Used cars piling up: Record sales of new vehicles put damper on auction prices

August 22, 2005

Especially these days, used cars have gotten all the respect of Rodney Dangerfield.

Like the late comic, they've been dissed-in this case by the incessant marketing of automakers' "employee discounts" that drove new-car sales to record volumes in July.

But with automakers expected to end those discounts in early September, local dealers and auction firms are bracing for used cars to be the next big wave of sales.

Dealer lots are crammed with trade-ins, so many aren't buying additional used car inventory at auction. Average auction prices have fallen more than $625, or 6.3 percent, since May, said Tom Kontos, economist for Carmel-based Adesa Inc., the nation's largest publicly traded wholesale auto auction.

One salesman at a local Chevrolet dealer told a customer trade-in values had plunged far more than that in recent weeks because of the glut.

"Take Kelley Blue Book and subtract $3,000," the salesman said, referring to the auto valuation guide used by consumers.

If true, that's bad for customers who want to trade. On the other hand, cheap used cars are good for new-car dealers who need something else to lure shoppers after the employee discounts end next month.

"Their new car inventories are depleted. So the franchised dealers are saying, 'We need to hold onto these'" used cars, Kontos said, rather than take them to auction.

Eventually, dealers will put their unsold used cars on a trailer and take them to auction-something that could accelerate Adesa's business. Until then, some dealers are preparing a massive push to sell rather than send to auction their own used inventories.

"The market is going to be very competitive in the near future. The used car business has been off a bit because the new volume is so heavy," said Bill Grimes, general manager of Tom Wood Pontiac.

Grimes estimated new-car sales rose some 30 percent locally, with a corresponding percentage in trade-ins. As a result, the far-east-side dealership had 199 used cars on the lots in mid-August vs. about 135 during a normal period.

Already, Tom Wood's Ford store near Carmel has been running "World War II Ends" newspaper ads to thin its used herd. "I saw it coming. Our sales were up almost 80 percent on the new car side last month," said Pat Dunn, general manager of Tom Wood Ford. "We were selling new cars without effort."

While Ford and other automakers have some special financing and warranty assistance for used cars, it will be largely up to individual dealers to market used cars in the months ahead, Dunn said.

That may take some heavy lifting. Many would-be used buyers are sated after their consumption of new cars over the last several weeks. Some of their trade-ins will have to head to auction. That would be good news to Adesa, whose nearly 60 used-car auctions nationwide have seen flat sales compared with 2004.

Wholesale car auctions have been trying to grow a business hurt by a decline in car leasing. Turned-in leased vehicles often become inventory for auction houses. With dealers now pushing leasing again, Adesa sees the soft off-lease trend bottoming out in 2007. Another positive sign is rental car companies lately replacing their fleets and sending their tired models to auction.

In spite of the tough auction market of late, Adesa's revenue grew 7.2 percent in the second quarter over the same time last year, to $248 million. It managed to improve its performance with a record volume of shortterm loans to finance dealer car purchases, with higher fees and a decrease in a provision for credit losses.

As for how successful dealers will be in whittling down their used car inventories, "In another month, we'll know better," Kontos said.

Another factor will be whether automakers revert back to a discount program for the 2006 models now arriving. GM plans to offer "value-based" pricing, Kontos said, as a successor to the employee pricing program. Analysts say GM plans to lower sticker prices and in some cases add more standard equipment than what was offered on 2005 models. It's unclear just how low the company can go given its expensive labor agreements.

Value pricing "is going to be all the rage when the new model year starts in September," Kontos predicted.
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