Earlier this month, I noted how retail used vehicle sales in April could be a trigger for the rest of the year. Like many dealers, I was hoping that sales would take a turn for the better – that a shower of sales from mid-April to late April might bring flowers into May and beyond.
Well, it looks like we won’t see the “rebound” in retail sales that everyone was hoping for. The hope rested in part on the fact that a few weeks ago, a smaller proportion of consumers received their federal tax refunds than usual. The arrival of these delayed checks, it was thought, would hopefully lead to a recovery in used-vehicle retail sales.
Unfortunately, as many dealers know, retail sales of used vehicles did not increase substantially during the month of April, despite the arrival of more (and larger) refunds from the Internal Revenue Service than at the same time last year. The bottom line: the tax refund dollars are there, but they don’t seem to be directed to used vehicles.
The end result is that while retail demand remains relatively strong, dealers are experiencing a much more subdued spring selling season than many had expected this year. At Cox Automotive, analysts had forecast April to be one of the strongest months of 2022 for used-vehicle retail sales. Today, analysts are revising their retail sales forecasts for the calendar year. Cox Automotive’s chief economist, Jonathan Smoke, estimates we’ll see 500,000 fewer used-vehicle retail sales this year than last year.
In my interviews with dealers over the past few days, I have explained how current retail sales rates, combined with broader economic factors such as rising inflation and rising cost of living in the together suggest that now is the time for more storage and pricing discipline. At some stores, fundamentals for investing in inventory have weakened as dealers experienced two straight years of record sales and profits for used vehicles.
Across the country, dealerships have approximately 45 days of used vehicle inventory on their lots. Given current conditions, I repeated my advice that dealers should balance inventory against their rolling 30-day total of retail sales. If you have a lot of inventory right now relative to your 30-day retail total, now is the time to temper acquisition efforts, especially in higher-cost sourcing channels like auctions. , makes sense. This is also a time when you need to make sure your appraisers and buyers understand exactly how badly your inventory needs the vehicle they are considering.
Current conditions also suggest that dealers will need to watch their used-vehicle retail prices more seriously than they have in the recent past. A few months ago, some predicted that a rebound in spring sales would lead to price appreciation in wholesale and retail markets – the best of both worlds for dealers.
While we have seen some wholesale market appreciation in recent weeks (about 2%, about half of typical spring value appreciation), retail prices are not rising significantly. Some expect retail prices to drop as dealers realize spring buyers aren’t arriving as quickly or in numbers as they had hoped.
Perhaps the best news about the current used vehicle market environment is that we’ve all been there. We know how to optimize the profitability of used vehicles when market conditions are not entirely favorable to us and when the risks of margin compression increase. It’s time to refocus on the fundamentals of inventory investment management to stay ahead of what appears to be a weaker used-vehicle market.
Dale Pollak is President and Founder of vAuto and this commentary originally appeared on his blog.
