Resale Values Up But Market Remains Fragile Resale values for mid-size sedans are substantially higher than in 2008, as are prices for light-duty trucks and SUVs. Contributing to this rebound is a decrease in wholesale inventory, low fuel prices, and strong retail used-vehicle sales. 6 5 4 1 How Do You Remarket Your Out-of-Service Fleet Vehicles? 14 Sales to Employee 2 4 3 Online Sales Employee Online Sales Auction Online Sales Dealer 16 Sales to Wholesaler Sales to Dealer Auction At 58 percent, auctions remain the main channel fleets use to remarket out-of-service vehicles, while employee sales was the second-most popular sales channel at a combined total of 16 percent. 3 58 By Mike Antich and Lauren Fletcher Wholesale used-vehicle prices during fourth quarter 2008 were the worst on record. Since then, wholesale prices rose significantly in January and February. The improvement in wholesale pricing in 1Q 2009 reflects better-than-expected retail sales of used vehicles. The decline in new-vehicle sales has decreased the volume of trade-in vehicles below retail demand for used vehicles. As a result, dealers are being forced to increase auction purchases of used vehicles to compensate for the lack of trade-ins. g 14 AUTOMOTIVE FLEET / April 2009
Depreciation Expenses are Down 2007 2008 Intermediate Cars Avg. Monthly Miles 2,070 1,951 Avg. Months in Service 29 29 Avg. Cap Cost $17,332 $17,214 Monthly Dep. Cost in CPM $0.1708 $0.1564 Dep. Dollars Per Month $341.41 $317.59 Compact Cars Avg. Monthly Miles 2,030 1,929 Avg. Months in Service 32 33 Avg. Cap Cost $15,912 $16,495 Monthly Dep. Cost in CPM $0.1742 $0.1503 Dep. Dollars Per Month $282.76 $230.78 36 9 2 7 26 11 9 Multiple Guidebook Usage 33 6 18 43 Depreciation expenses for compact cars were down more than $50 per month in 2008, with intermediate cars experiencing a decrease of more than $20 per month over 2007 numbers. Against Which Resale Guidebook(s) Do You Benchmark? KELLEY BLUE BOOK BLACK BOOK NADA USED CAR GUIDE BLACK BOOK COMMERCIAL INDEX MANHEIM MARKET REPORT GALVES NAAA AUCTION NET OTHER GUIDE MULTIPLE GUIDES Black Book + NADA Used Car Guide + Kelley... 21 Black Book + Manheim Market Report... 15 Black Book + NADA Used Car Guide... 8 Black Book + Edmunds True Market Value... 8 Black Book + Black Book Commercial Index... 8 Black Book + Black Book Commercial Index + Manheim Market Report... 8 Black Book Commercial Index + Kelley Blue Book + Manheim Market Report... 8 Black Book + NADA Used Car Guide + Manheim Market Report + NAAA AuctionNet... 8 Black Book + NADA Used Car Guide + Kelley + NAAA AuctionNet... 8 Black Book + Black Book Commercial Index + Kelley + Manheim... 8 Who is Responsible for Remarketing Your Vehicles? USE NO THIRD-PARTY THIRD-PARTY VENDOR REGIONAL/LOCAL MANAGERS FLEET MANAGEMENT COMPANY The overall wholesale market is very strong. This is driven by a lower supply of used vehicles at auction, the increase of dealers attending auctions due to depressed new-vehicle sales, and the shortage of quality trade-ins, said Paul Seger, vice president, asset remarketing for GE Capital Solutions Fleet Services. However, late-model vehicles over $10,000 continue to be a challenge. Increasingly, retail dealers are looking at used vehicles as an alternative to newvehicle sales, which have been abysmal. This has had a beneficial effect on the resale values of used fleet vehicles. Since December 2008, we have seen a steady increase in prices for quality fleet vehicles. Prices have increased 5 to 10 percent depending on the type of vehicle, with typical sedans increasing over 8 percent. Trucks and SUVs are experiencing increases over 10 percent, especially for pickup trucks, as supply and the lower gas prices have boosted their price increases. Dealers, both independent and franchise, are looking at used vehicles as a retail alternative as consumers are controlling their spending, said Darrin Aiken, assistant vice-president of vehicle remarketing for Wheels Inc. Another factor contributing to higher resale values has been the return to a degree of stability in the wholesale market since the start of the 2009 calendar-year. g At a Glance As new-vehicle sales collapsed, there was a decrease in used-vehicle trade-ins. Dealers are buying more used vehicles at auction to compensate for the trade-in decrease. Retail buyers are shifting from newvehicle to used-vehicle purchases. Lower fuel prices has caused increased resale values for trucks and SUVs. Resale values for mid-size sedans increased 5-10 percent in 2008. Despite resale gains, the wholesale market remains fragile, contingent on strength of the macroeconomy. Fate of the used-vehicle market is tied to the vitality of the new-vehicle market. 16 AUTOMOTIVE FLEET / April 2009
33 7 21 27 7 5 2 4 58 How Involved Are You in the Day-to-Day Remarketing of Your Vehicles? VERY INVOLVED SOMEWHAT INVOLVED OVERSIGHT INVOLVEMENT/ RESPONSIBILITIES OUTSOURCED TO THIRD-PARTY How are Floor Prices Determined for Vehicles Sold to Employees? WHOLESALE MARKET VALUE PERCENT BELOW WHOLESALE MARKET VALUE PERCENT BELOW RETAIL VALUE EMPLOYEE SUBMITS BID DEPRECIATED BOOK VALUE BOOK VALUE Current market conditions are stable in comparison to November/December 2008. It appears we are currently in a seller s market. However, the market is still down year-over-year. The seller s market is truly a reflection of three factors: vehicle values over-correcting in 2008 (especially large SUVs and light-duty trucks), the spring tax market, and a supply shortage, said Les Lynott, manager vehicle remarketing for Emkay, Inc. This assessment is seconded by Bill Cieslak, vice president, vehicle operations for PHH Arval. The current wholesale market for commercial fleet vehicles is generally better than third and fourth quarter 2008; however, market conditions vary by asset type. Mid-size sedans are selling briskly at prices substantially higher than where they ended in 2008. The supply and demand ratio for sedans has improved of late, and the tax refund season is supporting increased retail sales volume, said Cieslak. However, resale values for used fleet trucks continue to have varied results. Newer, lower-mileage, higher-valued trucks have enjoyed substantially higher prices when compared to Q4 2008. In many cases, values have increased by several thousand dollars, said Cieslak. Conversely, an oversupply of older commercial work trucks has not produced the same price lift. Continued challenges in the construction, remodeling, and contractor industries have not produced an increase in the demand for these types of trucks. Another factor contributing to improved market conditions in 2009 is that buyers are more positive about the usedvehicle market. Currently, and for the first 10 weeks of 2009, the wholesale market has been relatively strong and buying has picked up for every vehicle segment. We are receiving good prices in every region of the country, and auction sale percentages are very high, said Bob Graham, director vehicle remarketing for Automotive Resources International (ARI). Models that were hit hardest in October and November, such as SUVs and pickups, have seen the biggest recovery; buy prices are up on everything. One observation worth noting is that the mood of both buyers and sellers has improved, and there is definitely a positive vibe in the auction lanes, which helps keep the wheels turning. The decrease in fuel prices has also put upward pressure on resale values, especially for trucks and SUVs. Conversely, lower fuel prices have put downward pressure on resale values for more fuelefficient vehicles. The demand for smaller, fuel-efficient vehicles has slowed as more and more consumers base their purchasing decisions on vehicle utility and price rather than fuel Do You Offer an Extended Warranty for Out-of- Service Vehicles Sold to Employees? Do You View Condition Reports of Vehicles Prior to Resale? Do You Recondition Vehicles Prior to Resale? 9 8 7 6 5 4 1 84 16 NO 7 6 5 4 1 57 43 NO 7 6 5 4 1 66 34 SELL VEHICLES AS-IS 18 AUTOMOTIVE FLEET / April 2009
35 25 15 1 If You Recondition Vehicles Prior to Sale, How Much Do You Spend on Reconditioning? 5 UNDER $100 $101-$200 $201-$300 MORE THAN $300 Under $100 35 $101-$200 29 $201-$300 12 More than $300 24 What are Your Average Days to Sale? (From date vehicle is taken out-of-service to date sold) 4 35 25 15 1 5 UNDER 30 DAYS 31-40 DAYS 41-50 DAYS MORE THAN 50 DAYS Under 30 Days 4 31-40 Days 35 41-50 Days 8 More than 50 Days 17 economy. From their summer peak in 2008, used-hybrid values have fallen over 25 percent, said Juan Flores, director, vehicle valuation for Kelley Blue Book. Despite the upturn in wholesale resale prices, many believe today s price gains are tenuous. Today s market can be best described as fragile. The direction of credit, fuel costs, and consumer confidence are all potentially major influences of the overall market and specific asset segments. Now, more than ever, fleet managers need to carefully consider market conditions when preparing replacement schedules, said Cieslak. Others see volatility returning to the wholesale market. I see more price volatility than in a normal spring market. Currently, prices are rising as Donlen s National Auction Index reflects (view index online at www.automotive-fleet.com/magazine), but I expect that to level off shortly, likely in the next 45 days, said Gus Xamplas, vice president remarketing for Donlen Corp. Forecast for 2 nd Half of 2009 Some remarketers are forecasting a continuation of a strong wholesale market through the second half of 2009. We anticipate the wholesale vehicle market to remain strong in the second half of 2009, provided there are no major economic events that would negatively impact the automotive industry, said Seger. One reason for the positive outlook is that some remarketers are forecasting a shortage of used vehicles in the coming years. The supply for used fleet vehicles will decrease in the second half of 2009 as many fleet customers either delay ordering new AUTOMOTIVE FLEET / April 2009 21
9 Do You Also Use a Simulcast Online Auction When Vehicles are Sold at a Physical Auction? 8 7 6 5 4 1 86 NO 14 2010 vehicles or wait until the beginning of calendar-year 2010 for the spring order cycle. The market should remain fairly good due to the lower supply of available commercial fleet-type vehicles for sale in the wholesale market for the second half of the 2009 calendar-year, said Aiken. Since we have reduced new-vehicle orders over the last two model-years, this will eventually catch up to the used-vehicle market in the form of a shortage of used vehicles. Prices should continue to improve with every passing model-year. Lynott of Emkay offers a similar forecast. Supply shortage and dealer demand is driving pricing upward. Supply to the used-car market will continue to be reduced for several years to come. However, consumer confidence ultimately will dictate whether the upward pricing trend continues. I do not believe the pricing will have the same upward trend in the latter half of 2009, nor do I believe we will have the dramatic drop-off in pricing. I believe we will see the market return to a more historical used-car depreciation curve. Calendar-year 2009 will prove to be less volatile than 2008, and pricing will continue to stabilize, said Lynott. All remarketers agree that the vitality of the used-vehicle market is contingent upon the larger macroeconomy. I am cautiously optimistic that the market improvements seen year-to-date can continue throughout the year, but this projection is contingent upon the proposed benefits from the stimulus package, Troubled Asset Relief Program (TARP), and Termed Asset-Backed Lending Facility (TALF) filtering down to the automotive industry in short order, said Tim Martin, vice president, operations for LeasePlan USA. The availability of credit and improved consumer confidence will be key factors in determining the strength of the used-vehicle market in the second half of 2009. Overall, we expect the supply and demand of inventory to continue to trend more positively. Consumer purchasing patterns will likely continue towards favoring used-vehicle purchases over new. Challenges in the commercial and luxury segments will continue as the general economy struggles and the market attempts to process large volumes of off-lease consumer luxury brands. The availability of financing for all credit scores and an increase in consumer confidence are key items for the improvement of all market segments, said Cieslak. Martin of LeasePlan likewise believes the availability of credit is the key factor in predicting market conditions for later in the 2009 calendar-year. The demand for pre-owned vehicles will be strong if the market liquidity is available for wholesale and retail credit. Consumers are looking to lower their out-of-pocket expenditure for vehicle purchases and franchise dealers are looking to pre-owned sales to shore up their business in this tough economy. Because new-vehicle sales are down, dealers are coming to the wholesale market for inventory that normally would be sourced from trade-ins, said Martin. Consumer confidence and credit availability also will be the two key factors influencing the vitality of the wholesale market in the second half of 2009. One of the top factors influencing resale values in today s market is credit availability, which is really saying willingness and ability to buy. This is one of the biggest AUTOMOTIVE FLEET / April 2009 23
What Percentage of Your Vehicles are Sold as a Total Loss at a Salvage Auction Each Year? 7 6 5 4 1 UNDER 1 1-3 4-7 MORE THAN 7 Under 1 5 1-3 28 4-7 16 More than 7 6 drivers of the wholesale market. Consumer confidence is impacted by a lot of things, but I think unemployment and foreclosure rates are the biggest factors. Consumers defer purchases when they re worried about losing their jobs and homes, said Xamplas of Donlen. Regarding credit, he said, I don t think credit will flow again until the toxic assets are off the lenders balance sheets. Once that happens, more credit will be available to consumers and dealers. But I think those loans will be more structured than we ve seen recently. Other industry observers are beginning to say the higher resale values for used vehicles will not continue at the same pace. Regardless of fuel prices and a diminished supply of vehicles via reductions in trade-in and fleet volume, the current level of consumer demand will not provide sufficient support to continue the widespread appreciation seen over the past few months. Evidence of this can be found in March valuation data, which has already shown a significant decline in the appreciation rates of the full-size trucks and SUVs, said Flores. Long-Term Concerns Looking forward, there are concerns about the future of the overall wholesale market. This is a bittersweet time. However strong the wholesale market is, it presents long-term concerns regarding the overall automotive industry and the current infrastructure that supports it. With the reduction of new-vehicle sales and the direct impact that will have on the future usedvehicle supply, major changes within the industry are imminent, said Seger. The fate of the used-vehicle market is very much tied with the vitality of the newvehicle market and macroeconomy. We are hopeful market conditions will continue to improve in 2009. The future direction of the market is linked to many variables, which are unknown at this time. A predictable market is predicated on improvement in the auto industry, stability of fuel prices, and improvement in the general economy. We welcome stability, as this will be a general positive sign for the U.S. economy as a whole, said Lynott. Despite the optimism in today s market, when resale values are compared to same time last year, values are down. While we all talk about the good market, it s important to note that on a yearover-year basis, every segment is still down and it s not likely the wholesale market will fully recover until we have a healthy new-vehicle market and a more stable economy. We are also in a period of volatility where increased gas prices, a deeper recession, or failing OEMs could all easily turn the market back on its ear in record time. We should enjoy the market we have currently, but remember, it s very fragile, said Graham. One area of future growth will be in the upstream market for remarketing used-vehicles online. We are seeing the percentage of vehicles purchased online midstream and via simulcast on live-sale days increase during the first quarter. I believe this is in part due to dealers becoming more comfortable purchasing fleet vehicles online because of the quality of the product offered. But I also believe the necessity to cut overhead costs at the dealer level has driven buyers to the Web who were strictly live-lane buyers in the past, said Martin. AF AUTOMOTIVE FLEET / April 2009 25