Used-Car Sales Struggle, Along With Everything Else Auto
February 02, 2009

By Dale Buss

Used vehicles typically gain on new-car sales when times are tough because consumers scale back their expectations, and more of them settle for less expensive "pre-owned" products.

But these times are so tough that consumers are even discouraged from buying used vehicles. Even though they're considered classically to be less cyclical than new-car sales or even countercyclical to the new-car trend, this may be the worst year in two decades for used-car sales overall.

Used cars sold through franchised dealers comprised 49.7 percent of industry-wide sales, including new cars, through November, compared with just 47.3 percent for the same period of 2007, according to an Edmunds.com analysis. And by the same measure, used cars sold through franchised and independent dealers together comprised 65.2 percent of all industry sales including new cars, through November, compared with just 64.1 percent a year ago.

Nevertheless, franchised used-vehicle sales were still down by about 7 percent through the first 11 months of the year versus a year ago. Meanwhile, new-vehicle sales through November had fallen by 16 percent compared with last year, to just 12.4 million.

Credit Crunch, Too

Blame not only consumers' nearly complete lack of confidence in the economy but also credit restrictions that have figured mightily in the industry's new-car sales woes.

"The problem is with tightening credit," said Joe Spina, industry analyst for Edmunds.com. "Used-car wholesale prices are down fairly significantly, but consumers are having trouble taking advantage of that because they can't get credit."

Credit bottlenecks are afflicting used-car sales even more than new-car activity because a large percentage of used-car buyers are subprime credit risks. "They're not getting financing, period, so they've basically dropped out of the market," said Art Spinella, president of CNW Market Research, who is predicting the worst year since 1989 for used-car sales.

What's more, Spina noted, used-car sales continue to compete heavily with huge incentives on the new-car side, as OEMs take increasingly desperate measures to maintain some kind of minimal traffic flow to dealer showrooms.

No Trickle Down

There's also a big problem on the supply side. It's constricted generally as fewer consumers trade in late-model used cars because of the falloff in new-vehicle sales and the typically longer terms of new-car loans.

"The potential customer in the used-car market, in aggregate, is anyone who has a car and wants to trade up to something better," said Tom Webb, chief economist of Manheim Consulting, the Atlanta-based leader in the wholesale vehicle-auction business. "But today, because of financial conditions and tighter credit, they can't trade up. People are just holding on to their cars for longer."

And more specifically, through much of 2008, consumers have been trading in fuel-consumptive vehicles that quickly fell into disfavor last spring and whose sales have remained depressed because of the market's general woes -- although pickup trucks and SUVs have gained on a relative basis to other segments.

"What customers have been bringing in, because of this tremendous shift, isn't what dealers want in terms of vehicles for their used-car inventories," Webb said. So prices have firmed lately at Manheim's auctions, he said, as dealers scramble to maintain a decent used-vehicle inventory.

Three-Headed Disappointment

The used-car market, of course, consists of three main parts: used-car sales at franchised new-car dealers, the independent-dealer market, and private-party sales that cut out the middleman. (And, actually, a fourth type of sale -- barter of a used car for something else in trade -- has been picking up lately, Spinella said.)

Edmunds.com analysis shows that the used-car market splits sales about evenly between franchised and independent dealers. For 2008, however, while franchised dealers' used-car sales declined only about 7 percent through November compared with a year ago, independents sold about 17 percent fewer vehicles than a year ago, according to Edmunds.com.

Meanwhile, private-party sales were down about 35 percent, according to CNW data.

Especially among independent dealers, "It's been a blood bath," Spinella said, noting that in September alone, about 1,000 independent dealers closed their doors nationwide compared with only about 200 shutting down in September, 2007.

Chance for Revival

As they scramble for every available source of revenue, more dealers are paying renewed attention to their used-car operations -- especially in the midst of a recession that may well be more charitable to used-car demand than for new. Plus, the better their used-car operations, the more reliable complement they can be to new-car sales.

"The used-car business has always been the lifeblood of the new-car business, and the dealers who are surviving out there now are the ones that realize that they've got to put a bigger focus on used cars," said Howard Polirer, of AutoTrader.com, which carries the inventory of about 40,000 dealerships online.

Polirer believes that realistic pricing will be increasingly key to used-car sales strength. "The majority of the used-car business is still operating without realizing that customers now go to the internet and know what the market value is on a used vehicle," said the director of industry relations for Atlanta-based AutoTrader.com.

"If you're pricing cars way out of range, you're going to suffer right now. Market-vested pricing is an important piece of surviving the economic crunch."

Biggest Player's Travails

CarMax, the biggest player among the independents, got slammed in the second quarter with a 13 percent decline in sales overall and a 17 percent decline in unit sales at "comparable" stores -- those open at least a year. In October, the Richmond, Virginia-based operator of 99 used-car superstores around the country announced the elimination of 600 jobs in its service operations.

Still, CarMax expects to ride out the storm in part because the company maintains that "credit remains widely available" for its customers, through both the company's captive financing arm and third-party lenders.

In fact, the company looks at its financing availability and approach as a key competitive advantage in the midst of a clearly consolidating used-car market. "We don't have F&I managers, for example," explained Linda White, director of sales operations for CarMax's online customer-research operations. "Customers work directly with sales consultants through the entire process. Decisions come back on the screen in front of the customer and at that point they're able to select a payment and term that is right for them."

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