There are numerous factors currently helping to sustain used vehicle prices at historically high levels: economic improvements, relatively tight supply, greater certified pre-owned awareness and an extremely favorable credit environment. But an often overlooked factor is the increased focus that dealers have on improving used vehicle operations.
Sonic Automotive’s announcement this week that they will be opening numerous stand-alone pre-owned stores exemplifies this trend. Once considered something of a nettlesome by-product of new vehicles sales, used vehicle operations have assumed a more prominent role over the past few years for dealers both large and small.
The steep decline in new vehicle sales at the end of the last decade forced franchised dealers to depend more on used vehicle operations to make ends meet. In addition, the evolution of data collection and inventory management solutions have granted dealers better insight into the best-selling types or brands of vehicles at their dealership. This has helped to increase the already favorable profit margins on used vehicle sales.
The more dedicated approach to growing pre-owned sales has played a critical role in helping the largest publically-traded dealer groups consistently set profit records over the past couple of years. But while the rewards are greater, so too are the risks. Unlike new vehicles where condition is normalized and pricing is essentially based off of manufacturer guidelines, unique vehicle characteristics (e.g., wear, mileage, service history) and market conditions determine used vehicle prices.
Estimating value incorrectly – which is easy to do – can quickly eat into a used car’s profit advantage (or kill profit entirely). Understanding this, dealers and groups like Sonic have invested heavily in resources and processes to maximize the potential of every used vehicle transaction. The scale of these investments is evident in this excerpt from the press release Sonic issued describing their new program:
“Sonic's development of its proprietary Sonic Inventory Management System ("SIMS") is an example of only one of the technologies created over the last several years. This technology, and the processes surrounding it, allow for the procurement, appraisal, placement and pricing of inventory units that will be the foundation of these pre-owned sales operations.
"Sonic’s plans will have them competing in an area long-dominated by CarMax, the Nation’s top stand-alone pre-owned dealer group. In 2012, CarMax sold over 400,000 used vehicles that generated $7.8 billion in revenue, nearly four times greater than Sonic’s sales and revenue of 105,000 and $2 billion, respectively. In fact, CarMax outsold its next closest competitor, AutoNation, by some 228,000 used units.
But considering that there are approximately 40 million used vehicle sales each year in the United States, these figures are but a mere drop in the bucket and help to give an idea of Sonic’s plans. And while they are just the second big player to jump into the stand-alone pre-owned pool, it’s likely that they won’t be the last. Even if other big name retailers don’t follow suit right away, they’ll still work to grow used operations at their franchise locations.
Summing it all up, we can add growing dealer demand for used vehicles to the growing list of positive drivers that will help keep prices at a comparatively high level going forward.