A Q3 2015 report from the NADA Used Car Guide took a look at how better quality is affecting used vehicle demand.
Better Quality Vehicles and Used Car Demand
Automobiles are lasting longer across the board, and this is having an effect on consumer habits. This is according to data from J.D. Power that shows vehicle dependability has improved by nearly 50% in the last 10 years alone.
Improvements in quality, durability and dependability have undoubtedly made used vehicles more attractive to consumers. These improvements have made buyers less concerned about costly repairs, vehicle longevity, and the prospect of taking out a longer loan on a more expensive used vehicle.
Are People Actually Choosing Used over New?
So, are people actually choosing used vehicles over new ones more frequently? That's a loaded question, thanks to the economic disruption caused by the recession.
Pre-recession, the answer to that question was increasingly a "yes". The sales share gap between new and used vehicles purchased from franchised dealers started to narrow between 2005 and 2007. Then the recession hit and disrupted the market, making it impossible to track that trend because:
- A) The recession created pent-up demand for new vehicles and
- B) It greatly reduced the supply of late-model used vehicles available on the market
We have seen a steady increase in used vehicle sales over the past few years, but the sales share at franchised dealers has remained at about 67%-33% in favor of new cars since 2012.
While it is hard to definitively say that used car demand has increased thanks to the recession, it will be interesting to see if those same trends from 2005-2007 begin to materialize as the market continues to normalize.
Having said that, consumers seem to be viewing used vehicles in an increasingly favorable light. According to a recent survey from Autotrader, here is the percentage of new vehicle shoppers willing to consider used options when shopping for their next vehicle:
- 2013: 33%
- 2012: 26%
What Does This Mean for Dealers?
The improved inclination toward used vehicles has the attention of dealerships; many are moving aggressively to capitalize on the growing demand. It's easy to see why: Compared to the new vehicle market, the used market is more stable, about 3 times as large, and has a greater ROI potential.
Per NADA data, here are the average gross profit margins for new and used vehicles in 2014:
- New: 3.8%
- Used: 13.0%
Used vehicle operations were once harder to manage, but technology and access to data have turned the tables. Dealers are now able to improve their practices in regards to trade-in appraisals, wholesale and retail pricing, and inventory acquisitions. Managed properly, the increasing preference for used vehicles presents dealers with an opportunity for more profit.
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