Fleet Sales is often a dirty word in the auto industry. This can be true on the manufacturer side as well as the dealer side. Fleet sales are generally stable and profitable for manufacturers, and can be for dealers as well. Fleet sales have also (at times) been credited with keeping factory doors open.
That being said, fleet sales have a ripple effect throughout the auto industry. Much like the wake of a giant ocean liner, the effects of fleet sales can be felt by everyone in the industry, for good or bad.
The relationship between fleet and retail sales is a tenuous one. In the best of times, fleet sales have been considered a necessary evil. In the worst of times, fleet sales are detested as a disease that ruins residual values and steels allocation from retail sales.
Economics of Fleet Sales and Residual Values
Simple economics will tell you that when you increase the supply of a product that the price will go down. This principle is particularly true when it comes to the used vehicle market. The more used vehicles available on the market, the lower the prices, which translates to lower residual values as well.
The single biggest factor affecting the supply of used vehicles in the market is fleet sales. The more vehicles a manufacturer is willing to sell to fleets like rental companies, the more used vehicles there will be flooding the market when these vehicles are retired from service.
Furthermore, fleet incentives play a big factor in the market value of these vehicles when they are retired. The greater the discounts up front, the lower the prices coming out the other side.
Lincoln, FCA and Others Reign in Fleet Sales
Manufacturers are constantly trying to find the right balance between reaching required production numbers and protecting residual values. Riding the wave of increased demand in recent years, Fiat Chrysler Automobiles (FCA) has been following a plan to decrease sales to fleets in order to create more opportunities for retail sales.
Automotive News reported in March, 2018 that FCA’s 8.2 percent dip in sales in 2017 was largely the result of this decision to decrease sales to fleets.
FCA national dealer council chairman Denny Rogers says that the shift away from fleet sales “opens up production for retail that was being consumed by fleet.” He adds that “selfishly, the values of our products as used cars will rise and not be negatively impacted by the influx of daily rental fleet returns at auctions across the country.”
In a similar move as FCA, Lincoln is quietly curtailing fleet business for 2018 to protect residual values and improve operational fitness. Lincoln has long been a mainstay in limo and livery services, and will continue to sell to these commercial businesses, but will cut deliveries to rental companies such as Hertz and Avis, according to Robert Parker, Lincoln’s director of sales and service.
Parker also said that Lincoln has cut back on providing company cars, both internally and to other businesses as part of commercial fleet sales.
“Those are very deliberate efforts to really focus on residual values as our new products come out,” Parker said. “What happens is those cars come back in six to 12 months. That’s problematic on our residual values because that’s when all the depreciation occurs. The longer they stay out, the better.”
While fleet sales will likely never go away, it is encouraging to see manufacturers examining ways to improve the overall relationship between fleet sales and retail sales.