The party in the wholesale market had been running for at least eight years coming out of the Great Recession. When new vehicle sales cratered in 2009 and 2010, the knock-on effect restricted wholesale supply — and buoyed prices — for years to come.
More recently, 2017 and 2018 were supposed to be the years the market received an off-lease “tidal wave” that never quite materialized, extending that party for two more years.
Residual values are widely expected to soften in 2019. In its February quarterly conference calls, Avis Budget Group reported that it expects a decline while Hertz is predicting a 2% drop for this year.
As first quarter data makes it onto the books, signs point to an amplified acceleration of this trend: J.D. Power has revised its forecast to reflect an overall price drop of 3% this year.
Let’s layer in this residual forecast with an outlook on supply:
For the first quarter of 2019, sales into rental were up 6.4% compared to the first quarter of 2018. This sales growth comes amidst a drop of 2.5% in overall U.S. light-vehicle sales in the first quarter.
For greater context, last year’s first quarter rental sales grew only 2.8% over the same period in 2017, though light-vehicle sales were still increasing as well — a 1.9% increase in the first quarter of 2018 over the year previous.
Car rental fleets have been comfortably right-sized for a few years, as rental consignors were happy to sell into a hot market, which kept fleets tight. Yet a rise in rental sales combined with a drop in overall sales would historically point to a worrisome trend.
Without this stimulus and with increased sales to rental, will we see over fleeting?
Before we raise any red flags, let’s look at a few factors:
Last year, the U.S. car rental industry’s overall fleet size grew to a new record of 2.21 million units. Alarming? Not considering the industry’s record revenue of $30 billion, which produced yet another record for industry RPU (revenue per unit, per month) of $1,131.
We can safely say that even with the growth in cars in service, the industry was still under-fleeted in 2018 relative to demand.
Despite some factors pointing to a slight slowdown in the U.S. economy, demand appears to be healthy for 2019. The U.S. Travel Association (USTA) predicts that leisure and business travel combined will grow 2.4% from December 2018 to May 2019 over the previous period.
USTA sees domestic business travel growing 3.2% year over year, growing faster in 2019 than it did the past three years.
Looking further into the supply side over the last two years, one reason why that the tidal wave never quite materialized was because consignors are using many more tools to mitigate a flooding of auction channels.
For all types of consignors, “upstream selling” is the new mantra. This includes using online auctions, direct to dealer, and commercial direct to consumer channels.
“We can attribute a lot of the success of the remarketing industry in handling the growth of off-lease volume without deterioration in wholesale values to this multi-channel approach,” says Tom Kontos, executive vice president and chief economist, ADESA Analytical Services.
Both Hertz and Avis continue to push more profitable non-auction sales channels and direct sales to consumers, and this penetration will only accelerate. Hertz is trumpeting the fact that it’s the “eighth-largest used car seller” in the U.S.
Big data analytics is helping manage car sales too. Rental companies and other consignors have become a lot smarter about selling by factoring in granular data on model types, trim levels, mileage, resale location, and even vehicle color.
Looking into values by segment, the plethora of crossovers and small to midsize SUV models that came to market are putting downward pressure on values. “As these vehicles start coming home to roost in the wholesale channel, there will be more of them,” Kontos says.
Black Book’s three-month change in values for the first quarter of 2019 shows values for subcompact crossovers dropping 10.5%, the most of any segment, while compact crossovers show a 7% drop. Compact cars reveal a 5.1% drop, while midsize cars, the staple of rental fleets, show a 4.3% drop, the smallest of any non-truck segment — due to a scarcity of supply.
Rental fleets have followed the trend away from cars. Is it time to take a contrarian approach?
In 2012, the joke was that the laziest remarketing manager looked like a hero. Fleet costs will creep higher in 2019. The sky isn’t falling, but it’s time to gather your superhero team to take a hard look at fleet makeup, sales channels, and new big data tools.
The good news is that the industry is a lot smarter on managing fleet size and costs than it ever was before.