Following Manheim’s release of the latest edition of the Used Vehicle Value Index, Zo Rahim joins CBT News to discuss current defining factors of the auto industry. As the Manager of Economics and Industry Insights at Cox Automotive, Rahim says that there is still a lot of opportunity for dealers and fixed ops to continue to see favorable profit despite changes in the retail market. Watch the full interview above in order to hear more about these trends as well as how they are going to affect consumer trends and dealership’s profits.
VIDEO TRANSCRIPT:
Jim Fitzpatrick:
Hello, everyone. I’m Jim Fitzpatrick. Thanks so much for joining us on another edition of CBT News.
Jim Fitzpatrick:
Manheim has come out with the latest edition of the Used Vehicle Value Index and the findings may surprise you. Here to give us a rundown of the best performing divisions in the used car market, and the impact they can have on your dealership is Zo Rahim, Manager of Economics and Industry Insights at Cox Automotive.
Jim Fitzpatrick:
Thanks so much for joining us, Zo.
Zo Rahim:
Thanks for having me.
Jim Fitzpatrick:
Sure. So let’s dive right in here. What are some of the defining factors of the auto industry thus far?
Zo Rahim:
So, 2019 has been an interesting year.
Jim Fitzpatrick:
Sure.
Zo Rahim:
When you look at the new vehicle market, taking a step away from the used vehicle market, it’s the mix of what’s being sold. I don’t mean segments, I mean the type of vehicle.
Zo Rahim:
Overall, volume is down 2% year to day, but fleets up 4% year to day, and retail is where the weakness is, and that’s down 4% also this year.
Jim Fitzpatrick:
Okay.
Zo Rahim:
Fleets up 4%, retail is down 4%.
Jim Fitzpatrick:
Okay.
Zo Rahim:
Now, we’re not trying to have a doom and gloom conversation, but we are trying to address the fact that there are weaknesses in the new retail market, driven by affordability concerns.
Jim Fitzpatrick:
Yes.
Zo Rahim:
The Federal Reserve isn’t expecting to raise too many times this year with its interest rate, the Fed Funds rate. Right now, the Fed Funds rate is flat.
Jim Fitzpatrick:
right.
Zo Rahim:
But, treasury rates are down.
Jim Fitzpatrick:
Okay.
Zo Rahim:
Mort gates are down, but the auto rates continue to creep up. In fact, auto loan rates are up 200% basis points from their lows, so there’s a little pressure there for consumers.
Jim Fitzpatrick:
Yeah.
Zo Rahim:
When you look at incentives, on average incentives are down 5% to date.
Jim Fitzpatrick:
Okay.
Zo Rahim:
So, you have increased interest rates, lowered incentives, and vehicle transaction prices are going up, too.
Jim Fitzpatrick:
Right.
Zo Rahim:
You’re starting to see payment inflation on the new vehicle side, but as there are challenges to the new vehicle market, there’s still a lot of opportunity overall in the vehicle market, particularly used.
Jim Fitzpatrick:
Yeah.
Zo Rahim:
Where we see a lot of potential.
Jim Fitzpatrick:
Okay.
Zo Rahim:
April use volume, we estimate, was up 3% right in line with the spring selling season.
Jim Fitzpatrick:
Right.
Zo Rahim:
Which is a lot of opportunity out there for dealers.
Jim Fitzpatrick:
Sure. Why do you suppose to increase in fleet sales?
Zo Rahim:
So, that’s a good question. In fact, on the commercial side, it’s driven by the tax cut and job act that was implemented last year.
Jim Fitzpatrick:
Okay.
Zo Rahim:
Where you’re able to write off the depreciation in the first year of the vehicle, so I think small businesses operating fleets realize that and are starting to learn more about that. They’re reinvesting savings on their taxes, as well as new law changes on taxes, to invest in their fleets.
Jim Fitzpatrick:
Well, the auto industry benefits from that in a big way, doesn’t it?
Zo Rahim:
Absolutely.
Jim Fitzpatrick:
Yeah.
Jim Fitzpatrick:
We know Cox Automotive released its latest edition of the Manheim Used Vehicle Index. What can you tell us of some of the key takeaways from that report?
Zo Rahim:
Yeah, absolutely.
Zo Rahim:
The Manheim Used Vehicle Value Index increased 1.81% month over month in April, and 4.5% on a year over year basis, so that’s right where we’re seeing a traditional spring bounce.
Jim Fitzpatrick:
Right.
Zo Rahim:
Which was in line with the increased volume we saw on the used vehicle side.
Jim Fitzpatrick:
Okay.
Zo Rahim:
Consumers are jumping into the market. This is right around tax refund season, so consumers are getting tax refunds, using that money to shop for used vehicles.
Jim Fitzpatrick:
Okay.
Zo Rahim:
We still think that there’s robust used vehicle demand out there in the market. Our 2019 view came in at 39.4 million vehicles sold last year.
Jim Fitzpatrick:
Wow.
Zo Rahim:
Our estimate for this year is flat, so we’re still looking at 39.4 million used vehicle sales this year.
Jim Fitzpatrick:
Sure.
Zo Rahim:
Some people might say, okay, there’s no growth there, but we’re still looking at transactions at the highest level they’ve been of this expansion. There’s still ample demand out there to feed into the retail market for used.
Jim Fitzpatrick:
Sure.
Jim Fitzpatrick:
Some would say if you look at the new vehicles that are down, and used vehicles are flat, used vehicles are actually maintaining and growing, you know what I mean?
Zo Rahim:
Yeah.
Jim Fitzpatrick:
If you look at it that way, right?
Zo Rahim:
Yeah.
Jim Fitzpatrick:
It’s holding its own.
Zo Rahim:
Exactly, yeah. The used vehicle market continues to out perform the new vehicle market, for sure. There’s a lot of opportunity there. When you break out the used vehicle market, you’re seeing robust growth in CPO. We’re estimating 2.75 million CPO sales this year, which would be the ninth straight record of CPO sales growth.
Zo Rahim:
Last year, 2018, was the best year on record for CPO sales. When you look at off lease maturities, and lease maturities for this year, you’re seeing ample supply out there to drive this CPO supply.
Jim Fitzpatrick:
Sure.
Jim Fitzpatrick:
Do you think that we’re seeing more CPO sales as a result of the affordability factor on new cars?
Zo Rahim:
Absolutely. These are very like new vehicles.
Jim Fitzpatrick:
Right.
Zo Rahim:
Cheaper than the new vehicle alternatives, but, again, not too old. You’re still seeing the same technology packages, you’re seeing upgrades options content because these are leased vehicles, right? You tend to have a bit more options than maybe a retial contract, so these are like new vehicles. You get the benefit of a cheaper transaction prices, so there’s definitely appeal there for consumers that are cash strapped, or their budgets are a little tighter to jump into the new vehicle market. This is where they can get an affordable option.
Jim Fitzpatrick:
Sure, sure.
Jim Fitzpatrick:
What used vehicle segments are performing best in addition to what you just mentioned in the current market? Where do you see that going for the rest of 2019?
Zo Rahim:
The interesting thing is, when you look at pricing, the best performing segment in the used vehicle market has been mid-sized cars.
Jim Fitzpatrick:
Huh.
Zo Rahim:
A lot of people would think that it’s SUVs and pickups.
Jim Fitzpatrick:
Right.
Zo Rahim:
Pickups have done pretty well, too. SUVs are softer.
Zo Rahim:
The reason mid-sized cars are doing so well is because A, the affordability option, right?
Jim Fitzpatrick:
Yeah.
Zo Rahim:
It’s an appealing type of vehicle.
Jim Fitzpatrick:
Sure.
Zo Rahim:
It’s an appealing segment.
Zo Rahim:
What’s also interesting is that as a supply of cars decreases in the new vehicle market, that has the direct impact on the used vehicle market, too, where that supply eventually will start coming down, too. We’re starting to see that right now.
Jim Fitzpatrick:
Okay.
Zo Rahim:
Cars are losing market share in the used vehicle market. Because of that, because of tighter supply and still robust demand for these vehicles, you’re seeing better price performance.
Zo Rahim:
Likewise, with SUVs, you’re seeing more and more supply coming into the used vehicle market through off lease, off rental units, and that’s driving up share and driving down prices.
Zo Rahim:
Now, SUVs are still performing pretty well, right?
Jim Fitzpatrick:
Right.
Zo Rahim:
They’re increased on a year over year basis, but they’re not performing the same as the overall market.
Jim Fitzpatrick:
Okay, gotcha.
Jim Fitzpatrick:
How will this effect dealerships?
Zo Rahim:
Dealerships on the used vehicle side have a lot of opportunity. Both franchised and independent dealers have opportunity of a lot of volume, but we do say, and we do caution, that we don’t think volume is going to grow after this year.
Jim Fitzpatrick:
Okay.
Zo Rahim:
In the wholesale market, growth and supply has been driven by off lease units, and off-lease units according to our calculations, peak this year in 2019.
Jim Fitzpatrick:
Okay.
Zo Rahim:
At a little over four million units, they’re going to start to decline every year after this year.
Jim Fitzpatrick:
Ah, okay.
Zo Rahim:
Supply is going to be one of the major headwinds of the vehicle market, not demand itself.
Jim Fitzpatrick:
Okay.
Zo Rahim:
If you’re a dealer, used operation and used sales are still a very important part of your operations.
Jim Fitzpatrick:
Right.
Zo Rahim:
When you look at the public traded dealer groups that just reported Q1 earnings, sales for their new vehicle sales were down, new vehicle sales departments were down, but used vehicle sales were up.
Jim Fitzpatrick:
Right.
Zo Rahim:
Even the franchised, publicly traded dealer groups are seeing favorable performance on used vehicle sales, and I think it’s going to continue that way this year.
Zo Rahim:
Of course, with used vehicles you have favorable opportunities and fixed ops with service and with parts.
Jim Fitzpatrick:
That’s right.
Zo Rahim:
That’s where a lot of the margin for dealers is.
Jim Fitzpatrick:
That’s right.
Zo Rahim:
Dealers are still okay.
Zo Rahim:
The new vehicle market might have its challenges, but there’s still a lot of opportunity with used and fixed ops for dealers to continue to see favorable profit and favorable revenue.
Jim Fitzpatrick:
You mentioned that the leased vehicles coming back has peaked. Why is it that they peaked, and they’ll start to drop back now?
Zo Rahim:
That’s just the function of where the overall used vehicle retail market is, as well as lease penetration. Captive finance companies have been a bit more conservative on leasing, so they’ve brought the lease penetration down.
Zo Rahim:
We’re still looking at about 28% lease penetration, but that’s still down from 30% where we saw in 2016.
Jim Fitzpatrick:
Well, Zo Rahim, Manager of Economics and Industry Insights at Cox Automotive, thank you so much for joining us on CBT News.
Zo Rahim:
Thank you very much.
