Millions of vehicles are flowing out of leases into the used-car marketplace, and many will land on dealer lots.
But a blessing, too? Perhaps a huge one, if managed right.
“The return of a record number of off-lease vehicles will be one of the biggest challenges dealers will face, but it’s also one of the biggest opportunities,” said Wes Lutz, the 2018 chairman of the National Automobile Dealers Association, in an emailed Q&A.
“Obviously, the number of lease returns will put a lot of pressure on new-car sales, and used-car sales will likely increase because of the influx of late-model, lower-priced trade-ins returning to the market,” Lutz said.
“But there’s also a great opportunity because we are a little over capacity on the new side right now. The key for dealers will be properly managing their inventory.”
And inventory, it will be plentiful.
Cox Automotive is anticipating 3.89 million off-lease units in 2018, which would be up from 3.59 million in 2017. While that’s more than an 8-percent hike, the growth in off-lease volume is slowing down a bit.
Off-lease volume in 2017 was up more than 16 percent, following a more than 22-percent gain in 2016, according to data in a Cox Automotive presentation. Still, 2018 is expected to be a record year for lease returns, according to Edmunds.
It could also be another record year for certified pre-owned sales, helped in good part by that off-lease volume, which tends to be the bread-and-butter of CPO inventory.
In January, Cox Automotive economists said they were expecting approximately 2.7 million CPO sales in 2018, and if that comes to fruition, it will be the eighth straight year of record CPO sales. According to Autodata Corp., there was an estimated 2,645,718 CPO vehicles sold in 2017, compared to 2,642,986 sold in 2016.
That’s a gain of just 0.1 percent, but it was enough to bump certified sales to their best year on record.
“One of the biggest industry trends right now is lease returns, which will likely result in the eighth consecutive year of sales increases (for CPO). CPO sales are driven by the influx of late-model used cars coming off lease,” Lutz said. “I’m confident that we’re going to have another strong year for used-car sales.”
Lutz is the president of Extreme Chrysler/Dodge/Jeep, RAM in Jackson, Mich. Asked how top dealerships, including his, have handled increases in off-lease volume, Lutz points to CPO.
“The rise in off-lease volume and subsequent CPO sales is an opportunity for both dealers and car shoppers,” Lutz said. “There’s a substantial price difference between a new vehicle and an off-lease vehicle.
“The manufacturer-backed CPO programs offered at new-car dealerships provide consumers with numerous options for an affordable, late-model and low-mileage vehicle under factory warranty along with competitive financing rates and other perks,” he said.
Of course, lease returns aren’t the only used-car challenges faced by franchised dealers, just as CPO vehicles aren’t the only used cars they sell.
Another issue in recent years has been the margin pressure on used cars.
Asked if margin pressure was still an issue on the pre-owned side, Lutz said: “There’s margin pressure on generic late-model used vehicles. By that I mean, a rental fleet that orders the exact same model and brings them to the market at the same time will exert a lot of pressure.
“There’s not so much pressure on unique models or personally pre-owned vehicles returning to the used-vehicle market. For example, there would be a lot pressure on retail pricing if 100,000 minivans — all equipped the same — went to auction and resulted in everyone having the same product on their used-car lots,” he said.
“But if there’s a 100,000 lease returns that are a different mix of vehicles, then you wouldn’t have the pressure on those margins as much.”