An End of the Month Gross Profit Reckoning in Used Vehicles?

I have a suspicion that the month of August will look pretty good for dealers as far as used vehicle sales volume, but their month-end gross profit tally will likely be less-than-satisfying if not distressing.

My suspicion flows from dealer conversations in the past two weeks where the No. 1 topic of conversation was concern over declining front-end grosses. The concern struck me as similar to the moment when you’re not feeling quite right and you think a cold, or something worse, might be coming on.

This view squares with fresh Cox Automotive data on the current market:

Retail used vehicle sales have been strong over the past week or so. In fact, the weekly pace is the strongest it’s been since 2021, when everything was off the charts for dealers.

Wholesale values have appreciated over the course of the past eight weeks. The overall rise appears to owe to supply/demand dynamics in near-new vehicles. Cox Automotive data shows three-year-old vehicles have appreciated 2.4 percent; two- and four-year-old vehicles are up 1.6 percent. The explanation here is that buyers are likely looking to replace older-age vehicles with near-new used vehicles that are in short supply.

Wholesale conversion rates are running near 60 percent—about 10 percent higher than we historically see this time of year. The upshot: Dealers are buying auction vehicles to meet the brisk retail demand they’ve been seeing lately in their showrooms.

But here’s the part of the picture that doesn’t quite add up, and may well lead to a gross profit reckoning as dealers view their financial statements for August: Retail prices have been on the decline in recent months. With wholesale values on a sustained, two-month rise, we’d normally expect to see retail prices follow suit. Why? Well, as dealers pay more for vehicles, they tend to ask more.  Right now, though, we haven’t seen retail price appreciation, which is a bit of a mystery.

The combination of all these factors suggests to me that August will look OK in terms of retail volume but not so good in terms of gross profit. In response, I suspect some dealers will likely take steps to offset the $500 and $600 declines in front-end gross averages they’ve been experiencing. In turn, we may well see a subsequent rise in retail pricing, or at least a plateau in the pace of retail price declines.

As I’ve shared this view of the current market with dealers, I’ve outlined two cautionary points that seem relevant to share here:

First, it’ll be incumbent on dealers and managers to closely track where the market’s moving. The current moment suggests a potential near-term opportunity to raise retail prices, especially on your best vehicles, which would be Platinum and Gold vehicles for ProfitTime GPS dealers.

Second, it’ll be critically important to lean on live market data to make pricing decisions. While the current market dynamics aren’t as dramatic as the sustained periods of wholesale value appreciation we saw in 2021 and 2022, they are similar. Back then, dealers who relied on and trusted the data science-driven pricing recommendations in ProfitTime GPS had a distinct advantage—the system automatically guided them to the proper pricing decisions for individual vehicles. Meanwhile, other dealers were still trying to figure out what to do.