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According to an article in Automotive News, dealerships are in a new car sales slump and have to increasingly rely on used car sales and service revenue to drive profits. Industry experts recognize that used cars are typically more profitable to a dealership than new.
Competing predominantly on price, dealerships moving new vehicles frequently end up with low front-end margins. However, when it comes used vehicle buying or trading, there is more opportunity to make a profit. But, due to increased demand for used vehicles, auction prices have risen, as have used vehicle values. Some dealers now have to travel longer distances to stock their inventory. In addition, many can no longer place as much emphasis on used vehicle acquisitions from customer trade-ins.
According to the article, the competition for used vehicles is so fierce that dealers are taking to classified ad platforms such as Craigslist to attract consumers looking to sell their used vehicles. This practice reduces industry competition for inventory and allows the dealer to hold more gross profit after reconditioning and detailing. This benefits customers in the market for a vehicle as they can buy a used car that has already been hit with a large depreciation, making it more affordable. Dealers win as well as these used cars, in general, provide higher front-end profit.
But there is a whole other way this used car sales trend benefits consumers… recalls!
Unlike a new car, it is illegal for a dealership to sell a used car with an open recall. Now, private sellers and dealers must consider whether vehicles plagued with open recalls run the risk of devaluation…Ouch! Because of this, dealers looking to purchase these vehicles have to factor in the costs involved with performing any needed recall repairs prior to sale.
If the used vehicle is of the same brand as the acquiring dealership, the recall can easily be repaired at the dealership with no additional cost, as the manufacturer pays for the labor and parts. It’s a strategy deployed at several dealerships nationwide, but primarily born out of reconditioning efficiencies.
Recalls add another layer of complexity for dealerships looking to acquire off-brand vehicles. Profit margins can dramatically fall during the reconditioning process due to delays when repairs must be performed at a neighboring franchise dealership that is authorized to make such repairs.
The search for used car inventory could be right in your back yard in the form of recalls. Recall repairs are not only the right thing to do but may turn out to be a smart tactic for replenishing your used car inventory.
In addition, about 50% of consumers opt for additional repairs to keep their vehicle operating at an acceptable level of performance. The other 50% may be open to an offer to sell their vehicle to you.
Those dealers who successfully acquire inventory through private parties will, more than likely, end up with a profitable sale. And there is the added benefit to society as we end up with vehicles sold by dealers that are safe for the consumer and their fellow drivers.
While a decline is new car sales is certainly not an event worthy of applause, perhaps the silver lining is that the rise in used car sales can assist in the overall recall repair completion rates and increase dealership profits.