Auto sales continue to defy the pandemic forecasts, improving with each passing week. Rather than the predicted 70 to 80 percent decrease in new vehicle sales, most areas are roughly 50 percent lower sales volume compared with the same time frame in 2019.
That’s positive news, to be sure. Related industries, however, haven’t weathered the storm quite as well. The used car industry, particularly the wholesale segment, experienced a drastic reduction in volume. Between COVID-19 safety measures, closures, and demand, there’s a backlog in wholesale units.
Auctions Hit Hard at Busy Time
When coronavirus arrived in full force in the United States, the busy spring auction bubble should have been inflating. Prices go up and sales volume increases, all based on consumer demand. The Manheim Market Report shows that it did no go as planned. Instead of the annual trend, retail demand dwindled with prices plummeting around 10 percent.
Those low auction volumes continued for weeks. On April 5th, weekly wholesale auction volume was reported at just 18,000 units compared to the pre-virus forecast of 104,600 units. For the subsequent weeks, modest increases in volume returned the auctions to its current point of around 64 percent of normal volume.
Compounding the problem are the safety measures implemented. Most ADESA auctions, as well as Manheim, are limited to simulcast for both buyers and sellers. Appointments for pre-viewing are permitted with proper PPE. For dealers that need inventory, it’s time consuming and frustrating but doable.
For sellers, it’s a much more difficult time. Wholesale inventory like trade-ins roll through the block selling at drastically reduced prices compared with the dealer’s valuation weeks earlier, or they roll through unsold. The problem is a severe backlog as the auction downturn was more abrupt than dealership car sales, making the auction a bottleneck.
How Dealers Can Address Wholesale Inventory Issues
Some dealerships may be thinking of taking trades as usual, reconditioning what they can for retail, and holding the wholesale pieces until the auctions catch up. That could take months to accomplish. Sitting on hundreds of thousands of dollars of unsellable inventory needlessly simply isn’t good for business in an unstable economy.
Shedding the excess is necessary for liquidity, even if each unit is worth only a few hundred or a few thousand dollars. Not only is it money, but it’s valuable real estate on the car lot.
When dealers are inundated with used cars they can’t retail as CPO or state-certified vehicles, an ‘as-ism where-is’ sale can help. Clearly marking the price on the windshield invites people to purchase these cars to free up space and capital. It isn’t a good look on the lot, though.
Selling to Wholesalers
Junk car buyers can be a great way to relieve pressure on unsellable inventory. Dealers can receive on-the-spot quotes in minutes so they can accurately value cars for a quick turnaround that way. In the short term at least, it looks like salvage car prices are staying strong.
CEO of CarBrain, Marcin Ladowski, says, “Although auction prices have tumbled, we see the demand for salvage cars remain on the same level while supply got severely affected. Junk car prices went up in a short period and recyclers are looking for the inventory.
“There are so many forces playing the market from different angles that nobody can guess the full effect of COVID-19 on the salvage market. In the short term, the lockdown effects didn’t seem to hurt prices a lot.”
Try the Auction
Auctions may be backlogged, but they’re still running. Dealers can test their local market by sending a few choice pieces to see how their auction performs. Since volumes are lower, results can visibly vary day to day on the block.
Dealers have options to relieve the pressure from wholesale inventory. All it takes is a little creativity.
Did you enjoy this article from Jason Unrau? Read other articles from him here.
Car Biz Today, the official resource of the retail automotive industry.