Latest OnLine Editon  Read Here

Uncertainty Drives Dealers in Different Directions

Uncertainty Drives Dealers in Different Directions Featured

The industry is in a state of transition and dealers are uncertain about the best way to move forward.

Take the issue of whether or not to finance their own sales.

Michael Darrow, owner, The Auto Traders in Durham, N.C., said about 40 percent of his sales are subprime deals.

Darrow also “dabbles” in buy-here, pay-here. Lately, he’s been increasing the amount of paper he keeps for himself, doing two or three buy-here, pay-here deals a month out of 38 sales.

“The lenders have tightened up a little bit, which is where we’ve seen more opportunity for buy-here, pay-here,” Darrow said. “Now a lender says, ‘That’s a $900 fee,’ that’s when we’ll keep it in-house.”

Rex Echer, owner, The Car Shoppe, Salina, Kan., is acting like one of those finance companies.

His store used to be evenly split between straight retail and buy-here, pay-here. Now retail sales make up 70 percent of the business.

“ It’s a little safer,” Echer said.

A major issue for Echer is a lack of quality inventory.

“It’s harder to find anything with good mileage,” he said. “For the buy-here, pay-here stuff, I don’t know what good mileage is anymore. Maybe 150,000 or less.”

This drives up the recon costs.

Last modified on Thursday, 13 July 2017 13:06
Rate this item
(0 votes)

Related items

  • Carvana Moves into Detroit

    Carvana Co. is opening a location in metropolitan Detroit.
    This increases Carvana’s reach to 32 markets.
    To celebrate its arrival in Detroit, Carvana is hosting an event at Hart Plaza on the Detroit Riverfront on July 22. Visitors can enjoy cool treats, music from Bluewater Kings Band and giveaways, all courtesy of Carvana.

  • Independent Dealers Advised to Explore Upstream Opportunities

    LAS VEGAS –Changes in the market – from vehicle supply to increased competition to credit availability – offer independent dealers both challenges and opportunities.

    Tom Kontos, chief economist for KAR Auction Services, partnered with Joe Keadle, CEO for Automotive Finance Corp., to present an analysis of the market at the recent National Independent Automobile dealers Association conference.

    “In the U.S., the retail market for used cars is about 30 million,” Kontos said. “It’s roughly split evenly between independent dealers and franchise dealers.

    Independent dealers sold 574,000 more used cars in 2016 than in 2015, a 4.3 percent increase.”

    Year-to-date, used-car sales still favor franchise dealers. New-car stores use more inventory management tools to seek out the higher grosses that come from the used-car side of the business, Kontos said.

    They benefit form the trades they take in new-car sales. About 50 percent of all new-car sales involve a trade-in.

    “They are increasingly trying to hold on to those trades,” Kontos said.

    Keadle said those are cars that independents used to buy at auction, presenting a challenge for independents to find alternate sources, like upstream wholesale channels.

    Independent dealers should explore upstream opportunities, Keadle said.

    “So much of the inventory liquidation from the manufacturers off-lease vehicles are in that upstream channel,” he said. “You do have access to upstream, but you have to make sure you can dig it out.”

    There are more off-lease vehicles coming back than franchise dealers can handle, Kontos said.

    “Prices are going to be softening,” he said.

    One threat independents face is that, despite so many cars coming into the wholesale stream, they may not be the ones in demand.

    Kontos said during the last cycle’s leasing boom, many of those vehicles were cars and smaller vehicles because of the concerns over gas prices.

    That trend will eventually reverse itself a few years from now as new-vehicles sales today are falling mainly within the truck classes.

    Repossessions are another big source of inventory for independents Kontos said.

    “Typically, the repos we get at the auctions are vehicles that were financed as used vehicles to begin with,” he said. “They were maybe sold as a three-year old vehicle, now they are four- or five-year old vehicle brought back as a repo.”

    Kontos is seeing more of those vehicles showing up in the Southeast.

    In terms of repos, he doesn’t see a steep rise in delinquency and default rates, but even that can be misleading if dealers look at supply.

    But there are over $1 trillion of outstanding auto loans and leases –the highest it’s ever been.

    “So a 1-percent default rate results in more repos (because of the larger number of outstanding loans),” Kontos said.

    Keadle said the used-car business is coming out of a period where inventory was scarce and independents had to fight for it. It caused some poor habits, he said. A dealer could keep that car for a longer time on the lot, knowing that he could always wholesale out of it and get a good price.

    “That’s about to change,” Keadle said. “That vehicle you have on the lot now? There’s about 500 more coming down the pipeline.”

    Dealers can afford to be more selective to find a car with leather, navigation and a sunroof, instead of buying one without those features.

    “We just encourage you to be dialed into the market,” Keadle said, “so that you know what you should be stocking and how long you should be keeping it.”

    The credit market also poses both threats and opportunities for independents.

    In the fourth quarter of 2016, the non-prime, subprime and deep subprime numbers dropped compared to the prior year, Kontos said.

    “That’s an indication that lenders are backing away from the subprime tiers,” Kontos said. “I think they identified that they were a little overexposed in those areas.”

    Of course, this creates an opportunity for buy-here, pay-here dealers to actually get a better buyer, Keadle said.

     

  • Auto Leasing Declines

    Auto leasing dropped for the first time in four years, according to new study by Edmunds.

    Leasing made up 31.1 percent of retail new-vehicle sales in the first half of 2017, down from a record high of 31.9 percent set in 2016.

    The number of vehicles that were leased in the first half the year fell 4.4 percent. That is twice the rate of decline for overall sales, which are down 2.2 percent year over year.

    Declining residual values are also forcing automakers to inflate incentives to keep lease deals attractive. Lease incentives averaged $4,445 for the first six months of the year, up from $3,722 for the same period in 2016.