On today’s edition of CBT News, we speak to Larry Dixon, Senior Director of valuation services at J.D. Power. Larry gives us an update on inventory and auction volume as we settle into Q4, and overall trend predictions of used cars for the next three to five years.
Jim Fitzpatrick: Let’s kind of jump right in here. What’s your take on the overall health of the auto industry so far this year?
Larry Dixon: It’s been something of a mixed bag on the new side of the market. Sales are down by about 1% but they’re still going to come in at around 17 million units for the year, which would mark only the seventh time in history that that’s occurred.
Jim Fitzpatrick: Wow.
Larry Dixon: However, there are some caveats to that. Retail volume or the number of vehicles that are bought by consumers, that’s down by about 2% year to date. And fleet volume is up by 3%, so non-retail volume, think commercial fleets, rental companies, so on and so forth. They’re actually buying more vehicles than they were last year. That’s really helping to prop sales up and to keep that overall decline less than that 1% drop that we’ve observed year to date. 7 million still strong. Although moving forward expectations are that sales will decline into the upper to mid 16 million unit range going forward.
Jim Fitzpatrick: And your numbers is 17 million SAAR for the year.
Larry Dixon: That’s correct.
Jim Fitzpatrick: Wow, that’s good. That’s great.
Larry Dixon: October was kind of a decent month. September and October in particular were okay. We’re seeing that manufacturers are dialing up incentive spin as we got into the latter part of the year. We think that’s actually going to help push sales right around that 17 million unit mark. I think the consensus overall is in the upper 16 range, but LMC Automotive and J.D. Power, we’re expecting around 17 million for the year.
Jim Fitzpatrick: Great. Great news for dealers. Another phenomenal year in the history books. Or almost in the history books. But yeah, this is the good stuff for dealers, isn’t it?
Larry Dixon: It is and vehicle prices are up, new vehicle prices are up. There’s some considerations there that certainly helps with used vehicle demand, but overall that should help with the overall contribution to the economy. Dealer margins are trending lower, however they’re making that up by investing more into used vehicle operations.
Jim Fitzpatrick: From your perspective, what does the wholesale volume look like right now?
Larry Dixon: Wholesale volumes year to date for vehicles that are up to six years old, is up by 5% although there are differing trends there, as you might imagine. With the growth in new SUV sales over the past several years and decline in new car sales, you’re seeing similar trends on the used side of the market. SUVs and pickups on the used side of the market, that wholesale volume is up by around 17% year to date. Whereas car volume, think compact and midsize cars overall, that volume’s down by about 5%. That lift in SUVs and pickups, it’s bringing the overall market, used market supply total up to 5% growth year to date.
Jim Fitzpatrick: And what are the factors or indicators that are attributed to these results?
Larry Dixon: Well, in terms of overall used vehicle prices, let’s touch on NAF for a moment. Used vehicle demand and used vehicle price have been very strong over the past couple of years in particular, but certainly this is a trajectory that we expect to continue moving forward. There are a couple of reasons for that. One, there are affordability concerns. As I mentioned, new vehicle prices continue to move higher and higher. They’re up by about 4% year to date and they’re roughly, relative to a three year old used vehicle, they’re roughly 45% higher than that three year old used vehicle. That’s a rather significant delta there. And that compares to roughly 30 to 35% just five years ago.
Jim Fitzpatrick: Wow.
Larry Dixon: We have this continued escalation in new vehicle prices and while used vehicle prices are up as well, they’re not growing at the same rate. Consumers, the more value conscious consumers think millennials, they’re going to look increasingly toward the used vehicle market to satisfy their transportation needs. That’s one of the big drivers there is affordability.
Jim Fitzpatrick: Sure. And vehicles are being built as they have been, built better. The technology today is about the same as it was a couple years ago in the vehicles that the appeal of used vehicles or pre-owned vehicles is pretty strong isn’t it among consumers?
Larry Dixon: Oh, you hit the nail right on the head. That’s absolutely right. That trickle down effect is really no longer a trickle down effect in terms of technology and design coming from the new vehicle market, moving over to the used vehicle market. It happens rather quickly these days.
Jim Fitzpatrick: Yeah, really it’s amazing.
Larry Dixon: Used vehicle consumers, you’re not giving up much in terms of getting the latest features and the most advanced designs.
Jim Fitzpatrick: Nope. It’s really the case. Discuss the overall trend predictions of used cars for the next three to five years.
Larry Dixon: Yeah, we’re very bullish in the used vehicle market and you’re kind of alluding to it in terms of the overall quality and the parity between new and used vehicles, that increased parity there. We believe that because of those affordability concerns that I mentioned before, along with that natural demand, if you will, to vehicles as quality improves, which it will continue to do so. There’s no reason to believe otherwise. That used vehicle demand is going to remain very strong. And here’s another reason why that we believe that that’s going to occur because increasingly dealers, as I had mentioned earlier, are concentrating and focusing on used vehicle operations. Think not just consumer demand, but dealer demand for used vehicles as well.
Jim Fitzpatrick: Talk to us about the broader scope of the growth in buying alternatives such as disruptors like Carvana and Vroom.
Larry Dixon: His is again, that goes back to the dealer demand that I mentioned. Not only do you have franchise dealers increasingly reliant on used vehicle sales, but you also have a number of new disruptors that have come into the market, as you mentioned Carvana, Vroom. There are a number of them and it makes sense. You’re talking about a trillion dollar with a T, industry and it’s highly fragmented. You look at the top 100 used vehicle dealers in the US, they are responsible for roughly 23% of all used vehicle sales that occur at a franchise dealer. There’s a lot of room for that to improve and for disruptors such as Carvana to come into the space and carve out a name for themselves. Includes the CarMax’s of the world too. They’re competing with CarMax who was a disruptor when they hit the market several decades ago. They’re competing with one another.
Jim Fitzpatrick: It’s funny how these things pop up and we in the auto industry, we all get all nervous and we talk about it and such. Four or five years ago when Uber came on the scene and we said, “Oh, millennials are not going to buy cars. They’re just going to use their app and use Uber and ride share companies and Lyft and what have you and it’s going to affect new car sales.” And we didn’t really see any of that did we? It didn’t really, right?
Larry Dixon: No, no, they’re just different priorities at different stages of life these days. And of course that’s happened throughout history. But no, in fact, when you look at used vehicle sales in particular, you see millennials as a share of overall vehicle sales and use. They’re buying way more used than new and they’re buying more used than what prior generations had bought. As far as the Carvana’s of the world and Vroom shifts, so on and so forth, millennials in particular, but I believe multiple, multiple generations, we’re looking for a different shopping experience from what we’d experienced in the past. Transparency, trust, simplicity, think Amazon. It’s a perfect opportunity for these types of companies and for your entrenched franchise dealers to take advantage of what this up present market and the expected market for used vehicles has in store.
Jim Fitzpatrick: Larry Dixon, senior director of valuation services at J.D. Power, want to thank you so much for joining us on CBT. I could stay here all day and talk to you about this because I think it’s great stuff. Dealers love it. I appreciate all the time you gave us today.
Larry Dixon: Absolutely. Thank you for having me.
Jim Fitzpatrick: Thank you.
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