The New Normal: What About Used?

Good Day LinkedIn connections - it's been a while! First and foremost, I hope all of you are safe and healthy - it is incredibly important to stay focused, distanced, and creative.

We are all aware of what has happened to our beloved industry over the course of just the past few weeks and how everything has changed! I remember my last dealer contact vividly (while still working for FCA) - February 27th at an Alfa Romeo store in Raleigh, NC - and our agenda was based on Service Contract offerings for the Alfa brand. Despite FCA CEO Mike Manley having restricted all employee travel due to COVID-19 the day prior, the virus and its impact had not been a thought during the meeting. February would see over 1.4 million new cars sold in the US - a decent month and up on a year over year basis. North Carolina would declare a state of emergency less than two weeks later (March 10th).

Since then, I don't have to say where the markets and industry have gone. Dealers are now embracing the change faster than they ever have in history - moving towards "contactless" test drives and sales and moving towards various digital retail and omni-channel marketing platforms to foster enough sales to keep the lights on (JD Power estimates a sales pace of around 1 car per day per dealer, nationwide). With the latest issue of Automotive news mentioning that the worst of the new car decline might be over (based on the findings of the same JD Power analysts), I challenge dealers to keep adapting and keep your minds open for the next looming automotive problem: What do we do with the used cars?!?

For some reason, vehicle remarketing and used vehicles are always an afterthought, but they are about to affect our business in a very real way. Since Manheim physical auctions closed on March 20th, the volume of vehicles transacting has plunged by more than 75%. For those who don't know, used vehicle values are based off of these auction sales (ALG, Blue Book, Etc). The combination of a near complete lack of auction volume, historically unprecedented new car incentive spend, rock bottom interest rates, and deferment of lease maturities by banks are brewing into a perfect storm for the industry. How are you even able to value a trade or purchase a used vehicle for stock without having a benchmark of value?? While retail prices have only declined 1% on average so far, wholesale prices are down 10-12% in the past month. Likewise, with banks deferring lease maturities 90+ days to July and large fleet administrators like Hertz facing imminent collapse and restructure, the pent up supply of 1-3 year old vehicles (the most "sellable" segment of used cars before the crisis) are at the biggest risk for residual collapse. With banks setting leasing residuals and granting loans based on the residuals of this segment as well, it could ripple and severely hurt the used car market.

Are you hearing about this for the first time? I'm not surprised - Automotive News publishes countless COVID-related articles per day, but has only published 13 articles covering used vehicles since this began - most covering ADESA and Manheim closures. The need to innovate and adapt all dealership departments is real and immediate. How are you sheltering your store not only from the COVID-19 and New Car risks, but also the used? What is your ownership cost on your (now aged) used vehicles? How does this benchmark against the industry fluctuations? Are you utilizing the programs available to move this inventory?

Tips:

• If you haven't already, consider implementing your Manufacturer CPO programs on your late model used vehicles. No, your store "John Smith Certified" program doesn't count. The Manufacturer programs drive much better value, price, customer retention, and financing options. Help mitigate the gap as much as possible!
• Have an exit strategy for your Loaner vehicles. These late-model used cars are right in the worst-hitting residual zone... I'd be floored if dealers made any money on these in the best of times! Consider the gradual purge of these cars to replace your used vehicles that sell instead of immediately going to the inconsistent auction. You know what you own these for, minus internal depreciation and manufacturer incentive. On that note...
• Consider using an alternate transportation source instead of reporting new loaner vehicles. Dealer inventories of loaner cars are at all time highs and with new car sales and factories closed, new vehicles will become sparse. Loaners represent not only frozen capital for your store and lock you out of actually retailing the unit, but they are also assets in their highest curve of depreciation. Consider gradually transitioning 10-50% of your loaner fleet to a "true" alternate transportation program by using solutions like Uber Central or Uber Vouchers. As you shift these cars out of service and on to the CPO lot, utilize new technologies to move your customers around at your leisure (Uber Central - you book rides for customers), or by way of Uber Vouchers (issuing a voucher to have the customer book their transport to/from your store at their leisure). Cut that depreciation off of your balance sheet and keep your CSI levels intact!
• Cut down recon time on your used cars! When I managed CPO for the 300 FCA Group dealers in the Northeast, the most common concern shared by stores was a 2-3 week turn around for recon. This was unacceptable in 2016 and is absolutely impossible now. Get these cars through the shop and on your digital spaces. Need parts? Order them in bulk from your Aftersales Manager or source them from other stores in a matter of minutes using UberDirect.

Feel free to contact me or comment below to continue the used vehicle and alternate transportation chat - the best way to formulate new ideas and processes is to talk together in an open forum!

As always, good luck and great selling!

John D. Possumato (emphasis on the "D") is a fourth-generation automotive professional and Senior Business Development Manager for Uber Technologies Inc and formerly of Fiat Chrysler Automobiles and Hyundai Motor America.

All opinions and analysis are my own unless cited.