Why the smart money’s in older vehicles
Every year at the Canadian International AutoShow in Toronto, I give a presentation to the CADA Industrial Relations Committee during which I provide an update of the main indicators in the retail automotive economy in Canada for representatives of every brand in the land. Every year, without fail, a single aspect of that presentation inspires more conversation around the table than any other: the state of the used market and new car dealers’ share of it. You may think it strange that new car dealers would be so enthralled by what’s going on in the not-so-new market. Then again if you’re reading this magazine you are likely to be fully aware of the importance of this market to franchised dealers’ business everywhere in Canada.
SOLID MARKET
Broadly speaking, if you want exposure to a business that never stops growing, focus more attention on your used vehicle operations. Compared to the steadily and constantly growing used market in Canada, new car sales are a roller coaster of volatility. Certainly new car sales are the single most important indicator we have as a network, but the rock- solid used market is a very effective hedge against what’s been — in recent years — a very up-and-down ride for new sales. The used market always grows. In the context of a national fleet that grows every year, population growth, and the increasing longevity of new cars, it is hard to imagine anything preventing used sales growing year after year.
However, and to put it plainly, new car dealers have struggled in recent years to capitalize on the strength and reliable growth of the used vehicle market. There are a couple of major reasons for this. One of these reasons is related to a long-term shift in the market for used vehicles and will be very difficult to counteract. This is simply the fact that cars are lasting longer and therefore are being traded more often in their lifetimes than ever before. By definition, this means that more transactions are taking place for much older vehicles. New car dealers, specializing as they do in the under-five-year bracket for used vehicles, will naturally lose share, or relative used sales over time, as this evolution takes place and more and more vehicles reach ages that typically see them traded at independent shops or through private sales.
NEW REALITY
The other fundamental cause of new car dealers’ struggles in the used arena, however, was a manifestation of the credit crunch: the collapse of leasing and the contraction in the supply of younger used vehicles it has cause since 2010. This is already starting to heal itself with the return of leasing in the past three years, though nowhere near the levels the market reached in 2006 and 2007. As it stands today the market is still dealing with tight supplies in the nearly-new category, where dealers usually do well. Though used sales at dealerships have come up in the past couple of years, they’re still trending perhaps 50,000 to 80,000 below where they would have been by now had the collapse in leasing and subsequent impact on used supplies not taken place. That’s close to 30 sales for every dealer in Canada.
So, what’s to be done? It’s too much to ask that we reverse the decades-long reality that once a vehicle hits its fifth birthday, it’s decreasingly likely to be traded at a franchised new car dealer. The new and used businesses are very different ones. The business of selling vehicles that are approaching and surpassing middle age is a different beast again.
This leaves new car dealers in a tough spot: we’re not likely ever to return to 600,000 leases in Canada like we had as recently as 2007. Since the low point of less than 100,000 lease contracts in 2009 we’ve grown to a little more than twice that level, and it’s around this spot — at a fifth of the market for new cars — that we’re likely to stabilize in terms of the lease market for the foreseeable future. So nearly-new supplies will increase over the next few years, but will not hit recent levels for a very long time, if ever.
Dealers, therefore, will have to rely on other methods of supplying their used vehicle operations than just the near-automatic lot filler of off-lease cars. More attention will have to be put on auctions, trade-ins, and other ways to fill dealers’ lots with the used cars we know will be in demand every year. When new sales fell off a cliff and the economy tumbled into recession in 2009, used sales kept on growing. Those that invest in and capitalize on greater exposure to a market that is all but impervious to economic shocks will prosper, no matter what happens on the new car sales roller coaster.
