The pre-owned market is made up of several “pockets” of opportunity, and there’s money to be made in more than one of them.
The used vehicle market is coming out a winner amid an economic downturn stemming from a global pandemic. But as supply remains tight, dealers will need to search for every opportunity they can to boost sales — and in the pre-owned game, there are several to be found.
The EV opportunity
Selling used EVs is considered a tough market, but with the current crisis, the potential for more COVID-19 waves, and governments introducing legislation to reduce greenhouse gas emissions, it is a market that will continue to develop.
“The demand is good right now; there are a lot of imports from the United States at that level,” said Gino Côté, President of Évolution Automobile in Quebec. “I would say that there is a good market right now where electric vehicles are concerned. And especially during COVID; during this period a lot of electric vehicles were sold.”
In the first quarter of 2020, sales of zero-emission vehicles in Canada reached 11,978 units — up 49 per cent year-over-year from 7,999, according to Electric Mobility Canada. In March, 5.6 per cent of new vehicles sold were ZEVs. And while sales did decline significantly due to COVID-19 (only 9,069 units were sold between April and June), market share was still up in the first half of 2020 compared to the same period in 2019.
Côté said market value will depend on things like government subsidies, since EVs are typically priced higher than their gas-engine equivalents. It will also depend on things like the used EV incentive program offered by Plug ’N Drive in Ontario. Drivers in the province can qualify for a $1,000 incentive after attending a Used EV Incentive webinar and buying a used EV.
Plug ’N Drive also offers a Scrappage Incentive program where Ontario drivers that “scrap” their old gas-engine vehicle can receive an additional $1,000 when purchasing a used fully electric or plug-in hybrid electric car.
But what dealers will need to focus their efforts on is understanding what consumers are looking for when purchasing an EV. Côté said there are more and more EV specialists that know how to respond to their clientele, know who the competitors are, and are knowledgeable on the different types of ZEVs and models.
“People still have worries about electric vehicles,” said Côté. “They will ask a lot of questions, and dealers have to be up-to-date with all that information.”
According to Zachary Smith, General Manager at Nanaimo Mitsubishi in British Columbia, some of the main questions he has received from customers is about the battery — how long are the batteries predicted to last or remain strong, what is the deterioration like, and is there a warranty?
“What kind of guarantee can we put on that battery so the charge is going to hold as long as possible? That’s the biggest challenge we’ve had,” said Smith. “It’s just like a cellphone, right? Over time, if the battery kind of deteriorates somewhere, you charge it. And they want that reassurance that, seven years down the line, the battery’s still going to hold the charges when they drive it off the lot.”
Smith said consumers are cautious, but with the pandemic he has seen an upward trend in buyers considering used EVs. More customers appear willing to entertain the idea of a pre-owned EV during the crisis than pre-COVID.
Smith also said more leads are coming to the dealership, which he admits is “a little unusual” because used EVs have been tough to sell in the past. But while it can be a challenging market, he believes the pandemic has helped steer consumers towards the dealership’s used electric inventory.
“I normally sit on electric cars for a really long time on the used side, but right now I have no problem turning my electric cars out in less than two months,” said Smith. “Whether it’s the pandemic or just timing, I think the market for electric cars on the pre-owned side is going to flourish for a long time.”
The export opportunity
Dealers less eager to plunge into the used EV segment may prefer to dabble in the used export market, according to Brian Murphy, Vice President of Research & Analytics at Canadian Black Book.
“Right now demand, like dealers will probably tell you, is pretty brisk. The new car inventory and used car inventories are pretty tight,” said Murphy.
But on the export front, he said they are still seeing a large volume of vehicles being shipped to the U.S. and estimates that about 10 to 15 per cent of what is being sold at wholesale auction is being exported.
“That’s still a lot,” said Murphy.
“There is an opportunity for dealers who, if they haven’t been exporting vehicles, maybe that’s something they want to investigate,” said Murphy. “But there’s some good news that we do expect, and that is that prices will actually weaken and supply will grow.”
CBB is projecting a significantly higher used vehicle supply in the wholesale market around October or November, and says the supply constraint is a temporary situation since more lease returns and repossessions will start trickling in this year.
Murphy said it may be easier for dealers to source cars in the latter part of the year, and suggests considering where they are sourcing their vehicles from at auction. They may, for example, have more success with pickup trucks or commercial vans made in Mexico because they are less attractive due to the new NAFTA.
In general, the rules embedded in the new trade agreement will make it difficult for Canadian dealers exporting used vehicles to the U.S. to prove that the vehicles meet the necessary requirements under the new rules of origin. Murphy said that vehicles that were not manufactured in the U.S. or don’t meet U.S. content rules can be taxed 2.5 per cent, unless they can prove that they are exempt under the new NAFTA.
“And then light trucks (pickup trucks) or vans that have two seats in them, they are subject to a really old rule of taxation called the Chicken Tax. They can be taxed 25 per cent — so that’s a massive tax,” said Murphy.
With the old NAFTA, he said exporters could get a certificate of compliance that would allow the vehicle to cross the border without paying any tariffs. With the new NAFTA, those are no longer valid.
Circling back to the vehicles at auction from Mexico, Murphy said one of the frustrations for Canadian dealers looking to buy vehicles has been that they are often outbid by bidders who want to buy vehicles and ship them to the U.S. But now, some of those vehicles — the ones that are not as attractive to export are unlikely to be outbid by someone looking to ship those vehicles.
“I think dealers can make a tremendous amount of money exporting vehicles. I think you really can,” said Murphy. “There’s lots of people who’ve been quite successful at it, but it’s a challenge. But yes, there is definitely money to be made since U.S. values are quite strong right now. There’s definitely opportunity.”
The consumer supply opportunity
If exporting is not your game and supply remains tight, there is an opportunity to source used vehicles from the very people that purchased from your dealership, according to Jeremy Anspach, CEO of PureCars.
The key is trying to acquire vehicles directly from consumers — and they are seeing this done successfully in two key areas.
“The first is having an efficient trading tool on a dealer’s website, and often promoting that with digital advertising to drive more traffic for people, searching things like ‘What is my car worth?’” said Anspach, adding that many dealers are being very creative with their digital advertising and advertising in general to stimulate more trade-ins.
Having the ability to market a specific VIN, whether it is on search, social, video or email, provides “massive upsides” and is able to reduce ad costs per unit sold in a“very favourable” way, said Anspach.
The second key area that is helping dealers to acquire used vehicle inventory from customers is a function for data mining.
Anspach said some dealer groups hire people to do this. They know that a customer that has not visited the dealership for service in a while and likely still owns the vehicle that was purchased at the store. If they have that information they will know what the buyer paid for it and when, which can provide the dealer with an opportunity to buy the customer out of their lease or upgrade them to a new vehicle.
“The net benefit for the dealer when selling a different vehicle, oftentimes newer or pre-owned, and acquiring a vehicle at a competitive price, gives them increased margin in the total transaction,” said Anspach.
Buying directly from the consumer is a potential solution that does away with the vehicle purchase price at the auction combined with all the fees. And getting a trade-in is oftentimes a win-win for both the consumer and the dealer, said Anspach; the consumer still benefits from a great value for their vehicle and the dealer buys it for less than it would be at auction — helping them ultimately gain dollars per vehicle sold.
“When you see dealers willing to pay over book, by say $1,500, they’re doing this because they’re looking at auction prices going, after we get the vehicle back and we pay fees and we get into this hyper competitive bid, I would much rather buy a customer’s car at $1,500 over average book,” said Anspach. “The point being, there’s a favourable spread by acquiring the trade value, even if you’re willing to pay slightly over book value.”
No one can predict the future with certainty, but dealers can start looking at every opportunity they have to survive the current recession and pandemic — keeping in mind there is money to be made in the various “pockets” of the pre-owned market.
