The used car industry represents a substantial portion of the vehicle market. Often underestimated in size, the used car market generates more than $300 billion in revenue annually. The number of vehicles sold through used car outlets and by existing owners exceeds new car sales by a significant margin. Historically, the big drawback to buying used cars has been the lack of pricing information on comparable vehicles, as well as the risks incurred from purchasing a vehicle from a possibly unreliable source. Consumers are often wary about paying more than fair value in the sometimes illiquid used car market. Meanwhile, the thought of owning a lemon makes the occasionally overpriced new vehicle market a more attractive option to many. Over the past few years, however, it has become increasingly easy for consumers to gain access to information about comparable used vehicles. Moreover, the creation of centralized outlets in comparison to, for example, the local newspaper classifieds, has lowered the risks of going this route.
The used car industry as a whole remains highly fragmented. There are a large number of independent dealerships dedicated to purchasing and reselling vehicles. A significant part of the market is also comprised of direct owner-to-owner sales. Still, a growing part of the retail sector is comprised of larger companies that focus on gathering information on used vehicles and others that specialize in reselling vehicles on a greater scale.
The most well-known and frequently used information provider on vehicles is Kelly Blue Book. Consumers can browse Kelly Blue Book’s Website to receive the most up-to-date information on both used and new vehicle pricing. The Website has undoubtedly added incremental sales to the used car market over the years by giving potential buyers more leverage going into a purchase. Moreover, another Internet-based platform, CarFax, provides a detailed breakdown of past owners and any insurance claims made during their tenure, adding additional transparency to the used-car buying process.
There are also a few large scale retailers of used cars. The most notable is CarMax (KMX). Formerly a subsidiary of the one-time retailer Circuit City, the company was spun off in 2002 as the leading domestic dealer of used vehicles. CarMax now operates about 100 superstores that combined generate sales in excess of $7 billion annually. While the company is the industry’s largest factor, it still represents only a fraction of the total used car market. It also has limited domestic geographic coverage, with major areas of the Northeast untapped. There are a few national competitors to CarMax. Penske (PAG) and AutoNation (AN) are the other largest public companies; however, both are predominantly new car dealers, with used car sales comprising only a minority percentage of total revenues.
The used car industry commonly carries fundamentals associated with the new car retail market. Comparable unit sales, average selling price, and gross vehicle margins are helpful gauges in both sectors. However, since the two products can be considered substitutes, they sometimes work against each other. In general, demand fluctuation appears to be less evident in the used car arena, as these vehicles are typically less of a burden on consumer budgets. Still, there is a substantial degree of volatility as seen by the rapid fluctuation in selling prices and unit sales for a company like CarMax over the course of just one year.
Although the scenario has been worse for new cars, the used car market has faced its share of challenges over the past few years. In 2008, exorbitant gasoline prices reduced the resale of gas guzzling cars and trucks. In 2009, the recession caused used vehicle sales across the board to decline. In addition, the credit crisis affected many dealers that profit from financing arms. They were hurt twofold; fewer financing options for consumers lessened the ability of many to purchase cars, and reduced financing spreads and losses on defaulted loans took an added toll on profitability. Sales received a temporary spike in the summer of 2009, thanks to the government sponsored ‘’Cash-For-Clunkers’’ program. This year, we expect revenues to rebound off of 2009’s lows, as economic conditions improve, although high unemployment is likely to continue to temper near-term vehicle demand.