A look at wholesale, residual value, and retail market insights in the Canadian market.

As part of TalkAUTO 2021, Miranda Pyette of Miranda Pyette Automotive Consulting, moderated a session on Wholesale, Residual Value, and Retail Market Insights, which featured Rene Abdalah, Senior Vice President of Black Book in the U.S., and James Hancock, Director, OEM Strategy and Analytics from Canadian Black Book (CBB).

Given the uncertainty in the automotive industry and the wider economy over the last 18 months, the impact of the pandemic and supply chain shortages has left many dealers having to rethink their wholesale and retail strategy.

Inventory levels halved

James Hancock said due to the pandemic induced lockdowns and plant shutdowns, followed by a ramp-up in vehicle demand and now the ongoing semiconductor shortage, new vehicle inventory in November was half of what it was at the same time in 2020. As for electric vehicles, supply was down even further, by 70%. As a result, due to the way that leasing is structured in Canada, this short supply of new vehicles has and is continuing to put pressure on the used vehicle market, since many would-be shoppers of new, leased vehicles are having to look to the used market for alternatives.

Rene Abdalah noted that while all the attention is currently focused on the semiconductor shortage, there are also some other factors to consider. Firstly, that when the COVID-19 pandemic initially hit and OEMs reacted by shutting or slowing down vehicle production and parts orders, nobody really knew how long the situation was going to last. Abdalah also mentioned that assessment plans did, in a number of cases miss the mark, meaning that they didn’t take into account the surge in demand that ended up happening in the spring and summer of 2020 and that has continued since.

As a result, given the demand and supply imbalance, the situation has resulted in some unique challenges and also opportunities for dealers. To be fair, Abdalah said that when taking a deeper dive; some segments of the market have faired better than others.

A lot of this relates to OEMs and their strategic approach to ramping up production following plant shutdowns and cancelled parts orders. Given the higher margins on trucks and SUVs, these types of vehicles are being prioritized over sedans and small cars. “This is where we are going to see more relief in terms of production,” explained Abdalah.

Considerable pressure

Getting back to used vehicles, the shortage of new inventory has put considerable pressure on wholesale values. James Hancock noted that since the lowest point during the COVID-19 pandemic, prices for used vehicles in Canada have increased a whopping 39% and not just across some segments, but the entire used vehicle market. Additionally, this pressure on wholesale values has created a knock-on effect for retail prices meaning that consumers in some cases are paying more for a used vehicle now than it cost new 3-4 years ago.

Another factor contributing to the supply-demand imbalance is export activity. As Abdalah noted, since the onset of the COVID-19 pandemic, there have also been significant exports of used vehicles to the U.S., to capitalize on the massive buying power south of the border. Yet in the U.S., the auto sector faces many of the same issues, namely a shortage of inventory, high demand and high prices.

Trucks and SUVs still continue to be the most popular vehicles among Canadian buyers but the strong demand and short supply has put major pressure on both segments. James Hancock noted that as of November, the full-size truck segment had seen a decline of 61% in terms of vehicles available since May 2020, while prices continued to increase and by November were up 40% over the same period. For SUVs, the decline in availability was around 35%, but prices were up by around 40% as well.

Rene Abadalah said it was important for dealers to pay close attention to the data and look for signs of increases in new vehicle production and inventory levels. “This is when used car prices are going to start declining,” he said. A softening of the market is expected, but as to when this will really happen remains to be seen.

Strategic approach

In the meantime, dealers need to be very strategic about acquiring inventory and marketing to their customers. Greater emphasis on F&I products such as protection, warranty and maintenance plans, as well as service opportunities, can allow them to take advantage of current market trends and boosting profits on each and every vehicle they sell or service through fixed ops.

James Hancock said an interesting trend since the onset of the pandemic is the growing market share being taken up by independent (non-franchised) dealers. Because profit margins on used vehicles have increased so much over the last two years, independent dealers are in many cases, witnessing banner years for business and profitability. “Right now, 36% of all used vehicles sold in Canada come from independent dealers,” said Hancock.