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INDUSTRY INSIGHT

Growing U.S. Used-Car Glut is a Consumer's

Dream, Automakers' Nightmare

BY NICK CAREY, REUTERS

Three years ago if a customer walked onto a discount versus brand new cars. hicle is resold, profits suffer.
Dan Reel's used car lot seeking a late-mod- CEO Mike Jackson said rising off-lease car
el off-lease Ford Escape, his answer was numbers means "a higher supply of pre- That risk was highlighted last November
short: tough luck. owned vehicles at a more attractive price.” when Ford lowered its financial service
arm's pretax profit forecast by $300 mil-
The supply of lightly-used cars and trucks Consumers seeking great deals are in luck. lion, citing falling resale values for off-
was tight because automakers had drasti- lease vehicles.
cally cut back on bargain leases during and Used-vehicle prices at auction fell about
after the Great Recession. 3 percent last year, according to Carmel, Still, carmakers show no sign of aban-
Ind.-based KAR Auction Services Inc., doning leasing. In the first quarter, leases
Recently, though, a computer search for which facilitated the sale of 5.1 million made up 31.06 percent of sales to consum-
available used vehicles within 150 miles used and salvaged vehicles in 2016. Used ers, just below the record set in the second
of Reel revealed an eye-popping figure: prices should drop around 3 percent an- quarter of 2016 of 31.44 percent, accord-
668 Escapes. That's enough to put more nually for the next couple of years, accord- ing to data from Experian.
than 40 percent of the inhabitants of this ing to KAR's chief economist Tom Kontos.
small northeastern Ohio town, population For a graphic showing leasing activity,
1,600, into the popular crossover. General Motors and Ford Motor Co. say click here.
prices for used vehicles, which consist
A search for the Chevrolet Equinox, a largely of nearly-new ones coming off Wall Street is worried carmakers are re-
comparable crossover, showed 461 avail- lease to consumers, fell 7 percent in the peating past mistakes. Shares of GM and
able. first quarter versus the same period in Ford barely budged last month after their
2016. GM says it expects a 7 percent de- earnings both beat analyst expectations.
"The automakers have flooded the mar- cline for 2017 compared to last year. But when the companies reported disap-
ket," said Reel, owner of Reel’s Auto in Or- pointing April sales last week, GM's shares
well, Ohio, about 40 miles east of Cleve- Automakers not celebrating fell 3 percent and Ford's 4 percent.
land.
While many used-car dealers and their Automakers contend there is little cause
That deluge is good news for independent customers are spoiled for choice, the glut for alarm.
dealers, auto auction houses and car buy- bodes ill for GM, Ford and Fiat Chrysler
ers, who stand to benefit from a bountiful Automobiles and is one reason the Detroit In late April, GM CFO Chuck Stevens said
supply of high quality, off-lease vehicles 3's share prices are stuck in neutral. off-lease vehicles were "an issue," but in-
rolling into the U.S. market. sisted that "overall the used-car market is
Demand for new vehicles is slowing after absorbing that supply."
By the end of 2019, an estimated 12 mil- seven consecutive years of rising sales.
lion low-mileage vehicles are coming off Meanwhile, carmakers' discounts on new Others see it differently.
leases inked during a 2014-2016 spurt in vehicles have surpassed record levels set
new auto sales, according to estimates by during the Great Recession. Those dis- KAR CEO Jim Hallett said there's now an
Atlanta-based auto auction firm Manheim counts have been averaging over 10 per- oversupply of off-lease vehicles.
and Reuters. cent of a new vehicle's average selling
price, according to industry consultants "The flood of lease cars puts a lot of pres-
That's helping independent dealers such as J.D. Power and LMC Automotive. sure on automakers and their dealers to
Reel, who can turn a quick profit on ve- get new cars sold," he said.
hicles bought cheaply from auction com- Slumping prices also hurt automakers' in-
panies. house lenders. They price leases using a Cookie cutter vs. unicorn
car's "residual value" -- an estimate of the
Big players like AutoNation also aim to vehicle's worth after its lease ends. If that In a market teeming with product, attention
benefit from selling late-model vehicles at value is lower than expected when the ve- Continued on page 48

44 | GIADA Independent Auto Dealer JUNE 2017