It’s common knowledge at this point that demand in the automotive market is favoring truck segment vehicles, such as crossovers and SUVs.
Even with buying inclinations leaning toward crossovers and SUVs, it’s actually sedan segment values that are poised to rise in the wholesale market.
The wholesale market is reaching this inflection point, where the continued heavy supply of crossovers and SUVs entering the used market could cause wholesale values for CUVs/SUVs to decline.
There are already early signs of this trend emerging in the market. Black Book data from 2018 showed certain sedan segment depreciation improving year-over-year while certain CUV/SUV depreciation accelerated.
Analysis from early 2019 by Tom Kontos, chief economist for KAR Auction Services, compared depreciation rates for 3-year-old midsize CUVs/SUVs and midsize sedans with 30,000-40,000 miles on the odometer. Through this comparison he found that depreciation for the CUV/SUV segments was higher than it was for the midsize sedan segment that month.
Should the supply of SUVs/CUVs returning to the used market continue to grow and demand in the used market for the segments not grow alongside it, wholesale values for CUVs/SUVs could continue to decline.
Sedan supply, on the other hand, is projected to decrease in the coming years, as OEMs continue to shift their portfolios in favor of CUVs/SUVs.
This means that the sedans that do reach the wholesale market will be rarer and be able to command a higher price than they have in the past.
“In the past we have seen crossovers do really well but some of the mainstream sedans have done very poorly,” said Anil Goyal, executive vice president, operations, at Black Book. “Last year we saw this trend reverse, sedan values saw the lowest depreciation. Compact / midsize car depreciation was 3-4% lower than it was the year before. Meanwhile, compact crossovers saw about 1% higher depreciation over the year before, not a strong drop off for crossovers, but the segment’s valuation should continue to be chipped away.”
Goyal doesn’t expect crossover values to suddenly plummet, he expects a gradual decline in residual values while midsize and compact mainstream car values will stabilize.
Advice for Fleet Managers
Kontos recommends fleet managers be conservative in the depreciation estimates they may have for truck models because there is going to be more of them returning to the used market in the coming years.
As more trucks return to the used market, their lifecycle costs are expected to take a hit, he added.
Meanwhile, with an expected decrease in supply and a larger potential demand, sedan lifecycle costs are expected to improve.
“The economics should begin to favor sedans going forward a bit more than they have thus far,” said Kontos. “Thus far, it’s been the opposite, the popularity of trucks at auction boosted prices. But it really comes down to what your needs are for your fleet.”
Kontos said that if a fleet doesn’t need the added utility that a crossover or SUV offers, and a sedan can fulfill the fleet’s needs, then fleet managers should take a sedan’s lower expected depreciation, and lower acquisition cost into account when deciding on what vehicle to add to their fleets.
Goyal agreed with that sentiment.
“It comes down to looking at depreciation patterns,” he said. “A couple of years ago, it would have made sense for a fleet manager to recommend a crossover because used vehicle values were strong and you could see the depreciation cost could be better even if you paid more upfront. With the trend that has happened last year, as sedan values have gone up, I think it’s time to revisit that for the fleet manager.”
The State of Sedans and Trucks in the Wholesale Market
The demand for crossovers and SUVs doesn’t appear like it will slow down anytime soon, and as that continues to hold true, fleet managers may want to take another look at the type of vehicles they’re procuring.
“Cars accounted for more than 50% of the wholesale channel, but now that number is less than 50%, and that number is skewing more toward trucks every month,” said Kontos. “Soon we’ll see a 60/40 split in favor of trucks. Supply trumps all other factors in terms of wholesale values. If you get a lot of something, you’re going to have wholesale values soften for that particular model, class, or even group of vehicles, such as trucks. That is going to affect the value proposition for fleet buyers as well as consumers.”
The first time that truck segment vehicles accounted for more than 50% of sales at auction was August 2017, and since the beginning of 2018 truck segment vehicles have consistently accounted for more than 50% of wholesale market sales, according to Kontos.
As more truck segment vehicles continue to return to the used market, the wholesale channel split is expected to reach a 70/30 split in favor of truck segment vehicles, closer mirroring the split that exists in the new-vehicle market.
How New-Vehicle Trends are affecting the Used Market
In the past several years manufacturers have shifted their priority away from sedans and toward truck segment vehicles. Some have reduced their car lineups and others have eliminated them entirely.
“The new sales of crossovers started to increase a few years ago, so as a result, you have more coming back,” said Goyal. “On the other hand, you’re seeing the supply of sedans rather flat, the demand has gone up though. Sedans have a long tale, as new production gets rightsized. From used market perspective, the sedan market is thriving in the used market, because there is more focus from affordability perspective.”
Truck segment vehicles comprised approximately 70% of U.S. sales in 2018, Kontos noted. Vehicles included in the truck segment include pickups, vans, SUVs, crossovers from both mainline and highline brands.
This leaves about 30% of the new-vehicle market to sedan sales. Looking back 10 years ago, car sales accounted for more than 50% of new-vehicle sales, Goyal noted.
In 2018, the new-vehicle sedan sales saw a 753,000 year-over-year reduction in units sold while the truck segment saw a 859,000 year-over-year increase in units sold. This equated into an overall 95,000 unit increase to new-vehicle sales in 2018 over 2017, due in sole part to a rise in truck segment sales.
Kontos expects the bleeding from the car segment to stabilize soon and for the new-vehicle side to reach a market share of 75/25 in favor of truck segment vehicles.
Some buyers will always want sedans because they simply prefer that type of vehicle. From an overall cost perspective, fuel expenses are a large operational cost for both consumers and fleet managers. While the extent is shrinking, sedans continue to offer better fuel economy than CUVs/SUVs.
“Although, that advantage has been minimized in recent years due to the types of engines being used in crossovers,” Kontos said. “Still, you do pay a bit of a premium in fuel when you choose a crossover.”