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2 factors may be behind rise in used-vehicle sales

August 10, 2018
The retail used-vehicle market likely is benefitting — at the moment, at least — from pulling over and pulling ahead.
That is to say, a value proposition that is pulling would-be buyers of traditional cars in the new market over to the used market; and the specter of proposed automotive tariffs that may be leading dealers to buy used inventory ahead of such measures going into effect.
Analysts with Cox Automotive posited those theories during an Aug. 1 conference call with reporters.
Used a better buy than new, for some
The conference call came right after a month in which used-car sales were expected to reach 3.4 million, according to a late July forecast from Edmunds, a sum that would beat June used-car sales of 3.2 million units. That also would translate to a used-car seasonally adjusted annualized rate of 39.5 million units, compared to the used-car SAAR of 39.2 million a month before.
The used-vehicle sales growth is amid what Cox Automotive senior economist Charlie Chesbrough described as a "huge reduction in the car segment" in the new-vehicle sales market during July.
"[Sales for traditional cars were] down quite a bit on a year-over-year basis, and certainly more than what we were initially expecting. And we think one of the things that might be going on is that car buyers are moving into the used-vehicle market," Chesbrough said.
"One of the things that we saw in our recent data from our auction activity is that used-car prices are above their normal July levels. And so, we think that there’s probably a number of folks that are looking for buying opportunities in the used-car market," he said.
"Buying that same 3-year-old version of that new car in the used market at a 30-,40-, 50-percent discount or getting that crossover vehicle — 3-year-old crossover vehicle — for essentially the same price they would pay for a new small car in the new market."
In a news release issued ahead of the conference call, Kelley Blue Book analyst Tim Fleming said the monthly new-vehicle market share for car segments was likely to be 31 percent, compared to 36 percent in July 2017.
"Consumers clearly are favoring utility vehicles over cars," Autotrader executive analyst Michelle Krebs said during the call.
"What we think is exacerbating the decline in [sales of traditional new cars] is the fact that there’s this plethora of used cars, and more importantly, a richer mix of utility vehicles coming off lease and back on the market," she said. "And we do know that affordability is becoming more of an issue, so the used vehicles provide a value alternative to new vehicles. And there’s the richer mix in terms of utility."
To that end, Krebs said that affordability is starting to be concerning even to luxury vehicle shoppers, according to recent survey data from the company. And if value in general is that important, it raises an interesting choice.
"To Charlie’s point, if you’ve got $20,000 to spend and you can buy a new compact car or you can buy a 3-year-old compact sport utility, hmm, what are you going to choose?" Krebs said.
The recent quarterly results from public dealership groups "reinforces that notion," Krebs said, as they have shown "very heavy reliance on the used-car market for a lot of their growth."
String of used-car gains continues for publics
At Sonic Automotive, for instance, its EchoPark standalone used-car stores were a bright spot in the second quarter amid disappointing new-vehicle margin erosion at the dealership group’s BMW and Honda dealerships.
Its same store, new-vehicle revenue in the quarter grew 1.6 percent, driven by higher average selling prices, but gross profits dropped 6.3 percent because of lower margins.
The EchoPark stores were "profitable as a group" in June, Sonic executive vice president of operations, Jeff Dyke, said during the company’s second quarter earnings call on July 27. EchoPark’s seven stores made more than $1 million in June, and were tracking to exceed that amount in July. The company expects its EchoPark operations to generate about $15 million in profits next year.
EchoPark’s retail sales of 7,459 units in the quarter were more than triple its unit sales in the second quarter of 2017, the company said. EchoPark stores generated $180.2 million in revenue, which was also more than triple its revenue in the year-ago quarter.
"I’m most proud of the topline revenue growth experienced in our EchoPark stores as we continue to open new stores, and our ramp up period is shortening and volumes are building at a more rapid rate," Sonic president Scott Smith said during the call.
Sonic isn’t the only public dealer group with some used-car momentum.
In 34 of the past 36 quarters, same-store used-car unit sales for the seven public dealership groups (which includes Carfax) have climbed, former Cox Automotive chief economist and current Auto Remarketing contributor Tom Webb said via Twitter [4] on Wednesday, citing company earnings. (That said, used-vehicle retail gross margins for those groups were down again, Webb wrote).
Tariff impacts 
Another factor perhaps driving the strength in the used-vehicle market is dealer reaction in anticipation of the impact from the proposed auto tariffs.
"On the used market, we might be seeing some early pull-ahead activity, where … many dealers are buying inventory to try and get ready for [the proposed auto tariffs] if and when they go into effect, which probably wouldn’t be until later this fall," Chesbrough said.
Dealers perhaps are aiming to acquire used-car inventory before these proposed auto tariffs are effective, as they’re apt to increase used-car prices, Chesbrough explained.
In comments provided by email in early July, PureCars chief executive Sam Mylrea echoed much of the same sentiment about used cars being a more cost-effective alternative, while also touching on the potential price impact of proposed auto tariffs.
"There is still a high demand for used cars because when high-quality, off-lease cars are returned to dealerships, consumers are presented with a cheaper alternative to purchasing a costly new vehicle," Mylrea said. "Prices for new cars are on the rise, and as leasing continues to grow in popularity, prices continue to go down in the used car market. Put simply, used cars are often the most realistic purchase for car shoppers.
"Given the pending automotive tariff, however, there’s a chance that used-car prices could skyrocket alongside that of new cars," he said. "This will make it even more important for used-car dealerships to monitor inventory and implement the most efficient marketing strategies possible to move cars off the lot."