By Mike Antich
October was an extremely difficult month to remarket vehicles in the wholesale market as resale prices took a precipitous drop. Wholesale pricing, based on mixed mileage and seasonally adjusted, declined a record 6 percent in October, according to Tom Webb, chief economist for Manheim. “October will represent the biggest percentage decline ever,” said Webb. “I think some further downward movement is probable.”
Other wholesale industry analysts share this grim assessment. “Everything is going down. The vehicles getting hit the hardest are the high-line luxury vehicles. Some of these vehicles are getting hit in the $600-$800 range. Most everything else is [being hit] in the $100-$400 range,” said Ricky Beggs, managing editor for Black Book. “The market is moving and it is moving down.” Of the 24 vehicle segments tracked by Black Book, “vehicles in every segment have moved downward this week.”
Tom Kontos, executive VP, customer strategies and analytics for ADESA, reports similar gloomy results. “Wholesale used-vehicle prices registered sequential and annual declines (in October) that were the most dramatic since the formation of the 170-plus auction database used by ADESA Analytical Services 15 years ago,” said Kontos. “The closest period for comparison to these price declines was roughly six weeks following 9-11, when prices in September and October 2001 fell by over 10 percent versus August 2001. However, that price decline was exceeded in about four weeks during October of this year. The key difference between now and then is the availability of credit,” said Kontos.
The lack of credit to both dealers and retail buyers has been the key catalyst contributing to the downturn in the wholesale market. “The wholesale market was horrible in October, which is probably not a real surprise given that the retail market has also stalled,” said Webb. “Buyers at auction are car dealers, not car collectors. They buy on their expectation of profitably reselling the vehicle and those expectations are not very good right now. We are in a severe recession. Credit markets have frozen up and that has bled over to the labor market and overall economic activity is negative. Financing, both at retail and wholesale, is more restricted, more costly, or simply not available in some cases,” said Webb.
The credit crunch has also impacted fleet units sold at auction. “Dealers who might normally stock up on rental and fleet units that come available in the fall due to fall/model-year changeover de-fleeting are unwilling or unable to add to their floorplans with credit and sales prospects so constrained,” said Kontos.
Even buy-here-pay-here dealers are becoming dependent on external credit sources, said Webb. “If those external credit sources dry up, then their ability to do buy-here/pay-here will become limited,” said Webb. Buy-here/pay-here dealers are a key buying segment of fleet units sold in the wholesale market.
Under-$8,000 Vehicles Still Selling
The decline in wholesale prices in the month of October was broad-based. “The price decline in October spared no market sector or consignor. The greatest weakness in October occurred in many of the middle price tiers (wholesale values in the $8,000-$12,000 range). “That suggests fallout from the more restrictive retail financing environment. Vehicles in the lower price tiers always show a greater stability in pricing and that continued to be the case in October’s weak market,” said Webb. Fleet management companies confirm this assessment.
“I would agree that overall the marketplace is pretty challenging and grim is a good description. However, compared to other sectors, fleet sales are better off since there is still ‘activity’ on the under-$8,000 units. The typical domestic high-mileage two- or three-year-old sedan usually falls in that category and those prices are relatively stable, especially compared to some of the other market segments,” said Bob Graham, director vehicle remarketing for Automotive Resources International (ARI).
Tim Martin, vice president, operations for LeasePlan USA, reports similar results. “The sedan and small-truck market values overall have done much better than other vehicle segments in the $8,000 and below price point.”
A ‘Tsunami’ of Inventory
One concern expressed by consignors is the fear that auctions are becoming “clogged” with inventory. Many consignors report an extremely large volume of rental cars and manufacturer cars at auction and the conversion rates (sold units as a percentage of units offered) for those two segments have been very low. According to Kontos, “these low conversion rates, coupled with high incoming volumes from fall de-fleeting, caused auction inventories to climb to levels that likely represent a future ‘tsunami.’ ” ADESA Analytical Services estimates that auction industry inventory volumes stood at 66 days of sales at October month-end, compared to 43 days at the same time last year – an increase of 52 percent. If the principles of supply and demand hold true, as these units are released into the wholesale market, they will put significant downward pressure on resale prices.
“Not only are retail sales down, but dealers are also having greater difficulty using their floorplan lines to stock up on the large number of cars that enter the auction channel this time of year due to fall de-fleeting of rental and commercial fleet units,” said Kontos. “This lack of dealer demand caused conversion rates to decline dramatically in October. On average, auction industry conversion rates fell from their norm of about 60 percent to around 50 percent, with some consignors’ sales reportedly falling into the teens and even the single digits.”
The key factor contributing to low conversion rates is the decreased number of buyers in the auction lanes. “Many auctions are reporting 40-50 percent sales when they are normally 60-70 percent,” said Graham of ARI.
Anecdotal stories abound about the low dealer demand. One Asian manufacturer ran 300 vehicles and only sold two. Another 150-unit sale generated zero sales. Compounding this problem is that some consignors are assigning floors higher than current market value. The theory is that these vehicles are on the books for a much higher dollar amount and some captive finance companies are unwilling to take the financial hit, in essence, using the auctions as storage facilities.
Forecast for 2009
Kontos warns consignors to brace themselves for continued softness in wholesale prices through the remainder of the year and well into 2009. Others agree with this forecast.
“I don’t think anyone in the industry has a crystal ball for predicting 2009, but I think it is safe to say we are in for a bumpy ride near-term,” said Martin of LeasePlan USA. “How soon we see a market upturn is going to be dependent upon a number of factors.
If you look at how the pre-owned wholesale market has performed historically in economic downturns (new vehicle sales down double digits, consumer confidence down, therefore spending is down), we would expect wholesale performance to benefit. Vehicle purchases during these difficult economic periods tend to be more ‘need based’ and that bodes well for the fleet vehicles we all sell. With new vehicle sales down dramatically, franchise dealers are not going to have the ready supply of trade-in vehicles and will move to the auction and upstream channels for inventory.”
Everyone agrees the catalyst needed to jumpstart wholesale transactions and prices is the availability of wholesale and retail credit. “The stability of the wholesale market is heavily dependent upon how soon the availability of credit returns - wholesale floorplan availability to dealers and a return to more normal availability of funds to retail consumers with reasonable rates and credit parameters,” said Martin.
In a recent industry briefing on the state of the wholesale market, Webb was questioned whether there will be the traditional “spring spike” in resale values next year. “Certainly, the overall economy will be very, very weak next spring. Consumers will not be out rushing to buy anything. Retail sales numbers are going to look pretty dismal this quarter. My guess is that the tax season will be a little bit heavier than normal, but I don’t think it will give a real bounce to the market,” said Webb.
Others share similar assessments. “Quite frankly, I don't expect much of a change as we move into the winter months. With the market conditions that exist today, even factoring in lower fuel prices, I don't see much of a change for the balance of the model-year,” said Dave Nagy, vice president of asset management for Emkay Inc. “Tight credit, layoffs, high vehicle supply, and very low consumer confidence combine to make for a longer recovery period. Unfortunately, I’m not very optimistic for the short term.”
Let me know what you think.