Bridging The Gap
Dealer Insight from Edmunds.com

Volume I   Issue No. I May 2009


Overly Focused on Used?

Edmunds has been listening to dealers, and we hear you.
"I'm 'concentrating' on used" — "Everybody's looking used"
"I can't get used cars bought by the banks at these prices"
"I watch the lanes at auction for weeks on end and can't get a used car near book"

The Tide is Turning to New Cars, Bank on it!
While it's easy for us to focus on Used in this economy, Edmunds data reveals that some current model year cars will be an overall bargain compared to a one-year-old, pre-owned built the same way. The data also shows that this list grows drastically if the prospective buyer qualifies for Tier One incentive financing. As dealers and "car people", it's important for us to understand why, because in the reasons reside the solutions. And if you see it coming, then you can ride this wave of opportunity.

Today's Economy and Credit Crunch:
A consumer's knee-jerk reaction to a rough economy, a shaky job market, and tight credit lines is to shop used. "Keeping my payments low", "getting the best bang for my buck", and "my credit isn't so great right now" are phrases that tend to push customers to the used car lot- with our sales people leading them there. But, maybe the key to this sale and a happier customer actually reside in the New Car showroom.

Short Squeeze on Used Cars

New Car Sales & Used Car Inventories:
New Car sales predictive models are much like retail consumer durable goods. But, used cars are more like commodities and there are no used car factories, as far as I know, so quantities are limited. New and used are only loosely tied during "normal" economic times. They become closely connected during times like these. The pressure on used car inventories is building due to consumer mentality and the current U.S. automotive landscape:

  • Edmunds' analyst Jesse Toprak also recently announced that where people would normally keep a car for 4.5 years, that term is now approaching 6 years. That adds 33% to the amount of  time before that vehicle enters used car inventory. Therefore, pre-owned inventories are not replenishing as quickly as before.
  • Scrappage rates are holding steady in the area of 13 Million per year. Nothing changes the fact that people wreck cars and cars break down for good.
  • New drivers are joining the ranks of driving veterans at a rate of about 2 Million a year. This number is figured by taking those who are getting a driver's license for the first time, minus those turning licenses in. And the figure us holding steady which only amounts to more pressure, particularly on used inventory.
  • New Car sales are now tracking to levels not seen since the 1960's, 10.0 Million in the U.S. new for 2009, a far cry from estimated annualized levels as high as 17 Million in recent years.

Hmmm, 13 Million coming off the road, an additional 2 million needed, people holding longer, and the factories just adding 9 Million? No PhD needed here. Using stock market terms, the "short squeeze" on Used Cars is under way. Used car inventories will be unable to fill this void for long and we are seeing the beginnings of the squeeze evident in wholesale pricing.

New vs. Used Reality Check

Now What?! How does this information help me sell a car?
Educate your sales staff and get ahead of the curve. Positioning New Car Inventory properly and having a well trained staff on the following dynamics, that are making new car purchases smarter than pre-owned, will help your store win. Talk to your customers and make them aware of all of the following:

See New vs Used Costs:
Total Monthly Payments

Powerful Customer Incentives

Resale Value:
I have also tracked the Edmunds TMV for the resale of these vehicles and found that it can make a HUGE difference in the total cost of having a car. Examples:

  • A new '09 Honda Civic LX sedan purchased with preferred credit saves $1,305 over buying a pre-owned unit. Also, upon resale, selling that car, as opposed to the used one (a year older and about 15,000 more miles on it) will fetch almost $1,000 MORE in resale, turning up the overall savings to over $2,300!
  • It gets even a bit starker when there is a body style change in the interim. The same comparison using a Mazda3 Grand Touring resells for about $1,600 more than a one year old used with an extra year of miles, $2,839 overall saving.
  • Finally, the high end example I looked at opened my eyes, where on the BMW 650i Convertible  the difference was over $16,000, ballooning the overall possible savings to well over $22,000!

Warranty Value:
There is a value to the warranty that is exhausted when buying a pre-owned car. Replacing the one year and 12-15,000 miles to create a comparable warranty to buying new will cost in the range of $115 to over $500 based on the make and model. Certification by the factory is even more.

Scheduled Maintenance & Consumables:
Free Scheduled Maintenance programs, which have become popularized in recent years, cost between $180-$300 per year. Consumables, such as tire and brake wear, for the lost year should also be considered.

Vehicle Tax Credits:
These Tax Credits are available for CNG (Compressed Natural Gas), Clean Diesels, and Hybrids.Some are added and some expire through the model year. A comprehensive, up to date list can be found here on Edmunds.  You should also be aware of any State Tax Credits for similar purchases in your state (i.e., Oregon offers a $1,500 State Tax Credit on Hybrids).

The Obama Tax Write Off:
The new statute signed into law by President Obama, might allow a qualified taxpayer to write off sales tax on a NEW, and only a NEW, car purchase.

May 5th: House of Representatives Passes Cash for Clunkers

New car inventories have bloated to almost twice the normal average days supply, about 5 ½ months now. After that extra 60 days of inventory is depleted margins should also rise.

Get ahead of the curve! They're coming! For the first time, Edmunds has local dealer partnerships available to list your inventory. Contact me for information.

Good Selling!

John Giamalvo

John Giamalvo, Director, Strategic Marketing
DealerInsight@edmunds.com


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