Cutting prices on declining unit sales leads to a decline in revenue.
By wolf richter for wolf street,
The used vehicle market now has a major hangover: Price hikes from August 2020 to early 2022. During this period, according to Cox Automotive, retail prices have increased by mindlessly ridiculous amounts – 40% of the average used vehicle listing price; According to the Bureau of Labor Statistics, the CPI per used vehicle is 53% – although there was never a shortage of used vehicles.
But there is now growing market resistance against these prices, and retail sales of used vehicles fell 10% year-over-year in December to about 1.29 million vehicles, according to Cox Automotive.
According to Mannheim, the largest auto auction house and a unit of Cox Automotive, wholesale prices – reflecting costs for dealers – dropped 15% year-on-year in December.
Retail prices have also fallen, but have remained stable compared to wholesale prices, as dealers try to hold the line and slow down the process.
The average used vehicle listing price fell just 4.3% in December from a peak in April to $27,140, largely unchanged from November, and down 3.8% from a year earlier. Cox Automotive, But this is much less than the 15% drop in wholesale prices.
Just three years ago, in December 2019, the average listing price was $19,900. It’s hard to wrap your mind around these kinds of price increases. Most people can continue to drive what they already have, but that they chase these prices in this way is one of the big developments that developed during the pandemic.
And dealers made hay whenever possible, bidding wholesale prices at auctions because they believed they could sell those vehicles for even higher prices because consumers were suddenly willing to pay anything. And the prices exploded more. But now it’s hangover time.
The seasonally adjusted CPI for used vehicles in December declined 10% from the peak in January 2022 and 9% year-over-year. This is still less than the 15% drop in wholesale prices:
Independent dealers (like CarMax and Caravana or the little dealer on the corner) and franchised dealers (like Ford dealers) ended December with 2.32 million used vehicles in stock, according to Cox Automotive, which is plentiful, given the decline in sales. Happened.
At the current rate of sales, supply in December remained at 54 days, up from what it was in November, and up from 53 days in December 2019 three years ago, and up from an average of 48 days in 2019:
Hangover time for used car dealers,
During an era of price increases, enough American used vehicle buyers were, for the first time, willing to pay whatever. Now, with fewer used vehicle buyers willing to pay anything, more buyers are protesting those prices and looking for deals, and unit sales declined 10% year-over-year. is, and the dealers are dealing with a bad hangover.
Dealers have already dialed back their enthusiasm in the auctions, and hence wholesale prices are down 15% year-on-year in December. This means that the cost of their new inventory is coming down. But he still has some inventory that he bought a few months ago that is getting old and that he paid a lot for. So this is an issue that they have to deal with.
When dealers cut their retail prices to encourage sales or prevent declines, their dollar-sales will drop even if unit sales remain the same. And if they cut their prices, and unit sales still fall, so does their dollar sales. And this is happening now.
For example, CarMax, the largest used vehicle dealer, reported a 24% drop in revenue for the quarter ended Nov. 30. Its gross profit fell 31%, and its net income plunged 86%.
The most difficult thing to do is to cut prices in the face of falling unit sales as this leads to a decrease in revenue. So dealers try to hold the line as long as possible, which makes it stickier when the retail price goes down.
But the prices have gone up so, so furiously, that it is not possible to hold the line for long. Furthermore, interest rates have risen, and more potential buyers are resisting those prices. For buyers, patience will pay off. And for those who bought in 2021 or 2022, it’s not the end of the world; His vehicle is depreciating much faster than normal times.
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