This week offered a stark example of the changing nature of the used car business in the face of spiraling used car prices that have risen some 40% since the onset of the global microchip shortage. OEMs are strengthening their hold on their dealers’ used car business even as a dearth of used cars are forcing an escalation in prices, impacting independent online retailers.
High used car prices are no accident
The escalation in used car prices can be pinned on the pandemic-induced microchip shortage. Automakers have been reducing their production or eliminating certain optional equipment as there aren’t enough microchips to meet automakers planned production.
If a consumer wants a new car, truck or SUV, they have to place an order and wait. This has caused used car prices to rise dramatically during the past year as impatient consumers opted to buy used cars, particularly 2- and 3-year-old certified pre-owned vehicles, because they don’t have to wait.
Rising prices has affected leased vehicles, which are worth more at the end of the contract than they were when new in some cases. Lessors are selling returned vehicles for more than they expected and the profits are substantial. Consider General Motors for one, which realized $2 billion in leasing gains in 2021.
The effect of extreme vehicle demand and diminished supply was revealed a few days ago.
Online used car retailing hasn’t proved profitable
Carvana Co., known for its automated car vending machines, announced it would lay off 2,500 employees representing 12% of its workforce, which numbers more than 21,000. Affected employees will get four weeks of pay, and an additional week’s pay for each year of service. The company also said that its executives will forego their salaries for the rest of the year.
The moves came as it sold fewer vehicles than planned in the first quarter of 2022. The online used-vehicle retailer sold 105,185 vehicles in the first quarter, a 14% year-over-year increase, bringing in $3.49 billion of revenue, up 56% from the first quarter 2021. But the company still realized a net loss of $506 million, up from the $82 million net loss a year ago. Gross profit per vehicle also declined to $2,833, down from $3,656 a year ago as lower-than-expected sales volume led to increased reconditioning and transport costs.
“Q1 was a unique environment,” said Ernie Garcia, founder and CEO of Carvana, in a statement. “Omicron, high used vehicle prices, rapid changes in interest rates and other macro factors impacted Carvana and the used vehicle industry as a whole.”
It shouldn’t come as a surprise, however. Carvana has yet to prove profitable, losing $287 million in 2021, and $462 million in 2020.
Yet at the same time, in an effort to improve profitability, the company closed a deal to acquire Carmel-based Kar Global’s Adesa U.S. auction subsidiary for $2.2 billion in cash from part of the $3.275 billion in financing it received from JPMorgan Chase Bank N.A. and Citi. Carvana will take over Adesa’s auction business, which delivered more than $800 million in revenue in 2021, and use its 56 physical sites to inspect and recondition the vehicles it sells online.
Investors are not impressed as Carvana’s stock has fallen from August’s $370.10 high to less than $40 as of mid-day Thursday.
No zoom in Vroom’s numbers
Similarly, one of Carvana’s competitors in online used car retailing, Vroom Inc., reported 19,473 units sold, up 26% from the same period last year. The e-commerce retailer posted revenue of $675.4 million in the first quarter, up 60% from the same period one year earlier, but still posted a $310.5 million net loss.
In response, the company plans to reduce operating expenses to maximize liquidity and is contemplating a realignment of its business plan, which could include layoffs. Vroom is looking to reduce operating expenses by as much as $165 million.
Vroom also named COO Tom Shortt as the company’s new CEO. Shortt replaced Vroom CEO Paul Hennessy Monday, when the move was announced. Shortt, 53, joined Vroom in January having previously worked as senior vice president at Walmart, in charge of the retailer’s e-commerce supply chain. He also held leadership positions at Home Depot, ACCO Brands, Unisource, Fisher Scientific and Office Depot.
Not all online retailers suffering
But the current market isn’t hurting all used car retailers. Market leader CarMax, whose fiscal year ended Feb. 28, reported sales of 343,413 units for the fourth quarter, up 11.3% from the prior year and 1,630,550 combined units for the fiscal year, up 38.4% from the prior year.
This led to net revenues of $7.7 billion, up 48.8% compared with the prior year fourth quarter. For the fiscal year, net revenues of $31.9 billion, up 68.3% the prior year. Net earnings was $159.8 million for the fourth quarter and $1.2 billion for the fiscal year.
But look deeper, and CarMax was still affected by the current market, with retail used unit sales declining 5.2% in the fourth quarter to 194,318 vehicles, and comparable store used unit sales dropping 6.5 percent.
OEMs a new factor in the used car market
Booming demand for used vehicles has caught the attention of automakers. Cox Automotive estimates that half of all used retail sales — or about 10.6 million vehicles — were sold by franchised dealers last year. And while state laws prevent OEMs from selling cars directly, they can set up sites to fight the growth in national independent used car retailers.
Most notable among them is CarBravo, a used car megasite created in January by General Motors to increase used vehicle sales at its 3,800-plus dealerships. Customers can get guaranteed online offers to purchase their vehicles using prices from the industry standard Black Book. And CarBravo isn’t restricted to GM products. Given that GM dealers have about 400,000 on their lots at any given time, and GM and GM Financial carry about 500,000 vehicles in inventory annually, there should sufficient inventory.
“CarBravo will give customers more choice and access to shop significantly expanded inventories of both the dealer and a national central stock of GM used vehicles,” said Steve Carlisle, GM executive vice president and president of GM North America in January.
GM’s not alone in this effort.
The announcement comes about a year after Ford Motor Co. started a used vehicle platform called Ford Blue Advantage, offering many of the same features as CarBravo. The site is an extension of its current Certified Pre-Owned program, including vehicles built by other manufacturers sold through its franchised dealers.
All prices are guaranteed, and a include 14-Day/1,000-mile money back guarantee, 24/7 roadside assistance and a CarFax vehicle history report. Ford sells the vehicles in two tiers.
Gold Certified vehicles are Ford vehicles up to 6 years old with fewer than 80,000 miles. They undergo a 172-point inspection, and receive a 7-year/100,000 powertrain warranty and 12-month/12,000-mile comprehensive warranty. Blue Certified vehicles are non-Ford vehicles up to 10 years old, and get a 139-point inspection along with a 90-day/4,000-mile comprehensive warranty.
Prior to that, Honda put up its own HondaCertified.com website to help potential buyers locate the brand’s certified pre-owned vehicles in December 2020. The site came as Honda experienced significant growth in demand for Certified Pre-Owned Hondas. Now, it plans to boost its share of the 3 million non-CPO used Hondas sold each year that aren’t sold through Honda dealers.
And, in Europe, Stellantis is already in the space with its used car website Spoticar.
New car sales remain a different story
But don’t expect new car sales online from mainstream OEMs anytime soon.
“The U.S. market locks dealers in; it’s just the way that the laws have been set up in most states,” said Sam Fiorani, vice president, Global Vehicle Forecasting, AutoForecast Solutions LLC. “If you’re a startup like Tesla or Rivian, there are ways to get around the rules because the rules say the manufacturer can’t compete with the dealer. If you don’t have dealers, then in many states, you can set up a factory-owned network. But if you already have Dodge dealers and Chrysler dealers and Jeep dealers, it’s against the law in many states to set up your own network.”