Follow Up To the Manheim Conference Call

I received a number of emails regarding my note Thursday on Manheim's quarterly conference call.

The comments came from a variety of sources, dealerships, public dealer groups, finance companies, etc. I am not going to quote or name anyone. But I did want to give you an idea of the comments people gave me.

#1: Public Used to New Ratio Decline due to higher new sales
On Thursday, I said that over the years investors were led to believe (the higher margin) used vehicles hold up better when demand for new vehicles ebb. But the demand for new vehicles are down 4% or so since 2000, and yet the used to new ratio at the large public dealership groups are also down. Why is that?

An industry leader pointed out to me that this is probably because the large public dealer groups have actually done a better job at selling new vehicles. I think this individual is absolutely right. New vehicle sales per employee are up at most of the large public dealer groups, while used per employee are down at everyone but AutoNation.

Although this observation further supports Mr. Webb's statement, that when the new vehicle market declines, dealers focus more on new vehicle sales and this hurts used vehicle sales and values (regardless of manufacturer incentives).

And it raises another question. . . Is this a good thing?

I don't know.

From a manufacturer standpoint, it is clearly is a good thing (and why I am a little confused why they get so upset then at the large public dealer groups when the large public dealers are gaining share and improving productivity for them).

But at the end of the day, I tend to look at new vehicle sales as the "razor" and the repair business as the "razor blade." What do I mean by this? Many years ago Gillette gave away the razor for free so people would buy their very profitable razor blade replacements.

So being forced to focus more on the loss leader (new vehicles) could impede the focus on the razor blades (service and parts).

If this is the case, it certainly has not been showing up in the service and parts same-store sales numbers at the pubic dealership groups. But the large dealer groups have expanded their service bays, so I don't think we have an accurate "same-store sales" figure.

So if slowing new vehicle sales are hurting the focus in the used vehicle department, it does leave me a little worried that it could also be hurting the focus (of dealership management) in the service and parts department.

#2: Decline due to lack of trades
Another individual pointed out that the reason why used vehicle sales get hurt when new vehicle sales go down, is because dealers get their best late model vehicles from trade-ins (when a customer buys a new vehicle they trade in their old one).

So fewer new vehicle sales hurt trade-ins (supply), which hurts used vehicle sales (lower supply equals lower demand).

#3: Dealers are not selling used vehicles at retail, just at wholesale
Another individual pointed out that retail demand (at least with older/buy here pay here dealerships) might be weak despite high demand at auctions.

He said the reason why dealers are buying so many vehicles at auction is because they can't move it at retail, and are therefore trying to change up their inventory in hopes that a better mix will improve sales.

#4: AutoNation correction
I also said that Asbury (ABG) seemed to be the only large public dealership group over the last 6 years that has bucked the trend with keeping a stable used to new ratio. Actually, as the table showed, AutoNation (AN) went from 0.52 to 0.61 used to new vehicles. I am sorry for the oversight.