Seeking shelter from volatile residual values, rental car companies are selling more retired rental vehicles directly to dealers and consumers through non-auction sales channels.
Avis Budget Group Inc. and Hertz Global Holdings Inc. said during their respective first quarter conference calls that per-unit fleet costs rose substantially in the quarter because of lower-than-expected used-vehicle values when they sold their retired vehicles.
Both companies said they were caught off-guard when the seasonal uptick in residual values expected in February was delayed into March.
The two publicly-held companies also said non-auction lane sales — also called alternative channels — make up bigger portions of their remarketing strategies.
Hertz Global through its subsidiary, Hertz Corp., operates Hertz, Dollar and Thrifty rental car brands. Avis Budget Group operates Avis, Budget and Payless rental car brands and Zipcar, a ride-sharing operation.
Neither company said how much money they make on non-auction vehicle sales, but in previous conference calls Avis Budget said its alternative channels brought about $250 more per vehicle than vehicles sold in auction lanes.
Though new vehicles sales to rental fleets have increased since the recession, they were down for the first half of this year.
Auto companies sold about 932,000 new vehicles to rental fleets through June, down from 1,093,000 in the first half of 2016, said Tom Kontos, KAR Auction Services chief economist, citing his analysis of Bobit Business Media data.
About 1.82 million new vehicles were sold to rental fleets in 2016, up from about 1 million in 2009 during the recession, Kontos said.
“The market has done a good job of absorbing off-rental vehicles, but when you have more supply it puts downward pressure on wholesale values” he said.
Savings: “millions of dollars”
Avis Budget saved “millions of dollars” by selling 45 percent of its risk vehicles in the quarter in non-auction lane venues, up from 30 percent in the first quarter of 2016, said CEO Larry De Shon, during the company’s earnings conference call in May.
The rental car company’s use of analytics helps it make “decisions about how, when and where to dispose the vehicles” and will help “limit the effect of weaker residual values this year to a per-unit fleet cost increase of 2 to 5 percent,” added Avis Budget CFO David Wyshner, who was also on the conference call.
Among Avis Budget’s non-auction lane venues are Avis Direct, an online platform offering vehicles directly to dealers.
The company also sells vehicles directly to consumers on aviscarsales.com and budgetcarsales.com and on third-party platform, TrueCar.com. Avis Budget announced in February an agreement with Uber Technologies Inc., to sell vehicles retired from Zipcar to consumers who drive for Uber.
“Pressures on residual values have only highlighted the importance of selling more of our used cars through alternative disposition channels,” De Shon said.
Though direct sales to dealers yield higher profit margins, rental car companies must continually weigh and balance vehicle acquisition costs, time to sell, maintenance and customer satisfaction, said Anil Goyal, senior vice president of automotive valuation and analytics at Black Book.
Analytics can help
“Advanced analytics continues to be a focus for rental companies and we’re finding more rental companies are looking to value their portfolios on a more frequent basis. Some rental car companies already do this very well,” Goyal said.
“Selling direct to consumers continues to be very limited.”
In its first quarter, Hertz Global sold 21 percent more vehicles year-over-year and sold 65 percent of its risk vehicles in non-auction lane channels, the company said.
Also in the quarter, Hertz Global’s retail sales grew 20 percent and sales through its Dealer Direct platform increased 18 percent year-over-year, the company said.
Hertz Global CEO Kathryn Marinello, said the company is “realigning and upgrading our fleet mix to reflect customer preference.”
In December, Hertz Global began marketing its vehicles directly to consumers on Shift Technologies Inc.’s used-car marketplace.