude of external conditions that contribute to a dimmer outlook right now for all of us. Vehicle affordability. Interest rates. Economic uncertainty. Political uncertainty. Violence across the globe and in our communities. The high cost of everything. The reasons one might feel glum are all around, and they seem to arrive with greater frequency.
3. Dealers haven’t had to contend with the more margin-competitive environment that’s emerged in recent months. This week, my conversations with dealers have focused on right-sizing inventory levels and retail pricing. Broadly speaking, there’s a reluctance among dealers and managers to face the music on their most-troubled vehicles, and a willingness to cheap-sell their best inventory to meet their volume targets. It’s all completely understandable. But, over time, it’ll become increasingly unacceptable. Let’s remember, it doesn’t take much for a margin-competitive environment to become margin-compressed.

I would also note that the current gloom doesn’t extend to every dealer. Some are very optimistic about where their used vehicle business is headed. Such optimism tends to come from the same place. It’s the confidence the dealers hold for the teams, technologies, tools and processes they’ve assembled to achieve the most investment-optimal outcome for every used vehicle they acquire and sell.