With the new vehicle market expected to dip slightly this year and used vehicles set to increase, dealers will need to capitalize on their businesses and develop their used program to weather the storm.
The Canadian economy is recovering from a short period of downturn in the late stage of 2018 and early 2019. Buying conditions in the economy remain robust and strong labour markets, coupled with the halt on interest rate hikes by the Feds, are providing a solid foundation for vehicle demand. However, headwinds are strengthening within the market for new vehicles, slowing the pace of sales this year.
We expect 2019 to be another strong year of sales, although with a modest weakening in the demand for new vehicles. The new vehicle market will experience a minor dip from its soaring heights of 2018 and 2017. In this period of downturn in the new vehicle market, dealers should capitalize on all business units including finance and insurance (F&I), fixed operations and used vehicle sales. Dealers will need to ensure that all departments are generating enough revenue and costs are kept in line to offset the losses from the new vehicles revenue stream.
The new vehicle market generates the most attention and headlines, and rightly so, as new car sales are the most important indicators of the health of the automobile industry. However, the used market has been steadily growing over the past few years and has remained unshakeable even during the Great Recession when new car sales hit rock bottom. The used market has increased its share of the overall vehicle market, growing to close to 3 million units sold in 2017. This upward trend is expected to continue over the next few years.
The rise in this market comes as no surprise; quality improvements, information and online offerings over the Internet have significantly changed the structure of the retail used market. Vehicles last much longer than a few decades ago, allowing for a potential lifespan of four to six owners and consumers have access, at the tip of their fingers to a wealth of data on inventory, quality and price information, facilitating their purchase decisions.
In the context of quality and information improvements, coupled with population growth and new content driving the price growth on new vehicles, the used market is set to continue growing year after year.
The good news for franchised dealers is the supply of used vehicles is set to rapidly increase from the recent years of record sales and off-lease inflow. Dealers dominate this age group (0-5 years) and have traditionally relied on cars coming off lease to supply their used operations.
Dealers can fully capitalize on this opportunity by developing a stronger used vehicle program at their dealerships, including a certified pre-owned program, extended warranty availability and increased online presence.
Leasing has drastically declined between 2007 and 2009. The lack of liquidity during the Great Recession stifled the new vehicle leasing activity. Leasing has since recovered and the leasing’s share of vehicle finance market has grown rapidly, rising from less than 15 per cent of the total market in 2010 to 40 per cent in 2017.
As a result, a large number of off-lease vehicles are coming back to dealers in recent years and providing a steady supply of high-quality, high-content products. More trucks will also enter the used market, in line with the increased consumer preference for this segment.
Over this decade, new car dealers held around 30 per cent of the total used market. There is an opportunity for new car dealers to exploit the off-lease inflow to increase their market share in the used market. New vehicle sales fell well below trend during the recession, creating a supply constraint on older used vehicles, which are mainly sold via private sales or at independent used dealers.
Consumers who would typically purchase older used vehicles will turn to off-lease used due to this supply limitation, which could drive used sales at new dealerships.
Dealers can fully capitalize on this opportunity by developing a stronger used vehicle program at their dealerships, including a certified pre-owned program, extended warranty availability and increased online presence.
Gross profit on a good high-quality used vehicle and a new vehicle is not that different. Dealers can generate a large stream of revenue from a well-developed used program. The rock-solid used market can provide dealers with the extra support needed to weather the storm in the new vehicle market.
