Monday, August 24, 2009

Rising used-car prices means shortage on lots

Morrie’s Automotive Group Inc. has only $6 million worth of used cars available for sale at its eight Twin Cities dealerships, two-thirds less than it had a year ago.
Demand is relatively high for used cars, but declining supply and the corresponding rise in prices are making it difficult for Minnetonka-based Morrie’s and other local dealerships to purchase enough vehicles to keep their lots fully stocked.

“That’s probably one of our biggest challenges right now — acquiring inventory at what we consider a reasonable price,” said Morrie’s Chief Operating Officer Karl Schmidt, who estimated that his company is paying an average of 10 to 15 percent more for used cars than it did a year ago.

Used-vehicle values have risen for seven straight months due to decreased supply, according to the most recent Used Vehicle Index from Atlanta-based Manheim Consulting, which operates auto auctions in Maple Grove, Shakopee and numerous other sites across the country.

Prices are up across the board for used vehicles, but the supply is especially tight for cars and trucks that are just one or two years old, Manheim Chief Economist Tom Webb said.

‘Obscene prices’

Dealerships typically get a little more than half of their used cars through trade-ins. Due to the recession, consumers are buying fewer new cars, so they’re trading in fewer as well.

Dealers now need to rely more on auctions and other wholesale sources. It’s getting harder to find bargains at the auctions, though.

The auction buyer for Morrie’s, for example, will go out on a three-day “car-buying mission” and come back with just two or three cars, Schmidt said. “There’s just no availability at the right price.”

Sports-utility vehicle prices have jumped the most, thanks to lower gas prices, he said. “You’re seeing pretty dramatic $3,000 or $4,000 swings on some of the SUVs. People got used to buying those pretty cheap a year ago, but that didn’t last long.”

Paul Walser, CEO of Bloomington-based Walser Automotive Group Inc., said he hoped used-car prices would start dropping after the start of the federal “Cash for Clunkers” program, which provides consumers with vouchers of $3,500 to $4,500 for trading in old cars and trucks for newer, more fuel-efficient vehicles. New-car incentive programs typically pull down prices for used vehicles, but that wasn’t the case this time because the impact was offset by low inventories of new products.

Walser Automotive has pulled back on its buying, hoping that the “obscene prices” will start to fall in coming months when new-vehicle inventories rise due to increased production by the automakers. For now, the company is just “filling holes” on its lots with cars that it finds at more reasonable prices.

“We’re not being nearly as aggressive as we were, so our inventories are running a little light from where we’d like them to be,” Walser said. “There’s going to be plenty of inventory here in 60 to 90 days, so we are not getting too silly on acquiring late-model used cars right now.”

David Luther, president of Luther Automotive Group in Golden Valley, said his company’s used-car inventory is down slightly, partly due to tighter management. But prices are making it more difficult to find cars that make sense for the company to put on its lots.

If the dealership has to pay more for used cars, it has to pass that on to consumers. Luther said he’s reluctant to do that because customers are less likely to buy used when prices close in on new-car levels. “There has to be a reasonable amount of savings to buy a pre-owned car. If that gap gets too close, it’s going to be less advantageous for us and for our customers.”

Rising prices haven’t scared away too many customers so far, though, according to Manheim’s Webb. “It really hasn’t hurt dealers that much. They’ve been able pass their higher acquisition costs on to retail buyers.”

Strong sales

The used-car segment in Minnesota has declined from a year ago, but not nearly as much as the new-car segment. Sales of used cars in the state declined 26.2 percent to 103,690 through April, while sales of new cars fell 39.2 percent to 32,637, according to the most recent statistics available from the Minnesota Automobile Dealers Association (MADA).

“New cars have suffered to the benefit of used cars,” MADA Executive Director Scott Lambert said.

Some dealers, however, say their used-car sales could be stronger if they had more cars to sell. “It’s definitely hurting us,” Schmidt said of Morrie’s reduced inventory. “In this market it’s hard to say exactly how much, but I feel like we could be up 20 to 25 percent in the used-car business year-over-year if we had the inventory. As it is, we’re even to down 5 percent, depending on the store.”

New car sales at Morrie’s rose 83 percent during the first half of 2009, thanks largely to “Cash for Clunkers.” Used-car sales, however, were down 2 percent.

For the year, Morrie’s expects total sales to increase by 40 percent. “That’s a good story,” Schmidt said, “but it could be even better with more of that pre-owned business."

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