The numbers are looking good, but inventory is a challenge
We are well into 2011 now and some of what we expected to see in the wholesale market has, indeed, trans- pired in the first few months of the year. The big topics of conversation in the market so far include reasonably strong used vehicle values and the challenge for dealers to find the used vehicle inventory they need.
In its monthly commentary for the ADESA Canada Used Vehicle Price Index, ALG has noted that prices remained strong through the winter months. Year-over-year compari- sons with 2010 values indicate strength in
the market and their analysis confirmed what many participants seemed to already know: in some of the key demand segments, the supply of vehicles was somewhat constrained.
As winter gave way to the spring market, ALG identified resale price increases at whole- sale of up to twenty-two percent, year-over-year, in five key segments: full-size pickup, mid-size SUV, mid-compact, mid-size and minivan. Only the compact SUV segment was experiencing prices at comparable levels to late-winter 2010.
What about cross-border shopping?
It seems clear that demand for used vehicles has been strong, resulting in prices being pushed up. In its predictions for the year, ALG did expect to see this happen as 2011 progressed and supply constraints were felt in certain segments, though this result is occurring a little earlier in the year than anticipated.
One element that may bring some variabil- ity into the market is cross-border shopping. It is likely that the market has not seen the expected volume of U.S. vehicles being
imported into Canada. As we all know, the strong Canadian dollar has been substantially at par with the U.S. dollar for an extended period of time now.
In the early days of this ‘phenomenon’ the resulting implication for the Canadian used vehicle market was a significant influx of vehicles from south of the border. At present,
however, there does not appear to be a strong import effect in the market. It is likely that American used vehicle prices have normalized in comparison to their Canadian counterparts and the ‘savings’ opportunities are no longer as attractive.
Strong demand persists for used vehicles
The strong demand for used vehicles is being felt in all auction channels, including the upstream remarketing programs that facilitate off-lease vehicle sales for the manufacturer finance companies. A number of these pro- grams are seeing steady demand from both franchise and non-franchise dealers as the need for inventory is bringing buyers into the market at an earlier stage than in previous times as they strive to source units to support their retail used vehicle operations.
While we have commented on the poten- tial in the past, it is now apparent that these upstream sales are not limited to the commer- cial consignors. The large remarketing service providers have increased efforts to make auc- tion utilization easier for dealers by bringing the marketplace to them.
Tools and products are now in place to allow dealers to post their own inventory or order a comprehensive 3rd party vehicle
inspection to support the sale of their units via web-based auctions. Dealers now gain the benefit of exposing their inventory to a very large group of potential buyers without having to move that inventory off the lot to a physical auction location, thereby incurring cost and losing the opportunity to continue marketing the vehicle to retail purchasers.
In the early part of the year, the general consensus in the marketplace is that more dealers are looking to the auctions to remar- ket their own inventory and they are using all available outlets. This tends to happen when we experience strong demand and prices in the market and dealers that would typically hold onto their trades for extended periods or transition them to a wholesaler begin to tap into the larger auction venues and thus potentially increase returns on their assets. The shift to upstream selling by these deal- ers is somewhat new and participating dealers indicate that they are pleased with the oppor- tunities in this space.
It remains to be seen what happens with dealer consignment as the year progresses. A key variable will be the general level of used vehicle prices, especially as impacted by retail demand. Consumers reaching the end of their lease terms will be assessing vehicle values to determine how to proceed.
If residual values are close to market values for maturing vehicles, consumers may exer- cise their purchase option at the end of the lease term and keep driving the vehicle. Alternatively, J.D. Power’s Power Informa- tion Network recently noted that 2010 was
a strong year for vehicle trade-ins at dealer- ships, indicating that the percentage of retail new and retail used transactions with a trade increased over the previous year. At the time of writing, it was still too early to see if this trend was continuing into 2011. If dealers continue to take in significant volumes via trade, they will use all available channels to aid in the remarketing of those units.
We will attempt to follow up on these topics later in the year to see how things evolved in our market. Until then, here’s hoping you are having a great spring and that we all get to enjoy a nice warm start to the summer!
