Texas dealer Clarence Kahlig has always believed in his group's used-vehicle business. And pandemic-strained 2020 has only strengthened that conviction.
Kahlig Auto Group through the years has tried to keep its sales volume of used vehicles close to that of new vehicles. In 2019, it sold slightly more new vehicles than used, 19,275 new to 17,012 used.
"So far in 2020, it's a reverse," said Kahlig, president of the 11-store group based in San Antonio. Kahlig sold 11,422 new vehicles and 12,662 used vehicles through nearly the first nine months of the year.
And Kahlig is by no means an outlier. Figures from the National Automobile Dealers Association show that through July, the average franchised dealership in the U.S. retailed more used vehicles than new — about 102 used vehicles for every 100 new.
That's a change from previous years. Franchised stores typically have sold more new vehicles — sometimes far more — than used. In the same period in 2019, for instance, the average franchised store sold about 89 used vehicles for every 100 new vehicles.
That underscores just how crucial the used-vehicle business has been for U.S. dealers so far this year. In fact, it has never been more important, some industry analysts say. As the coronavirus outbreak shut down factories and stifled new-vehicle production, both dealers and consumers have increasingly turned to used vehicles to fill demand.
That doesn't mean used-vehicle sales have gone smoothly this year or even performed as well overall as most industry observers expected at the beginning of the year.
In January and February, used-vehicle sales were already red hot heading into tax return season, the prime selling months for that part of the business.
And everyone knows what happened in March. The pandemic shuttered showrooms throughout the country, and government mandates kept many shoppers at home. Wholesale auctions suspended operations or went to digital-only sales, and auction giants Manheim and ADESA continue with all-digital sales today.
The turbulence initially sent wholesale values into a nosedive. Prices were "falling a cliff" in mid-April, said Larry Dixon, senior director of valuation services at J.D. Power. Prices declined 16 percent vs. the beginning of March, he said.
But in May, restrictions on dealerships and shoppers eased, and consumer demand roared back. The new-vehicle inventory shortages meant used vehicles filled the gaps. Wholesale values jumped.
"So just an incredible roller-coaster ride," Dixon said.
And, for some dealers, an opportunity.
"We've never had as much wholesale profit in our 40 years that we've been doing business as we have now," Kahlig said.
Holman Automotive Group, which manages 1.2 million vehicles in corporate fleets, anticipated some of the wild ride.
"We had the inventory ready to go to set up for the recovery," CEO Brian Bates said. "So we rebounded quite quickly." That was after it closed its 39 franchised stores across nine states for about six weeks in the spring.
As Holman began reopening dealerships as local regulations eased, it was well positioned for the industry shift to digital retailing and home delivery that the pandemic accelerated.
For about a year prior to the outbreak, the retailer was developing Holman at Home, a technology platform that enables remote vehicle shopping and trade-ins, as well as no-touch test drives and vehicle delivery. Once stores reopened, sales for both new and used vehicles have been at normal levels or better.
Holman's used-to-new sales ratio has edged up to slightly better than 1-to-1 as part of a strategy put in place a few years ago, Bates said. It's remained there during the pandemic.
The resilience of Holman's overall business this summer and into the fall "proves the strength of the used-vehicle market," he said. "It truly is a resource that's needed in the U.S. to support the folks that need transportation."
Through the first half of March, Ray Skillman Auto Group was ahead of its 2019 used-vehicle sales pace.
After a 30-day lull early in the pandemic, the retailer's used sales have since "gone straight to the moon," owner Bill Skillman said.
That's led to several straight months of record profits. "Not what you would expect during a pandemic," he noted.
The group retailed 15,875 used vehicles in 2019 and expects to sell a similar amount this year, despite the disruption to the market.
With prices still high and dealers scrambling for inventory, Skillman sees it as a good time to be a customer with a trade-in.
"We're putting thousands and thousands of dollars more in used cars than we were four months ago," he said.
Skillman stores have called customers who were shopping several months ago and pulled them back in with promises of more money for their trade-ins.
Wholesale and retail values, while still relatively high, cooled in September. Wholesale values, which hit a record in August, are starting to normalize, said Zo Rahim, manager of economics and industry insight at Cox Automotive.
"You should see continued pullback in prices," he said. "We aren't forecasting a crash whatsoever, but we are expecting that we'll see modest declines from where we were when we peaked in August."
New-vehicle production will be a "major factor" influencing used-vehicle prices, Rahim added.
If new-vehicle supply quickly ramps up, it may put downward pressure on used-vehicle prices. But "we just don't see it happening right now as long as [COVID-19] is a factor," he said.
Cox Automotive forecasts total used vehicle sales will hit 36.1 million in 2020, down from 40 million vehicles sold in 2019. Retail used-vehicle sales are expected to decline to 19.1 million, compared with 20.8 million last year.
While lower volume is expected for the year, values should remain high, analysts said.
J.D. Power expects year-end wholesale prices to be 3 to 5 percent above where they were at the end of 2019. Retail prices should remain stable, Dixon said.
"That's a positive indicator in terms of used-vehicle demand in general," he said.
Still, as the market cools, dealers may want to be more judicious, and less aggressive, as they compete to buy inventory, Dixon said.
Several factors could still play a role in either boosting or sapping sales, such as uncertainty around the U.S. presidential election and whether more economic stimulus will be doled out, as well as the continued effects of the pandemic on the broader economy.
The used-vehicle market is expected to remain generally strong in 2021.
J.D. Power's outlook calls for prices increasing another 3 to 5 percent next year. Any increase largely will be driven by supply, Dixon said.
"If the macroeconomic conditions are better next year than they are right now, which the majority [expect] to be the case, then used vehicles should continue to be a very solid play for dealers," he said, "and used-vehicle prices should remain very strong."
Lots of dealers are counting on the used business to stay robust. The pandemic has only proved its resilience as many Americans wary of public transportation and uncertain about the economic recovery turned to used vehicles.
"The demand out there for used cars is, like, three times what it is for new," Texas dealer Kahlig said. "You just can't stop that need for the public to need vehicles."
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