Archive for the ‘Economics’ Category

Auto sales revenue growth reveals industry’s strength, opportunity, TrueCar reports

Auto salesAuto sales should generate more than $500 million in total revenue this year, significantly more than just five years ago and a good sign of the industry’s strength, according to a report from TrueCar Inc.

TrueCar expects total sales of $521.5 billion this year compared to $292 billion in 2009.

Nearly 80 percent growth in revenue surpasses 58 percent growth in unit sales over the same period, TrueCar reports, in part because of increasing transaction prices.

“Looking solely at industry volumes without factoring in the richer margins and revenue generated by three of the four vehicle segments masks how truly robust the industry is,” said TrueCar, which suggests that sales revenue is a better measure of industry health than unit sales.

The industry average price per vehicle purchased was $33,361 in October, reported Kelley Blue Book, while the average new-vehicle transaction price in 2009 was around $26,000.

Industry trends across the four distinct product categories, or “super segments,” show a current consumer-driven mix of 30 percent mass-market cars, 30 percent mass-market utility vehicles, 20 percent pickup trucks and 20 percent premium brand vehicles of all types.

“Utility vehicles, especially small and mid-size, are the story once again, as consumers are buying more and are willing to pay more for these models,” said Alec Gutierrez, senior analyst for KBB. “With gas prices at a three-year low and consumer confidence at a seven-year high, this trend should continue.”

During the 2009-14 period, pickups and mass-market utilities, which deliver higher transaction prices and margins than mass-market cars, increased their share of industry to 50 percent from 44 percent.

But none of the automakers is positioned to take full advantage of consumer preferences, even as unit sales climbs toward 16.4 million for the year – the best total since 2007 – and could reach 17 million in 2015 if the economy continues to improve and automakers increase incentives.

“For individual automakers, the revenue mix across the four super segments varies considerably,” said John Krafcik, president of TrueCar, in a recent Automotive Press Association presentation.

“Some are overly reliant on mass-market cars – notably Volkswagen Group and Hyundai-Kia – while others are significantly overweighted in pickup and utility segments, such as Fiat Chrysler. Remarkably, no automaker has a revenue mix even close to the consumer-driven industry mix.”

But that also means there may be opportunity for the major automakers to broaden their portfolios and “create more revenue-balanced OEM groups,” Krafcik said.

 

Falling gas prices lifting trucks, sinking hybrids, other ‘green’ vehicles

gas prices

Perhaps “liquid gold” should be downgraded to “liquid silver.”

That’s because the average price for a gallon of liquid gold – gasoline – at the end of October stood at just $3.003, according to AAA, down 10 percent from the beginning of the month.

In fact, gasoline prices are lower in real terms than they have been in 20 years, and all indications point to prices at least holding steady, or even continuing to drop in the near future.

That sounds like great news – unless you’re trying to sell a Prius.

While truck sales have risen 17 percent and SUVs have risen 20 percent on the year, sales of hybrids such as Prius, plug-ins and EVs are down 5 percent, according to a National Public Radio report. Sales of green segment cars are down for the fifth straight month this year, Autoblog says, falling 11 percent year over year in August and 9.6 percent in September.

Trucks make up 53.5 percent of the model mix currently on the road, according to Edmunds.com data, while cars make up 46.5 percent. A year ago, when the average price for a gallon of gas was around $3.50, the mix was evenly split between cars and trucks. The red-hot crossover SUV segment, incidentally, makes up 20.4 percent of market share through September 2014, Edmunds indicates.

The Toyota Prius, meanwhile, which leads the green segment in annual sales, has seen its sales volume drop 11.4 percent on the year through September.

“If you were to turn back the clock seven years, Prius was at the height of its game,” said John Krafcik, president of TrueCar, the car-buying and selling platform. “Demand was high, inventory was limited, and incentives were practically non-existent. Fast forward to this year: Hybrid popularity is waning, and the country’s love of the full-size pickup truck is remarkable.”

“Last month, incentives for the main Prius model … averaged $2,309 per vehicle,” according to TrueCar. “By comparison, in September 2007, the Prius sold with average incentives totaling only $91.”

And the outlook on gas prices doesn’t provide much consolation for prospective sales of green vehicles.

Tracy Noble, AAA’s mid-Atlantic region spokeswoman, said demand for gas is lower and supplies are higher than in recent years. The price has dropped at the pump 34 percent since its 2014 high in July, and a price of $2.50 or $2.60 is a possibility going forward, she said.

“Right now,” said Krafcik, “automakers with a heavy mix of hybrid vehicles, like Toyota, are feeling the effects associated with this turning of the hybrid-popularity tide.”

– Philip Ryan

Who is getting on the M&A expressway, and who’s looking for the exit?

110114 IL Who's Getting On M-A Expressway_RoyalDealership mergers and acquisitions seem to be getting headlines even in mainstream media these days.

Lithia Motors was among the first dealership groups to get national attention for dealership M&A activity when it announced in June that the company would be purchasing DCH Auto Group’s 27 stores.

Lithia also purchased Clovis Nissan in Clovis, CA, in late October, shortly after Hendrick Automotive Group added Sandy Springs Toyota-Scion in Atlanta, GA, to its roster. AutoNation purchased all five Barrier Motor stores in September to expand its footprint and reach in the luxury segment.

However, it was the purchase of Van Tuyl Group by Berkshire Hathaway Inc., the Warren Buffett-run company that owns Dairy Queen, Geico Insurance and BNSF railroad that seemed to signal to the industry that the car business was no longer an insider’s game.

It’s no mystery why dealers are in a mood to sell.

“Profits per dealership are at an all-time high,” says Alan Haig, president f automobile brokerage firm Haig Partners.

And buyers with cash are willing to pay strong prices to get a piece of the action.

It’s no longer the case that dealers looking to sell will be older folks looking to head for the links. Instead, they’re saying, according to Haig, “I’m going to take advantage of market conditions and sell, and lock in my gain.”

Another factor that could play into dealers’ fading enthusiasm is increased scrutiny of the Consumer Financial Protection Bureau. While large organizations might be able to absorb costs associated with meeting the requirements of new regulations, the strain on small operations in a business that is growing in complexity can make some dealers call it quits.

On the one hand, it’s a good time to cash out, according to experts such as Haig. But most projections see profits per dealership on the upswing, which might make it harder to say yes.

For more on this story, see Greenlight Remarketing magazine, available at some auctions, or the online PDF at the Inside Lane blog.

– Larissa Padden

Buffett auto acquisition a sign of the times in auto industry

BuffettWho knew that billionaire investor Warren Buffett (Berkshire Hathaway) was a car guy?

Well, if he wasn’t, he is now, following Berkshire’s acquisition of Phoenix, AZ-based Van Tuyl Group, the largest privately held chain of automotive dealerships in the United States.

“Warren Buffett already had the planes and the trains. Now he’s got automobiles,” opined The Wall Street Journal’s MoneyBeat, referring to BH’s ownership of NetJets and Burlington Northern railway.

Many see the acquisition as just a first step into a fragmented market headed toward consolidation.

“The Van Tuyl Group fits perfectly into Berkshire Hathaway from both a financial and cultural viewpoint,” said Buffett, chairman and chief executive, in a press release about the acquisition. The group will establish a new headquarters in Dallas, TX, as Berkshire Hathaway Automotive in 2015.

The Van Tuyl Group currently has 78 independently operated dealerships and more than 100 franchises spread across 10 states, with more than $8 billion in revenue, according to the company’s website.

Barriers to entry

“Warren Buffett has always said he likes industries that come with moats, so-called barriers to entry that keep competitors at bay,” reported Bloomberg Businessweek. “In buying a chain of car dealerships, Buffett’s Berkshire Hathaway sees plenty of moats and a clear path to consolidation.”

Buffett told CNBC last week that he expects BH will continue to buy automotive dealerships.

“With many of the publicly traded dealers sporting businesses of 60, 70, even 100 stores, it’s not hard to imagine Buffett’s financial engineers finding attractive targets with which to bolster the company’s automotive division,” according to the Bloomberg report.

The BH acquisition is just a sign of the times with dealer consolidation going strong in 2014.

For example, AutoNation Inc. of Fort Lauderdale, FL, is the largest dealership group in the United States, according to annual rankings by WardsAuto and Automotive News, with acquisitions this year adding around 50 dealerships to 228 in 2013. Sales revenue for 2013 was reported at about $17.5 billion.

Other large dealer groups

Meanwhile, No. 9 Lithia Motors completed its acquisition of DCH on Oct. 1, with Medford, OR-based company paying about $364 million for DCH’s 27 units to Lithia’s 101 dealerships. Lithia reported total revenue of more than $4 billion in 2013, according to WardsAuto.

Another top-10 group, Asbury Automotive of Duluth, GA, which already boasted 80 dealerships in 2013 and has climbed to No. 7 since the WardsAuto list was compiled, also has said it is in acquisition mode.

Other dealer groups ranked in the top 10 nationally, according to WardsAuto, with their total 2013 stores, are Penske Automotive Group (194), Carmax (118), Group 1 Automotive (148), Sonic Automotive (102), Hendrick Automotive Group (86) and Larry H. Miller Automotive Group (53).

“The field is highly fragmented, with the 10 largest U.S. dealers accounting for less than 10 percent of new vehicle sales,” Morningstar told Bloomberg in pointing to continued consolidation.

Larissa Padden of Royal Media contributed to this article.

Generous credit and technology buoy new vehicle sales, threaten used values

new vehicle salesUsed car values just aren’t what they used to be – for now, at least.

Increasing availability of credit and longer loan terms spurred on by competition are possible reasons for the recent shift from used to new vehicle sales, reports IHS Inc. market research firm.

An analysis of vehicle registration patterns by IHS shows that more than 3.2 million used vehicle owners returned to market to purchase a new vehicle during the first half of the year, according to Tom Libby, a solutions consultant in the loyalty practice at IHS, with the percentage of used car owners now purchasing a new car at the highest level it has been in six years.

There are several drivers of new vehicle sales, Libby said:

“One is the new vehicle industry extending credit, broadening the range of credit approval and broadening the length of loans. We’re now seeing more and more eight, nine year loans, which obviously is going to lower those monthly payments.

“Also there’s intense competition that goes along with it. In the new-vehicle industry, that’s offering more [features], including at the low end of the market, based on price.”

The lure of new technology also is pulling buyers from the used-car market, Libby said, with more efficient fuel economy and safety features offered in newer vehicles hitting the market.

“The four-cylinder engines are much more efficient than they used to be, so they’re getting much better fuel economy,” Libby said. “So, if an owner of a vehicle has medium fuel economy and really needs something that gets better fuel economy, the new vehicles are leaps ahead of existing vehicles. And if a customer is really focused on safety, then technology could play into it.”

And the rapid growth of technology available in new cars should play a larger role in holding down the residual values of cars going forward, according to the consulting firm.

Still, amid all the industry changes, brand loyalty remains strong, IHS reports, with 30 percent of the 3.2 million used-to-new buyers purchasing the same brand as their used car or truck.

– Larissa Padden

Decline in used-vehicle prices expected to last several more years

used carsPrestige luxury cars, premium sporty cars and luxury cars were used-vehicle price loss leaders in July, but the overall used-vehicle market apparently is closer to the beginning than to the end of price declines expected to last through 2019.

With the biggest drop seen in the past 12 months, the top 10 car segments fell by an average of $86 during the last week of data in July, Auto Remarketing reported.

The “three segments trending softer than most in the dollar levels” cited by Ricky Beggs of Black Book in his weekly video analysis, with the single-week decline and the four-week average were: prestige luxury cars, $183 ($131 average), premium sporty cars, $184 ($121), and luxury cars, $110 ($87). Meanwhile, the truck segment has done better with a one-week decline of $45 and four-week average of $49.

“The level of declining amount continues to get larger week over week,” Beggs said.

“With strong current sales and more favorable economic conditions, the supply of used cars in the market is expected to increase steadily through 2019,” RVI Group’s latest Risk Outlook said.

The overall price decline is expected to be 10 percent, according to the story in Auto Remarketing.

Two major factors are expected to drive used-vehicle price declines the remainder of this year and for several years to come: a growing supply of used vehicles and price pressure exerted by increasing competition for new-car sales, suggested the analysis by RVI, a provider of residual value insurance.

“A wave of newer vehicles from trade-ins has started to flood the secondhand market and will gradually bring resale values back down to pre-recession levels,” Auto Remarketing reported in another article, “New-car market tied to lowering used prices.”

The effect of new-vehicle sales on used prices reportedly reappeared for the first time since 2008.

Meanwhile, residual values also are expected to affect used-car prices, Auto Remarketing reported. “According to [consulting firm] ALG, by 2017 the average new vehicle will retain 49.4 percent of its value after three years, compared to the 54.6 percent retention recorded for vehicles through June 2014.”

“Used units will follow suit as ALG predicts growing supply will put the residual average back at 46 percent – the pre-recession rate – by 2019,” according to Auto Remarketing.

“The lower residual values will create a greater gulf between used- and new-vehicle prices, which could steer more consumers to purchase used vehicles,” ALG’s Larry Dominique told Auto Remarketing. “Consequently, we expect automakers to increase new-car incentives to keep up current sales space.”

The results seem to provide good news for consumers but challenges for dealers facing price pressure.

Vehicle auctions still felt effects of recession in 2013

recession

Sales of used cars and trucks through auto auctions increased to 8.2 million in 2013, but that still wasn’t enough for the industry to break out of its recessionary slump, based on results of a member survey by the National Auto Auction Association (NAAA).

Sales totaled 8.2 million vehicles out of 15.2 million offered in 2013, about 54.2 percent, NAAA reported. Total sales for 2012 were 7.9 million vehicles out of more than 14.5 million offered.

The percentage of vehicles sold, or conversion rate, was the same as 2012, the lowest on record.

The year-over-year results, however, tell only part of the story of the slump that hit its nadir in 2011.

Annual sales during the 2011-13 period marked the lowest level in the 17-year history of the survey, and the 54.2 percent conversion rate of 2012-13 also was the lowest on record. Conversion rates typically range between 57 and 61 percent, based on historic NAAA data.

Vehicles sold by NAAA member auctions in 2013 had a total value of $75.7 billion, an increase of $1.5 billion over 2012, but still the second-lowest total since 1998, based on NAAA survey records. The highest sales total on record was $88.8 billion in 2007.

The average price per unit was $9,210, the lowest in five years, and $200 less than 2012. The highest average price per unit was $9,722 in 2011, according to the report.

But at least one analyst expects improvement in the auction sales environment starting this year.

Higher new-car sales, especially those sold through leases and to rental-car companies in the past few years and this year, will fuel auction sales growth into the foreseeable future, Ira Silver, NAAA chief economist told Automotive News. “We’re going to see increases for a number of years,” Silver concluded. “This year, next year and maybe a couple of years after that.”

“Like the rest of the auto industry, auctions suffered as a result of the recession, which was deepest in 2008 and 2009,” wrote Arlena Sawyers in Automotive News. “But unlike new- and used-vehicle retail sales, which started to rebound in 2010 and 2011, auctions’ sales started to rebound in 2012.”

That’s because the auction business rises or falls about two to four years after changes in retail sales, when those vehicles re-enter the market as used vehicles, Silver told Automotive News.

NAAA’s findings were based on responses from 263 of the organization’s 325 North American members.

More details of the NAAA survey are available online.

Are you doing all you can to avoid sales department turnover?

salesmanSales staff turnover remains a big issue for automotive dealerships but the trend turned in a positive direction in 2013, according to CNW Research’s Retail Automotive Summary as reported online by Auto Remarketing.

Turnover rates for sales people at new-car dealerships dropped to about 111 percent last year from 124 percent in 2011, Art Spinella, CNW president, told Auto Remarketing.

“Though these numbers still seem unusually high, Spinella noted that historically, new-car dealership sales personnel turnover has been above 100 percent for decades,” Auto Remarketing reported.

That doesn’t mean turnover is high across all dealership departments.

“Technician turnover continues to be a bright spot,” Spinella told Auto Remarketing, at barely 15 percent last year.

Meanwhile, office staff turnover has been slower than in the past, according to the CNW report.

The results echoed a study last year by the National Automobile Dealers Association (NADA). The Dealer Workforce Study also showed high turnover rates for sales people (62 percent in 2012), with turnover among female sales personnel around 76 percent, Auto Remarketing reported.

If your dealership is having trouble holding on to sales people, here are some factors automotive industry experts suggest you might consider:

How you qualify sales people. You don’t want just warm bodies, but people who project a professional demeanor, have bullet-proof product knowledge, recognize sales is a process, are team players and do what it takes to “delight” customers, wrote Don Graff, an automotive industry consultant.

How you train sales people. Don’t simply follow “the salmon-going-upstream approach – if they survive then we will invest some time into them,” wrote Paul Sansone Jr. of 66 Automall in Neptune, N.J. “Train, train, train, train” to give your sales people the tools they need to earn a good living.

Whether you overwork your sales people. High rates of dealership employee turnover might be due in part to long hours, according to NADA. When employees work over 45 hours, turnover increases.

Whether you’re paying them enough. “Consultants working 50 to 60 hours per week earn 4 percent more a year than their counterparts working [only] 40 to 45 hours,” reported Auto Remarketing.

“Let’s face it. We are not brain surgeons or scientists,” wrote Sansone on the Auto Dealer People blog. “We are only selling cars. If we hire motivated, personable people that care, we should be able to make it a personally and financially rewarding career.”

– Mark Macesich

Auto sales animated by recovery, low interest, attractive new vehicles

auto salesMay was a very good month for auto sales.

GM, Chrysler and Toyota reported their best sales since before the start of the recession in 2008, while Ford Motor Company did them one better – or should we say three – with its best sales since May 2005.

Meanwhile, among European automakers, Audi and Porsche had their best sales month ever in the United States and BMW reported its best May results ever. Nissan also set a sales record for May and Hyundai Motor Co. recorded its best month ever, Reuters reported.

Industry sales totaled 1.6 million vehicles with a seasonally adjusted annualized selling rate (SAAR) of 16.8 million cars and light trucks, according to Autodata Corp. market research company.

The results “blew away” analysts’ expectations of 16.1 million SAAR, reported Business Insider.

GM’s May sales increase of 12.6 percent nearly doubled expectations despite recall issues and concerns about the amount of time it took the automaker to report some problems, demonstrating, ABC News reported, that “car buyers are willing to forget the past and look at the present and future for GM.”

Premium models along with small and mid-size crossovers led the way to higher-than-expected results.

“Nearly one-half of the new-model activity in 2014 will be premium vehicles, which is expected to create new competition for mainstream segments,” Jeff Schuster, senior vice president of forecasting at LMC Automotive, told Nelson Ireson at The Car Connection auto research website.

Ken Brauer, Kelley Blue Book senior analyst, cited sales strength among crossover vehicles.

“Supporting this increased appetite for more expensive, more premium vehicles is a trend toward longer loan terms in the automotive financing market,” Ireson wrote.

Experian Automotive reports the average loan term has reached a record high 66 months, while loans with terms of 73-84 months grew 27.6 percent in the first quarter of 2014, accounting for 24.9 percent of all new vehicle loans issued, according to Ireson’s Car Connection report.

“Credit conditions are making it easier to buy or lease a new car,” said Jessica Caldwell, Edmunds.com analyst. “Shoppers are opting for longer terms at lower interest rates. In other words, they’re able to afford more expensive cars by keeping their monthly payments at or near what they’re used to paying.”

The surge in auto sales the last three months has begun to make up for the slow start to the year because of severe weather in the U.S. North and East in January and February.

“It’s the continued recovery in the summer selling season,” Shuster of LMC told the Associated Press. “Kind of everything aligning in the month of May.”

Analysts expect June to bring more of the same because of low interest rates, good lease deals and attractive new vehicles.

– Mark Macesich

Why Remarketing Remains Resilient amid the Housing Collapse

by Mary Wisniewski

The collapse of the housing market that began in 2007 has ravaged the U.S. economy, but done particular damage to the state economics with the most dramatic home-price inflation. Intuitively, remarketing in states steamrolled by the housing market should suffer, too. Yet, that’s not necessarily been the case. GreenLight Remarketing sat down with Tom McDermott, owner and general manager of Metro Area Auction, an independent auction house in Phoenix, to find out why. Metro conducts an auction weekly and employs 17.

Q: How has the depressed housing market in your region affected the sale of remarketed autos?

A: That is a complicated question. The economy as a whole has affected the auto market morethan the housing market specifically. Housingand auto sales often go hand-in-hand. But I don’t believe the auto market here is any worse or any different than the rest of the country. I think you’ll find the same situation all over.

Q: How has the remarketing market treated your company in recent months?

A: It’s very unusual for us, because we’ve been growing in a very weak economy. We’re an anomaly in that if you look at our sales and our operations, it’s like we’re saying, “What recession?” We were a greenfield site three years ago, and we’ve been able to grow our business every year. If you have been in this business as long as I have, you know this is the worst car recession in recent history. That said, we’re growing. Had there not been a recession, our growth would most likely have been much greater. I guess you could say this recession slowed our growth.

Q: To what do you attribute your growth to?

A: We’re not cutting back services in a recession. We’re adding services and staying ahead of the curve when others are cutting back. That has allowed us to take away marketshare in a weak economy.

Q: What kind of competition do you face?

A: We compete against four other auction houses in the Phoenix market. There are two Manheim dealers, one ADESA, and one other independentauction house. Since we’ve been able to grow since starting up three years ago, we have taken market share away from the competition.

Q: Has the type of buyers you’re seeing at auction changed since the housing bust?

A: We have not really seen a big shift in buyers. We have fewer buyers today, as the hard times have put some of the weaker dealers out of business.But among the buyers we have seen, there has not been a big shift in the type of buyers coming to our auctions. And people still seem to want to buy the same things as they always have wanted.

Q: Have you seen a shift in demand for vehicle types?

A: Not necessarily. I’ve been in this business for 30 years, and you’ll always see certain auto types in demand for a while and then there will be a shift in what people want. When gas prices went up [in 2008], you saw some movement away from SUVs and pickup trucks, but there were still people who wanted those cars. The typical American still wants to buy a luxury car or a big truck. As odd as it sounds, we really have not seen a big shift in the types of cars we’re selling. The only difference is that some cars that used to bring a premium — like many of the Honda models — are not getting as powerful of a premium as they used to get. The demand for these cars is still strong. They’re just not holding the strong value the way they used to. I think that is the biggest surprise we’ve seen.

Q: What do you see for 2010?

A: I think we’re still 18 months away from a recovery in this market. Still, we’ll be adding capacity and expect more growth in 2010. It will be tough to keep getting a strong supply of cars, but we’ll keep growing our marketshare.

Q: What are your near-term expectations for the local market?

A: October to December is always slow — it’s been that way ever since I can remember. It will be interesting to see what January brings. January sales are always a good indication of whether the market is ready to bounce back.