Michael Kulp of Kulp Car Rentals, serving southeast Pa., sells cars retail through this sales lot in Gilbertsville.He realizes returns of $1,000 to $1,500 greater per unit than selling at auction.
The 2015 remarketing season will take more effort and resources than the prior years. The easy selling and great returns of 2011 through 2013 have disappeared. And yet, we still need to sell cars.
Since the Recession, car rental consignors had the late-model used car market virtually to themselves, but that’s changing.
In 2014, some manufacturers began to ramp up repurchase programs (or guaranteed depreciation programs, GDPs) as they increased production. Car rental companies lessened their “risk” fleet in favor of GDPs, moving from 20% to 50% of their fleet buys. These late-model, low-mileage GDP units will come back into wholesale channels next year in numbers not seen in a long time. Those holding onto higher-mileage rental units will be selling against the overflow of off-lease vehicles coming back into the market.
Auto production is at an all-time high, and new car sales are projected to come close to the inflated sales figures of the middle of the last decade. Cheap credit and strong demand will prevent a doom-and-gloom scenario; however, manufacturers are back to incentive spending that rivals the pre-Recession market.
It’s hard for one- and two-year-old rental units to compete with new cars that can be had for a big cash rebate or 0% financing over 72 months — besides, late-model car buyers have many more choices.
How Incentives Affect Remarketing
Here is a real-life example of how incentives affect the sale potential of a typical rental unit:
As of the first week in December, a domestic manufacturer was advertising a new (2014) compact car for $14,400 after a $4,000 retail rebate. At the beginning of the 2014 model year, I paid $16,500 for the same car.
Currently, with 10 months of deprecation at 2% a month (or about $3,300), I own the car for $13,200. How much can I get wholesale for this car from a dealer who will turn around and sell it retail? In recent years, owning that car at $13,000 to $13,300 would have been OK. Today, you’re lucky to get $11,000 to $11,500. Using these new lower levels, you’d need to change your depreciation to 3% per month — what would that do to vehicle holding costs and rental rates?
As of early December, oil has fallen to $67 a barrel, while the average cost of a gallon of gasoline has dropped from $3.70 to $2.80 nationally — and is still falling. Some analysts speculate we won’t see oil at $100 a barrel for four or more years. What impact will that have on economy models and hybrids? While trucks and SUV prices will remain strong, cheaper gas may drive buyers to larger vehicles.
These factors create a new reality in the used car market. But this is no time for handwringing. On the contrary, it’s a good time to revamp and revise your remarketing strategy and make the new market work for you.
What You Can Do
Consider implementing these proactive steps in your remarketing game plan:
- Open a retail lot. Many of the majors are changing their remarketing strategies to move away from auctions to direct sales and retail lots, which offer fewer fees and better recoveries. While you’ll need a dealer’s license and personnel, retail lots have become a popular outlet for many licensees and independents. Local operators have a built-in customer base. Let your renters know you’re selling cars from your fleet. Let them know those cars are serviced and cared for by the local owner of the business.
- Beef up your sales to car dealers. Most used car managers are busy managing the in-house sale process. They’re looking for easier ways to restock their sales lots with fewer trips to the auction, where they could spend hours and come home with little for their time. Make contact with your local dealers of the brand you’re selling to find out what models and equipment they have interest in purchasing. By opening communication with an offer of good, clean models, they’ll know to call you first for easy repeat business. You may even become a rental source for their customers.
- Make friends with brokers. There are local as well as national brokers who can’t wait to help you sell your out-of-service vehicles — and they have buyers waiting. These brokers are calling on their large Rolodexes of dealers on a daily basis. Many used car managers use brokers to help stock their lots, as they can’t afford the time to search for cars to buy.
- Consider “upstream” remarketing. Using Internet auction programs such as SmartAuction, Manheim’s OVE and Openlane decrease the time from de-fleeting to sale. This continues to be a growing segment of remarketing. The latest buzz phrase is “multi-platform selling.” Multi-platform programs such as Alliance Inspection Management’s MarketConnect and Liquid Motors’ One Click Wholesale allow a consignor to use a single launch point to all major online auctions.
- Adjust your depreciation higher per month. This will help you avoid major losses on cars when they are taken out of service. If you’ve been stuck in this situation, you know the falling dominoes: Cars not depreciated properly will force holding the car in fleet longer to try to make up the difference. Those units attain high miles, which could lead to customer complaints and cause problems with corporate accounts. Rental cars with more than 60,000 miles may limit repeat business.
- Buy vehicles that are easier to sell. While this is evergreen advice, it’s more pertinent than ever: Choose makes and models that retail buyers like — with equipment not found on typical fleet units such as sunroofs, alloy wheels or even a higher trim level.
- Know what your competition is buying and selling. Some of the models the manufacturers are loading with bigger incentives are also the ones that the new retail buyers aren’t buying. When it comes time to remarket, the major rental companies will have lots of them, and they’ll be competing with yours.
- Buy used. A soft used car market makes for a good time to fleet up with slightly used 2014 model-year units rather than new 2015 models. Used units work well for local and replacement rentals, which don’t put on a lot of miles. Smart operators buy used units and sell before they reach the factory warranty limits. The buy-used strategy works well during low seasons, as those units have lower holding costs and can be rented for less.
- Run longer (but not too long). If your current fleet is in good condition, freshen up your units with a detail and a serious service to allow you to run them for another six to 12 months. Try using your older units for more local business, including service and replacement car rentals. Use your newer units for business renters and out-of-town use. Be mindful of crossing service thresholds that will up your maintenance costs, such as tires and brakes. Try to stay under the mileage for warranty period terminations.
- Diversify your fleet. Rather than buying all the same make and model of a car class, consider different cars from different manufacturers at the same price. Not only does this mitigate recall exposure — if one model is weak when it’s time to resell — but stronger products will also more than compensate.
Manheim's look at year-over-year price changes for select markets in November reflects predictions for the 2015 market: prices remain strong for pickups and vans but weaker for the car segments (compact, midsize and luxury).