You don’t need a PhD in economics to understand that when times are tough, consumers are on the hunt for less expensive products. That’s especially true with big-ticket purchases like cars and trucks. Even as new car sales remain sluggish, sales of used cars have increased in recent months, mostly because, well, they’re cheaper. The big auto dealer groups reported increases in used car sales of anywhere from 20 to 35 percent for the third quarter.
Much of that growth has been on the lower end of the pricing scale, where car buyers have been finding even cheaper cars on the lots of franchise dealers compared to a year or two ago. How cheap? Some are selling cars at prices under $3,000, the sorts of cars that used to be the stock and trade of low-budget independent operators.
But today, even at the big dealership chains, buyers can find a nice selection of bargain used vehicles. These are the sorts of cars that are more than seven years old, off warranty, and don’t qualify for certified pre-owned programs. They are always priced at under $10,000, vehicles that just a few years ago the dealers would have sent to auctions, where they would have been sold at rock-bottom wholesale prices to independent dealers or other wholesalers. Many of the big dealership groups, like Sonic, Lithia, Penske and AutoNation are now hanging on to these vehicles when they come in on trade instead -- and selling them on their own lots, for a profit, as rough economic times have increased the demand for even cheaper cars.
There has always been a need for cheap transportation, notes Jeff Dyke, executive vice president of Sonic. “There are 40 to 45 million used cars sold in the U.S., annually,” he says, compared to the 2010 new-car sales projections of 11.5 units.
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“Sixty percent of the people who come to out lots are looking for cheaper transportation,” says Dyke. “About four years ago, I’d say we were selling about 40 used cars per store per month. Now, it’s more like 75 or 80. And about 30 percent of our current used-vehicle sales are of vehicles priced under $10,000, compared to maybe five percent three or four years ago.”
John North, Lithia’s controller and vice president of finance, says Lithia’s sales of these cheaper cars is up significantly compared to last year, but could not quantify it, “since this is an area of the business we weren’t really in a year ago.” He says Lithia presently sells about 40 used vehicles per store per month.
He concurs with Dyke that there’s always been a demand for lower-priced vehicles, but “there does seem to be an even greater demand for them in the last year or so.”
AutoNation, the nation’s largest car retailer, is expanding its no-haggle “Value Vehicle Outlets,” which specialize in low-priced vehicles, according to a recent report by Automotive News -- opening 16 such stores this year, with plans to add six more by March.
Some of Sonic’s dealerships have similar cheap-car “corrals” at its dealerships, says Dyke.
“A few years ago, if we got a 2002 BMW with 120,000 miles on it as a trade-in, that vehicle would have gone to auction, and ended up at a ‘buy-here, pay-here’ lot, where it would have probably been sold to a sub-prime customer” – someone with bad credit.
“But now, if someone wants to buy an older Beemer for their kid in college, that vehicle is available to them.”
Dealers who sell this these cheaper, older cars generally like to take a no-nonsense approach to pricing, like at the aforementioned no-haggle Value Vehicle Outlets run by AutoNation – which is a practice Sonic also endorses, says Dyke.
“We like to price a vehicle right the first time, and not build in much of a negotiation gap,” he says. “We don’t like the final selling price to be within any more than $500 of the asking price. We don’t like to buy something at auction, automatically add $3,000 to that in order to get to its ‘asking retail price,’ and then negotiate to the sale price from there.
Starts, Stops and Steers
But are these cheaper used cars a good buy? Are they in reasonable condition? North says Lithia spends $300 to $400 to recondition these older cars before sale, and offers two-month or 3,000-mile warranty.
With normal late-model used cars, “the reconditioning standard is a ‘like-new’ standard,” says North. “But when we sell an eight-year-old vehicle, our motto when it comes to the re-con standard is that the vehicle will ‘start, stop and steer.’ They may not be cosmetically perfect, but these vehicles do allow us to reach a greater number of consumers who just need a car to get them from place to place.”
Obviously, when a vehicle is seven to 10 years old, parts are going to wear out and need to be replaced. That’s just part of the deal when buying a cheaper, older car.
“Yeah, you might get a car with a rattle, because you’re not buying a brand-new vehicle, says Dyke. “But we do a safety check, and we spend $800 to $1,000 on re-conditioning it before sale.
“We don’t offer a warranty, but if you buy one of those older, cheaper cars from us, and something major comes up, like a blown engine, we would definitely stand behind it. The consumer could return that vehicle and exchange it for another one.”