Declining RVs hit US remarketing industry
Ever since the Great Recession, America's used-car industry has benefited from high residual values (RVs). But a perfect storm of circumstances is now bringing that party to an end. How will it affect the remarketing business?
The outbreak of the Great Recession in 2008 took a big bite out of the economy of the US. Many people postponed big-ticket purchases, such as cars (pictured: highway in Los Angeles). New-vehicle sales took a nosedive throughout 2009 and 2010.
That turned out to be good news for vehicle remarketers a few years down the line: it meant that the supply of used vehicles newly purchased in the first post-Recession years was small, so the prices were relatively high.
That after-effect of the financial crisis was supposed to have faded away by 2017 and certainly 2018, but it didn't.
A major reason for this is the fact that remarketers have many more tools at their disposal than ever before. One in particular that helped prevent flooding the traditional auction channels in 2017-18 was upstream selling (i.e. direct to dealers and consumers, via multiple online channels).
Another is Big Data: information on preferred model types, mileage levels, and even vehicle colour is helping remarketers find the right buyer for individual cars.
This year, though, the industry itself predicts the inevitable will happen, and RVs will start to drop:
- In February, Avis Budget Group said it expected RVs to decline this year, and Hertz predicted a 2% drop for the entire year.
- In April, with first-quarter data indicating an accelerated drop in RVs, data analysts J.D. Power forecast a 3% drop for 2019.
An important factor in the downward trend is the large number of crossover and small to midsize SUVs – very popular in the new-vehicle market in the past few years – which are now starting to flood into the second-hand market.
According to Black Book, subcompact crossover RVs dropped 10.5% in Q1 2019 – more than any other segment – while compact crossovers dropped 7%. Compacts dropped 5.1%, midsize cars (still the bulk of rental fleets) dropped just 4.3%, thanks to relatively limited supply.
Could evolutions in the vehicle rental industry be a sign of worse to come? In Q1 2018, overall light-vehicle sales were up 1.9% over the same quarter the previous year, and sales to the vehicle rental industry were up 2.8%. But in Q1 2019, sales to rental were up 6.4%, while overall light-vehicle sales were down 2.5%. Some observers worry this indicates a tendency to 'over-fleeting' in the rental industry, with even worse consequences for RVs a few years down the line.
However, the rental industry grew to a record 2.21 million units last year and pulled in record revenue of $30 billion. As a result, the revenue per unit per month was $1,131. To some, that indicates there is still plenty of room for growth in the U.S. car rental industry – and a US Travel Association forecast that leisure and business travel will grow 2.4% from December 2018 through May 2019 seems to bear this out. In fact, USTA predicts domestic business travel will grow by 3.2% this year, faster than it did in any of the past three years.
So, thanks to those fairly rosy prospects – not to mention the multi-channel approach to mitigate oversupply of used vehicles – it seems that the downturn, if and when it hits the U.S. remarketing industry, may be a relatively soft one. Still, after so many years of nothing but good news, remarketers will have to get used to some leaner years than before.