While dealers of brand new cars recently report bleaker profits, things have all been good for the used-car market. Thanks to the Internet. Anyone interested to purchase, say, a Toyota SUV can easily compare prices and get to know the breakdown of the vehicle’s cost online.
Such transparency, driven by the Internet, has been known to undermine the big players’ profits because private sellers can easily match prices and even market products that offer the same quality, minus the much heftier price tag set by the competition.
The same internet-driven transparency issues have been observed among car dealers — both in the new-car and used-car departments. But why do sellers of second hand vehicles see more profits while those offering flashy brand new ones languish?
It’s All About Smarter Dealership And Operations.
Higher Profits Despite Reduced Spread
NADA Used Car Guide analyst Larry Dixon said that since 2008, the difference between the wholesale prices paid by dealers and at auction and the retail price they offer has diminished by about $1000, bringing down the spread to just about $4,000. But does a narrowed spread necessarily mean lower profits?
In fact, before the 2007-2008 recession started, gross profitability from used cars increased to about 13 percent, about two percent higher that it was before the recession. That the profits are up and the used-car market is doing good means that dealers are simply getting smarter.
To curb the growing threat of narrowed spread, used-vehicle dealers had to be more efficient in handling inventory and vehicle pricing. For example, selling the used car to buyers at prices close to what other dealers offer will leave little room for bigger discounts. This ensures greater profits, which otherwise could not have been achieved if buyers were allowed to haggle for more deals.
This move makes sense, now that price transparency, as a result of free information on the Internet, will show buyers the average price of a certain used car for sale. For example, a customer who buys a second-hand Toyota SUV may do so but could no longer demand for bigger discounts because he or she knows the average pricing online. Such smart strategy among dealers may seem very limiting, now that they can’t demand for higher price tags, but overall sales performance has been generally positive to date.
Another strategy to maximize profits making sure the second-hand car is sold within the first 20 days of purchase. Also, spending so much time for reconditioning repairs does not guarantee bigger sales. So, the pressure is on for dealers to keep the prices of used vehicles close to the market price, and at the same time market these cars to hasten the turnover period — from the time the vehicle is bought for resale until day it is finally sold to the new owner.
With these smart techniques in purchasing, handling and reselling used cars, Internet transparency can be a surprising ally, not a threat as many businesses perceive.