The past several years have been kind to the automotive industry. However, most economists agree the rate of growth is slowing, with year-over-year sales increasing by just 400,000 units in 2015, compared to 700,000 units in 2014, according to JD Power. As of this writing, the average nonprime loan term was 72 months for new cars and 64 months for used cars, the longest average terms on record.
What does all of this mean? In response to that, we have two words for you: older cars.
Transition to Older Cars
Change is coming, no doubt, and some data suggests it’s already here. According to the National Independent Automobile Dealers Association (NIADA), 68 percent of used vehicles sold in 2014 were six-plus years old. That’s a 12 percent increase over the previous year, and we saw a corresponding decrease in vehicles aged five years or less.
Not surprisingly, in a recent survey of DealerSocket’s 2,150 independent dealers, inventory acquisition was cited as the most important problem facing dealerships today. Increasing competition from franchise dealers is clearly eating away at independent dealers’ ability to stock newer used cars.
Increased Dealer Competition for Used Cars
Used cars, especially certified pre-owned, are growing in popularity among the younger generations. This consumer trend has not gone unnoticed by franchise dealers. With competition heating up, used vehicles are proving quite fruitful for franchise dealers. Consider these metrics from JD Power:
- $426 additional per-unit profit on used cars versus new cars
- 17 fewer days to turn used cars versus new cars
- 617 percent ROI on used cars, compared to 121 percent ROI on new cars
- $1,407 front-end gross profit on used cars, compared to $555 on new cars
It’s also interesting to note that 2015 welcomed a record-breaking 103 new or redesigned products to market. That flurry of activity diminished product anticipation in 2016. Why does that matter? You guessed it: used car inventory is quickly becoming the go-to resource for faster selling cycles and larger profits.
The Franchise Advantage
With more money chasing after older vehicles, smaller players are in a tremendous struggle with the franchise big boys for attractive used inventory.
The truth is franchise dealers simply have more resources to acquire inventory, with off-lease vehicles being one of their chief channels. JD Power estimates an extra 800,000 lease maturities will come back to market by the end of 2016. Instead of selling those vehicles to their independent counterparts, franchise dealers will likely keep the cars for their own inventory. The result? Independent dealers will rely on older and older inventory.
Greater Competition Among Subprime Lenders
When you combine plateauing sales with longer loan terms, auto lenders will likely see greater competition for fewer contracts. Additionally, lenders’ risk exposure may be increasing in lockstep with the upward climb of average vehicle age. According to Experian, the average amount financed for used cars was $18,411 in 2014, a $437 increase from the $17,974 figure in 2013. In response, finance companies will likely take measures to tighten their pricing and underwriting criteria.
What Can Independent Dealers Do?
Finance companies that do business with independent dealerships are already preparing for an increase in average vehicle age. In the meantime, independent dealers can proactively respond by considering the following questions:
- What is your preferred vehicle age range and is your pricing flexible enough to adjust for older vehicles?
- How will you balance growth with the need to maintain a specific average vehicle age?
- How can you improve your prediction of a borrower’s ability to repay you or a third-party lender?
- What can you do to improve the repair and/or reconditioning process of older cars acquired at auction?
- How can you enhance your loan servicing and collections processes to prevent repossessions of older vehicles?
The good news is that even though many of these trends are already taking shape, independent dealers still have time to respond before sales begin to contract. Taking proactive measures to acquire and merchandise the right inventory is what will differentiate successful independent dealers from the rest.
What’s your inventory strategy? Schedule a demo to learn how to compete for better inventory.