Market Trends

Remarketing Déjà Vu: Will the Resale Market of 2016 be a Repeat of 2002?

February 11, 2014

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"Those who cannot remember the past are condemned to repeat it," wrote the philosopher George Santayana. This quote rings true on many levels and an analogy can be found in vehicle remarketing trends that are currently percolating in the wholesale market. Many of the dynamics in today’s market are eerily familiar to the resale value softness that occurred in the last decade, which ultimately peaked in 2002. At that time, year-over-year increases of off-lease vehicles entering the wholesale market exerted downward pressure on resale prices. For the sake of this discussion, off-lease returns are defined as those vehicles not purchased by the retail lessee or by the grounding dealer. Historically, this represents approximately 50 percent of all lease originations.

Change is Sometimes Cyclical

Year-over-year increases in off-lease vehicles will exert downward pressure on resale prices.


Source: J.D. Power & Manheim Consulting
Year-over-year increases in off-lease vehicles will exert downward pressure on resale prices.Source: J.D. Power & Manheim Consulting

Let’s examine in more detail the similarities between 2002 and what we anticipate for 2016. Today, retail leasing is in the midst of a dramatic resurgence. Lease originations have grown significantly, from only 1.1 million units in 2009 to nearly 3.2 million in 2013. Manheim Consulting projects 2.1 million off-lease units will enter the wholesale market in 2014, which will grow to 2.5 million in 2015 and 3 million in 2016. Fueling this growth are some OEMs offering aggressive lease incentives, such as inflated residual values, lower lease calculation rates, the absorption of negative equity in the lease calculation, and lower qualifications for credit approval. Although much of the forthcoming growth in wholesale inventory will be due to higher off-lease volumes, there will also be growth in the number of rental, repossessions, and dealer trade-in units.

As wholesale inventory swells, it will produce downward pressure on wholesale pricing, since it is not anticipated that there will be a corresponding increase in dealer demand. As Tom Webb, Manheim’s chief economist points out, 2016 is shaping up to be a challenging year for remarketers. In fact, there is no guarantee the 2016 market will be a straight-line progression from today’s robust market. As history shows, we operate in a cyclical industry influenced by macro-events that are often beyond our control.

While 2016 may seem far off, this is the wholesale market in which many fleet managers will be remarketing today’s 2013 and 2014 model vehicles. Many variables in the 2016 market are already baked into the forecasts, but many unpredictable variables exist that may mitigate these downward pricing pressures. Some remarketing experts downplay concerns that used-vehicle pricing may be heading for a pricing correction with the spike in the availability of used vehicles. They argue that used-vehicle supplies will continue to remain below historic levels, and with the improving economy, pent-up demand among consumers to replace aging vehicles will drive strong demand for both new and used vehicles in future years. Also, there has been a surge in the export of used vehicles to emerging international markets, which will help expand buyer demand for this expanded inventory.
Similarly, many off-lease vehicles are cherry-picked by OEMs for their certified pre-owned programs. In 2002, according to NADA, the certified-used vehicle market was less than 40 percent the size of total off-lease volume; however, in 2013, the CPO market was 23-percent bigger than total off-lease volume. The argument is that today’s CPO market can absorb a much larger portion of off-lease vehicles than in the past. Very few doubt the ability of the wholesale market to absorb the increased volume of off-lease vehicles. The question is how much adjustment will remarketers need to make to prices to facilitate these wholesale transactions.

A Multi-Pronged Remarketing Strategy

Today, used-vehicle resale values continue to remain strong as dealer demand scoops up existing wholesale inventory of good-quality used vehicles. It is important to remember that the higher-than-normal resale values we have experienced in recent years are an anomaly caused by the low used-vehicle inventory in the wholesale market, resulting from the extremely low sales of new vehicles during the 2009-2011 time frame. For instance, in 2009, annual new-vehicle sales fell to 10.3 million units from 16.9 million the preceding year. As a rule of thumb, 60 percent of new-vehicle sales result in a trade-in. The sizeable contraction in new-vehicle sales resulted in a significant drop in used-vehicle trade-ins, along with fewer off-lease units and a substantially lower volume of rental cars being remarketed at wholesale auctions.

This will soon change as trend lines point to a multi-year swelling of used-vehicle inventory in the wholesale market. The forthcoming off-lease volume is not a secret – the remarketing industry knows it’s coming. What are you doing to prepare for these different market dynamics? Fleet managers must optimize remarketing processes to ensure out-of-service fleet units are exposed to the most potential buyers. This requires a multipronged remarketing strategy to reinvigorate employee sales, promote sales to grounding dealers, aggressively using upstream online remarketing channels, and implement greater creativity in remarketing units at physical auctions in order to stand out from the crowd.

Let me know what you think.

mike.antich@bobit.com

Comments

  1. 1. David Ruggles [ February 12, 2014 @ 11:48AM ]

    Great piece Mike! Everyone I know at the OEM level is concerned that these lease returns will kill current resale value along with future residual values. We have already seen ALG fire a shot across the bow of Cadillac by reducing the residual of the ATS substantially in the face of HUGE incentives to move the cars at retail. But lease returns backing up would be a disaster as it was in 2002. Currently, the subvented monthly payments on new vehicles are about the same, and sometimes less, than conventional financing on pre-owned lease returns. Inside the car companies, a conflict exists. The guys in charge of sales think every CPO sale is a lost sale for them. The CPO know they have to compete with new vehicle subventions. IN the meantime, the overriding priority is that car companies exist to build cars. And their captives have their hands full remarketing the off lease vehicles.

    Enter pre-owned vehicle leasing. Its the only way to maintain the necessary distance between the subvented payment on a new vehicle, and a pre-owned. It shortens the term of the pre-owned deal while still lowering the monthly payment, allowing dealers to do business with their customer more often. OEM captives will never go for this. They already have their hands full. The worst part of the depreciation has already taken place. Technology today precludes "power booking." Wells Fargo, Chase, USB, BOA, are you listening?

    OEMs know what happens when their resale values and residuals go to pot. Their brand is tarnished and they lose new vehicle sales and production. Their owners are more upside down than ever. I wonder if the OEMs might offer some real support to a bank who will take on pre-owned vehicle leasing with a focus on CPO.

  2. 2. John Brewington [ February 12, 2014 @ 12:39PM ]

    Mike,
    It is inevitable that the sellers’ market for off-lease vehicles will end. You’ve identified many of the factors influencing this in your article. I see two approaches to this pending situation for most lessees – look at your off-lease units as a commodity whose value fluctuates with the market and plan accordingly OR take a proactive approach to your fleet assets to maximize the potential return on off-lease units.
    The proactive approach I recommend includes adjusting selector lists to include units and vehicle content that will help differentiate your units from the others in the auction lanes, adjusting mileage or in-service months to optimize ROI, rewarding drivers who turn in units with no or minimal damage, and pursuing employee sales or other sale methods that deliver higher than wholesale results. The second method does involve more effort, but the potential rewards are significant for those willing to “manage” their assets.

  3. 3. Richard Battersby [ February 18, 2014 @ 12:49PM ]

    Back in '02 we changed our replacement vehicle procurement model to take advantage of age of super low offlease and previous daily rental resale values. The state was going through a budget contraction at the time so it was a silver lining for us as a government fleet. Could be even more bad news for the OEM's if others follow suit this go around.

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Author Bio

Mike Antich

Editor and Associate Publisher

Mike Antich has been covering the fleet management and vehicle remarketing markets for more than 20 years. During this period, Mike has written or edited more than 4,600 articles on the subjects of fleet management, manufacturer fleet activities, the fleet leasing industry, and vehicle remarketing. He was inducted in the Fleet Hall of Fame in 2010.

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