Notable Quotables From the Manheim Conference Call

But in terms of the market itself, in terms of the vitality. It is a good (used vehicle) market. Certainly an increasingly number of dealers are buying an increasing number of vehicles at auction, which means that they obviously have a retail market for these vehicles.

I think when you look at some of the numbers, again, because of the higher acquisition costs, from a dealer standpoint there is some pressure on margin. However, their inventory turn has been good, so that has offset it. But overall the market is good and stable.

Source: Tom Webb, Chief Economist, Manheim Consulting. July 10, 2007 Conference Call

Favorite Quotes From Manheim Conference Call
This morning, I just wanted to share with you a few quotes from Tom Webb's (Manheim Consulting Chief Economist) quarterly conference call Tuesday.

As you probably know Manheim is the largest used vehicle auction company in the United States.

And the Manheim Value Price Index (released at the beginning of the week) showed its fourth consecutive monthly increase.

Favorite Quote #1: New Vehicle Inventories Provide Keener Insight into Used Vehicle Values

New vehicle inventory unit count as a 12-month rolling average. . . By that measurement, industry unit counts from early 2005 until today have been reduced by more than half a million units. And I would suggest that this is a major reason why wholesale used vehicle prices have remained strong.

In fact, although inventory levels and incentive spending are necessarily correlated. I believe it is the inventory number that provides the keener insight into used vehicle values.

After all, if a dealer has 100 days supply of new vehicles, there is little desire to buy used ones at auction. The dealer's mindset will be focused on selling new vehicles, not used ones. And the dealerships internal spiffs and compensation plans to sales people will be directed to new not used vehicles. And that situation will continue until new vehicle inventory is brought back into line, regardless if manufacturers step up to the plate with higher incentives.

Source: Tom Webb, Chief Economist, Manheim Consulting . July 10, 2007

Why is this quote important?
I think this observation is incredibly insightful. I always looked at new vehicle inventories influencing incentives (which they sometimes do). I never thought of new vehicle inventories themselves influencing used vehicle sales (and by default value).

And it raises a concern on my end. One of the investment merits we often hear from the publicly traded franchised auto retailers, is that when the demand for new vehicles slow, they can augment profits with higher margin used vehicles.

So new vehicle unit volumes are down 4.3% (from 17.2 million units in 2000 to 16.5 million in 2006). But the average used to new vehicle ratio at the large public dealership group has declined from 0.62 to 0.55 (see table below).

click to enlarge

And you should realize that over 30% of Penske's (PAG) revenues now come from international markets (mostly the United Kingdom), versus 0% in 2000. And in the United Kingdom they generally have higher used/new ratios because if the car sits on the lot too long, they end up selling it as a used "demonstrator vehicle."

So the "mix shift" (toward more international dealerships) may have helped Penske's used/new ratio remain more stable (suggesting in the U.S. they saw a similar decline to the peers). Only Asbury has been able to buck the trend, and I suspect it is because the used vehicle initiatives they have been successfully rolling out to their regions.

As a result I think there is a lot of validity to Mr. Webb's observation. And it suggests it is an area where the large public dealers (and likely dealers throughout the industry) need to improve. Clearly there is a benefit to focusing on used when new slows.

So while I am not a big fan of "overbenchmarking" (creating too many benchmarks for the General Managers), maybe a used to new ratio should be included in the General Manager's benchmark and compensation plan.

The only concern with this approach? I seem to recall reading an article in Automotive News a couple months ago about how Chrysler was becoming critical of some dealers that were becoming overly focused on used vehicle sales.

I think it is wrong for Chrysler to do this. If they can't produce vehicles the dealers can sell, the dealers should not be forced to stock their lots with vehicles (no one wants). And dealers therefore should be able to focus on more profitable business lines (like used vehicles).

But that is my more idealistic view of the world. So I just wanted to point out that large dealer groups creating used/new ratio targets have the potential of ruffling the feathers of some automakers.

Perhaps a good compromise is to raise the certified used to new ratio target (a segment automakers are focused on improving).

Favorite Quote #2: Rental Units Should Decline 8%

Slide 8 shows the number of new units sold into the rental market. . . June was off 17%. The decline for the first half of 2007 was 11%, and I still expect that the full year decline will be somewhere in the neighborhood of 8% this year.

Source: Tom Webb, Chief Economist, Manheim Consulting. July 10, 2007

Why is this quote important?
I talked about this after Manheim's last conference call. And a number of you emailed me saying "wouldn't this mean the rental car companies buy more vehicles at retail?" "How can the automakers dictate demand to rental car companies?" "If the rental car companies have more people renting cars, don't they need to buy more vehicles?"

And I said that the answer is that the automakers "created demand" by offering vehicles at uneconomical returns to themselves. And this resulted in rental car companies turning over (selling at auction) the vehicles faster than they otherwise would or should have.

Even Ford's Chief Economist (Ellen Hughes Cromwick) got on the call later and asked about some data disparities in the slides with one of the slides showing declining mileage?

Mr. Webb explained that it was due to mix differences with more risk cars being sold in the market. As a reminder a risk car is simply a vehicle where the automakers don't guarantee the residual value when the rental car company is done with the vehicle (so the rental car company is "at risk").

Importantly, while explaining the data disparity, he said that if he looked at the average mileage for all rental vehicles that it would "be up substantially."

So it goes to support my contention that you can only "create demand" for so long. An economic return is ultimately needed, or else the imbalances usually reverse. And now you see rental car companies holding onto vehicles longer (at least suggested by the increased miles Mr. Webb hinted at).

Favorite Quote #3: Buy Here Pay Here Dealers Continue To Face Rising Costs

If you want to continue to buy a vehicle with the 97,000 miles, you look at the final cluster of bars (2004 versus 2007) and it shows basically you have to spend $1,000 more. That is a severe problem for the buy here pay here dealers, and it is one they have wrestled with for some time.

Basically, they are not facing a shortage of supply. Nor is it a difficulty in finding units. The difficulty is finding units that meet the dealers age, mileage, and condition criteria at the price the dealer is willing to pay.

Source: Tom Webb, Chief Economist, Manheim Consulting. July 10, 2007

Why is this quote important?
I think the quote is pretty self explanatory. But a critical issue I think folks looking at the buy here pay here market need to understand. And why I continue to think the need for better merchandising/inventory optimization in the space is critical.

It shocked me that VAuto, FirstLook, and American Auto Exchange were no where to be found at the National Alliance of Buy Here Pay Here Dealers [NABD] Convention in May.

You really should check out the slides available on the company's website for some other interesting data points.