Hear the joke about the Chevrolet Aveo, the featherweight subcompact that General Motors imports from South Korea?
"It made me yearn for my 1981 Plymouth Reliant. At least I wasn't praying," one guy writes on a Consumer Reports blog.
Or the satirical ad slogan proposed by another blogger? "Aveo: Don't think of it as a small car. Think of it as a big pocket."
Keep cracking them, wise guys, but car dealers have your number and may soon have the last laugh. They'd better, that is, if they want to survive the sudden and dramatic market shift facing auto retailers and manufacturers.
As motorists rush to buy antacid pills with each $4.25-a-gallon fill-up, those same car dealers who got pudgy five years ago selling SUVs with $6,000 profit margins are scrambling to profit from Aveos or anything else with decent mileage.
"It's a cycle that most of the generation [of dealers] that's in there now hasn't had to deal with, but their dads did," observes Marty Murphy, executive vice president of the Automobile Dealers Association of Indiana.
Experts say no markup on miserly cars--new or used--can make up for the decline in SUVs and their relatively higher margins. Some even wonder whether consumer thirst for fuel efficiency could finally bankrupt domestic automakers too skewed toward trucks and SUVs.
"This is the most rapid depreciation of any vehicle segment that we have experienced in our 15 years," CarMax President and CEO Tom Folliard said last month, in announcing a 55-percent plunge in profit. The Richmond, Va., car chain isn't in peril, but its stock tumbled and it suspended earnings guidance for the next year--suggesting a rough road ahead.
Now, how to make a profit?
But one thing is certain: Car buyers itching to swap wheels quickly during a fuel crisis will likely pay for it, one way or another. If it isn't through additional premiums on the most fuel-efficient cars, it will be an even more-insulting-than-usual trade-in value on one's thirsty SUV or pickup.
Case in point: A used, 2008 Aveo was advertised recently by Bill Estes Chevrolet, for $15,995. That's a $4,339 premium over what even the overly optimistic Kelley Blue Book suggests for the car with 19,274 miles and roll-up windows.
It's $1,990 more than the West 96th Street car dealer wanted recently for its lone, brand new Aveo that comes with extra goodies such as cruise control, and with close to zero on the odometer.
Most dealers didn't return calls to talk about the shift in trade-in values. But Estes' used car sales manager answered his phone. When asked about the Blue Book price for the used Aveo, Chuck Jones pointed out that "what people are willing to pay is a different story." Supply-and-demand a factor? "You're on it," he added.
Indeed, the market share for compact cars in the United States soared to 27 percent in May from 17.9 percent in February, according to data from automotive research firm Edmunds.com. Normally, just a couple of points of percentage change in that short amount of time is a big deal.
It appears to be "the biggest market shift that's occurred in the shortest period of time in the U.S. market," said Jess Toprak, executive director of industry analysis for Santa Monica, Calif.-based Edmunds.
Edmunds said recent activity amounts to a "seismic shift" to smaller segments. But even earthquakes have their precursors, and Tom Kontos started noticing quivers at auction shortly after Hurricane Katrina in 2005, when gasoline prices briefly spiked around $3 a gallon.
Kontos, executive vice president of strategies and analytics at the nation's second-largest auto auction wholesaler, Carmel-based Adesa Inc., noticed that SUVs were fetching less at auction. Pickup trucks also took a hit, even though they are somewhat insulated from price declines during periods when construction activity is strong and pickups are therefore more in demand.
What was then a blip in prices for big vehicles later took on some permanence.
"There was an ongoing trend in the last 18 months at auction," said Kontos, but "really just shocking acceleration in the months of April and May."
Some older fuel-efficient cars are bringing good money. Kontos tracked a 23-percent year-over-year increase in May for a 2004 Toyota Prius hybrid. And even a 1997 Geo Metro fetched an average 27 percent more in May.
Those showing the most value growth at auction: compact cars, up an average 10 percent.
Bringing the least were full-size pickups, down 21 percent, followed by full-size SUVs, off 20 percent on average, according to Adesa.
"During the quarter, wholesale industry prices for SUVs and trucks declined nearly 25 percent, which is approximately four times the normal depreciation expected over this period and well in excess of the depreciation expected over a full year," according to CarMax.
Take the 2005 Toyota Sequoia SR5.
A 2-year-old model of the four-wheel-drive SUV (13 mpg city/16 mpg highway) in May of last year still fetched an average $23,587 in trade, according to Edmunds.
But in May of this year, the owner of a 2-year-old model, similarly equipped, might have been lucky to fetch $19,825 on trade, according to Edmunds data. That's a 16-percent hit over last year.
And that assumes a dealer would even want the big Sequoia.
"We've had reports of some dealers not taking [big vehicles] on trade," Toprak said.
By contrast, Edmunds said a 2-year-old version of the lowly Aveo (21/31 mpg) brought $604 more this May compared with last May, a 10-percent increase. It's an almost unfathomable shift in value after a decade of hot car and truck sales, when tiny cars seemed like a leprous vestige of the 1970s energy crisis and President Jimmy Carter.
These days, traveling 15,000 miles a year in a subcompact can easily cost $160 less a month than it would cost in a Sequoia-class monster.
Yet some SUV and truck owners won't be able to afford to trade anytime soon unless they're willing to fork over cash to pay outstanding loan balances that exceed what they're offered in trade.
Generally, even if one's credit is stellar, many lenders won't finance more than 120 percent of the value of a vehicle.
That's trouble for dealers, as well. Many faced with selling lower-margin miserly cars will have to lean hard on their finance departments to earn more by writing more loans and selling more extended warranties and other products, Toprak said.
But the upside for dealers is that, while many are taking a bath on gas-guzzling inventory already in stock, the supply won't last forever, Murphy said.
And most fuel-efficient cars won't get the boat to the lake, let alone carry six or more average-size passengers. So in another sense, this is a good opportunity to sell more gas-guzzling trucks and SUVs, at least to buyers who can afford the gas.
Murphy said some fleet owners think this is a good time to buy. Estes' Jones didn't offer specifics, but said his used-car lot moved a lot of trucks on a recent weekend.
"It's a buyer's market, especially for full-size SUVs and pickups," Kontos said.
Not just for end-consumers but for dealers also. Even with lower price tags than before, SUVs averaged $11,200 in May at auction versus $7,600 for a midsize car.
"A lot of dealers will be happy to buy at a lower price. ... They can still make a good gross profit," Kontos said of dealers. That's assuming those financed trucks don't sit on the lot too long, he cautions.
"They can make a good gross profit [on a truck]. The problem is, how do you entice people to buy one?"
Kontos rattles off a calculation by one economist who argues that you can buy a used truck or SUV so cheap that it will take 54 months until the penalty of higher gas prices is actually felt in the pocketbook.
"A dealer armed with the right information can sell snow to an Eskimo," Kontos said.