A tight supply of used vehicles has Canadian retailers aggressively pursuing customers to replenish their stock as sizzling demand fuels higher prices and profits.
“We’re buying a lot of cars from customers directly [because there] aren’t enough cars in the wholesale marketplace,” said John Hairabedian, CEO of the Quebecbased HGregoire dealership group. “We’re doing as many deals as we can.”
Demand for used vehicles, particularly twoand three-year-old pickups and crossovers, has soared during the COVID-19 pandemic. Supply has been strained by consumers seeking cheaper rides during a period of increased economic uncertainty, while others look to buy a vehicle to avoid using public transportation, industry experts said.
Volkswagen of Windsor recently put three 2018 VW Atlas crossovers up for sale. All were sold within a week, said Ruth Revenberg, general manager of the Ontario dealership.
“Sometimes we can almost just wholesale a car for what we think it should be retailed. That’s how hot we think the market is,” Revenberg said.
The inventory squeeze is not expected to ease anytime soon as automakers and parts suppliers sort through a microchip shortage, which has forced production slowdowns at many auto factories.
Used-vehicle values are on the rise as supply dwindles and demand remains elevated. Canadian Black Book’s Used Vehicle Retention Index, which tracks the retained value of twoto six-year-old vehicles, was at an all-time high in February.
“Supply is so tight. Our average margins are double what they were two years ago,” said Michael Carmichael, CEO of UpAuto, which owns General Motors, Nissan and
Subaru dealerships in Stratford, about 150 kilometres west of Toronto.
“I’ve pulled my dealerships off Autotrader, and we’re still selling cars.”
NEW OR USED, HARD TO FIND
As new-vehicle supplies dwindle, used-vehicle inventory is also expected to become harder to come by for dealers as the number of trade-ins falls. Some customers who would normally buy a new car might instead buy a used one if their new vehicle of choice isn’t available, or they might delay a purchase entirely.
Meanwhile, fewer fleet vehicles are moving through auctions. Auto analyst Dennis DesRosiers said 45 per cent of the fleet market typically comprises daily rental vehicles, a significant portion of which travelers rent at airports. Reduced travel due to COVID-19 restrictions, therefore, has depressed fleet volume.
Gross profit on used vehicles is rising, DesRosiers said, citing conversations with dealers.
“When you add in $2,000 to $3,000 to the transaction price, it does result in higher grosses,” he said.
Those high margins are why the period from mid2020 to mid-2021 might go down as the best 12 months in history for many dealers.
“One of the reasons car dealers are so profitable is that the demand for [oneto five-year-old] used vehicles is up, supply is down and they’re getting fantastic margins on their used vehicles,” DesRosiers said.
U.S. DEALER PROFITS SOAR
Data on 2020 profitability of Canadian dealerships is not publicly available. In the United States, however, average net pretax profit at dealerships surged 48 per cent to US $2.1 million ($2.7 million) in 2020 from a year earlier, according to the National Automobile Dealers Association.
Average gross profit per used vehicle rose 13 per cent during that time to US$2,675 ($3,375).
Profits vary greatly by market and brand, and large dealership groups might generally be in a better position on inventory because of greater resources and access to other markets.
Customers finding higher trade-in values for their used vehicles might not be getting discounts on a new car, DesRosiers said. Automakers and dealers have “backed off a little bit on incentives,” he said, given depressed new-vehicle inventory and the extra cash customers are receiving for their old vehicles.
“There’s never been a better time to trade in your used vehicle, but you’re going to pay more on the new — if you can find it,” said Carmichael, the Stratford dealer.
As margins on new-vehicle sales shrank in recent years, franchised dealers began focusing more on used and certified pre-owned vehicles. In the past, DesRosiers said, an average Canadian new-vehicle dealer might have sold 50 per cent as many used vehicles in a year as they did new cars. Today, that figure is more likely to be closer to 60 or 70 per cent, with an increasing number of retailers selling roughly the same number of used vehicles as new, he said.
That could explain retailers’ growing appetite for used-vehicle sales. Carmichael, for example, said he planned to open a used-car dealership by June, despite inventory shortages.
“It’s a tough time to do that, but I’m committed to it,” he said. “But where are we going to get the cars?”