The ABC’s of Manufacturer Repurchase Programs

The manufacturers have severely curtailed their repurchase programs to the major car rental companies in recent years. Smaller rental operators might then assume that repurchase programs are becoming extinct. On the contrary, repurchase programs are alive and available to small- and medium-sized rental companies through independent fleet suppliers.

For the uninitiated, here's a primer on how auto rental repurchase programs (also called buyback programs) work and in what financial and business environments they work best.

What Are Repurchase Programs?

In a repurchase program the manufacturer agrees to buy back the vehicle for a set monthly depreciated value, provided the vehicle is returned in a specified time period and in the contracted condition. The model choices and quantity are limited by the manufacturer. The cars are delivered directly to your location or a nearby dealer depending on the program. The cars are returned to regional return locations, usually auctions.

The manufacturers provide these programs for a variety of reasons. Their vehicles are introduced to a large captive set of potential customers (your renters!). The returned vehicles provide a source of clean, low-mileage used cars for their dealers. Since the cars are ordered months ahead of time, a repurchase program guarantees a minimum level of production.

Most of the manufacturers' programs for fleets with fewer than 5,000 units are handled by independent fleet supply companies. Those companies commit to ordering a large number of cars and then offer a program to smaller rental fleets at costs comparable to the programs offered to larger fleets. There is a consolidation fee to cover the costs of consolidating the orders to the manufacturer including dealer fees, commissions, processing costs and profits.

Most fleet supply companies are simply order takers, while a few others also handle the order processing, sales support and return processing for the rental car company and the manufacturer. They provide a higher level of support and will work with the RAC and the manufacturer to resolve problems.

When a Repurchase Program Makes Sense

Here are some advantages to repurchase programs and business scenarios in which they work best.

● It is low risk for the rental company. The used-car market can be fickle: With a repurchase program, the RAC does not get stuck with cars that will have to be sold in a down market. If something bad happens, the RAC can defleet quickly and at a much lower cost. If the RAC returns the car early, it only pays the minimum program term depreciation. If the RAC decides to keep the car, it already owns the vehicle. The RAC should call its fleet supplier and request a non-return allowance.

● It is low risk for your funding source, because the lending institution is only funding the depreciation for the time the vehicles are in service. (See the Hyundai Elantra example: Should your company fold the day after the bank funds the car, the car gets returned to Hyundai. The bank gets back $15,902. The bank's maximum risk is only $1,620 plus interest.)

● If the program is for four to six months, the RAC can stock up for a season and not get stuck with cars. For example, the RAC can get AWD SUVs for the ski season in November and return them in March. Or the RAC can get convertibles and small cars in May and return them in September, when everyone else is trying to sell cars.

● For the customer base that puts a lot of miles on the cars, repurchase programs allow as much as 24,000 to 30,000 miles for the term, which can be as short as four months.

● There are no remarketing costs, such as auction fees, and low to no transportation costs.

● The RAC has the customer service benefit of offering nice, new vehicles.

● There are low maintenance costs because the cars are newer.

● You can explore new markets with little risk because you already know what your costs are. For example, you can try a few 15-passenger vans, convertibles or SUVs.

● It is not optimal to buy new vehicles that depreciate quickly, such as 15-passenger vans. On a repurchase program a new Chevy Express van could be available for $550 a month in depreciation plus interest. You can cover its monthly cost with a week's rental.

CONTINUED:  The ABC’s of Manufacturer Repurchase Programs
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Comments

  1. John Jernigan [ June 27, 2010 @ 09:41AM ]

    Looking for manufacturers that have a similar program in South America, any information?

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