Reprinted from Automotive News, September 5, 2005

Big 3 dealerships are taking in a flood of vehicles as trade-ins and are paying less for them. Buyers are finding used-vehicle bargains.

Some retailers complain that employee pricing incentives on new vehicles leave them with too little profit margin. But the extra used-vehicle sales are gravy.

To be sure, used wholesale prices are down as a result of incentives that ignited sales of new General Motors, Ford Motor Co. and Chrysler group models. But dealers who buy used inventory at "sensible" prices are doing fine, says Paul Taylor, chief economist at the National Automobile Dealers Association.

Tim Walters, a Chevrolet dealer in Elkland, Pa., says the GM employee discount program has sparked used-vehicle sales by pulling customers into his dealership.

In early July, he says a used 2005 Chevrolet TrailBlazer with fewer than 10,000 miles on its odometer and an original sticker price of around $32,000 could be purchased at wholesale for about $17,500.

"That presents a great opportunity," Walters says. "A customer comes in for the new TrailBlazer, and, granted, you can buy it for $25,000 with all of the dough and discounts, but it's still a little bit out of their budget. Well, I've got this real nice one with less than 10,000 miles for $19,995. That is perfect."

A lid on prices

Used-vehicle sales at all franchised dealerships grew 6.7 percent to 1.9 million in June, according to CNW Marketing/Research in Bandon, Ore. CNW projects sales will rise more than 5 percent in July. Through May, used sales at franchised stores were up only 1.6 percent compared with 2004.

CNW estimates that GM retailers' share of a projected 1.9 million in used-vehicle sales at franchised dealerships in July will soar to 28.7 percent. That's up from 18 percent in July 2004.

Ford dealers' share will climb to 20.4 percent from 17.4 percent in July 2004. The Chrysler group will rise to 15.6 percent in July from 8.5 percent in July 2004, according to CNW.

The share of the used-vehicle market held by franchised dealers grew from 37 percent in May to 39 percent in the first half of July. In July 2004, their share was 34 percent. Independent used-vehicle dealers and private transactions account for the rest.

Taylor says about 60 percent of all new-vehicle sales involve trade-ins. That means more than 1 million used models poured back into the market in June, not including retired rental cars and off-lease vehicles.

The rush of trade-ins has put a lid on used prices, which had been rising steadily this year.

"The sheer volume of trade-ins is impacting resale value," says Alex Rosten, an analyst at Edmunds.com

Used-vehicle retail transaction prices in the first half of July dropped 8.6 percent to $10,658 when compared with the year-ago period, according to CNW.

"We do expect more softness as the additional (used-vehicle) supply moves through the marketplace," says NADA's Taylor. "We're going to see that in the July numbers when we get them, and I believe it will persist into August as well.

"(Dealers) may have more cars than they need for their operation, and they know that the secondary market - the auction market - is going to have more volume in it, too, and softer prices."

Less for trade-ins

The glut of vehicles means dealerships are giving consumers less for their trade-ins.

"You can't put as much in the trade if prices are down," says Bill Perkins, owner of Merollis Chevrolet in Eastpointe, Mich.

Perkins says June was an excellent month for used-vehicle sales, though he says used sales began to slow in July.

GM isn't overly concerned about the surplus of used-vehicles, says Paul Ballew, executive director of market and industry analysis. He notes that used-vehicle prices are up for the year.

So far, the incentives have had little impact on the residual value forecasts for domestic cars and trucks. That's because the projected residual values for 2005 GM, Ford and Chrysler group vehicles were already low, says Raj Sundaram, president of Automotive Lease Guide of Santa Monica, Calif., which publishes the industry's bible for residual values.

But if employee discount incentives are carried into the 2006 model year, it could spell trouble, Sundaram says. As a precaution, Automotive Lease Guide's overall 2006 residual value projections likely will be set "slightly" lower than 2005. That data will be released in early August.

"Our assumptions are still holding," Sundaram says. "While the exact impact has not yet been calculated, we believe if anything this gives us more reason to continue to be cautious."