Despite the pandemic, consumers are still in-market for vehicles. Manufacturers, at one point, were forced to slow production due to local and state regulations. As a result, some dealers have been struggling to maintain a full inventory of vehicles to offer car shoppers. Of course, dealerships cannot control when (or how many) new vehicles they receive from their OEM, so, increasingly, many dealers are turning to the acquisition of pre-owned vehicles.
In the past, dealers had a plethora of options to acquire these including trade-ins. But now, dealers are forced to focus on auctions for vehicle acquisition. At the same time, consumers are currently setting their sights on used vehicles, which causes a whirlwind of supply and demand.
The current situation: There are plenty of used vehicles and not so many new ones. And, it seems, used vehicles have become more attractive to consumers, which forces dealers to acquire more of them to meet demand and to generate sales revenue.
This “perfect storm” has forced dealers to overpay for used vehicles at online auction sites which, of course, drives higher prices. It is so bad that in some cases larger dealer groups are literally bidding for the same vehicles against themselves! Nowadays, it is not uncommon to see a CarMax, Carvana, or other large dealer group outbidding one another, while smaller dealers have to put the brakes on in frustration. When a dealer does acquire a vehicle at auction, just as it has always been, they are forced to sell that vehicle as quickly as possible to avoid an increase in the cost of the vehicle because of floorplan interest.
And therein lies the problem.
Dealerships need to stay in business and the only way they can do that is through two main revenue sources: sales and service.
Let's focus first on sales. Because dealers need to have an ample pre-owned inventory supply and are overpaying for those vehicles, they are forced to sell those vehicles quickly. Some dealerships sell those vehicles as fast as they get them. While that is great as a revenue stream, it may not be so great for the consumer. If dealers are selling pre-owned vehicles within days of getting them, they most likely do not have the time to repair any open recalls before the sale. This means consumers are buying and leaving the lot with unsafe vehicles that are potentially deadly. While no law prevents dealers from selling a used vehicle with an open safety recall, dealers are being forced to sell the car FIRST and then invite the customer back to get the recall repair completed. Yes, it is legal. However, at the state level selling a used car with an open recall is a legal liability under unsafe product laws, should that unrepaired recall lead to an accident.
When it comes to service, dealerships also have a difficult (albeit different) path. Service revenue is not only produced by regular maintenance and normal warranty issues but also recall repairs. Currently, 48 states mandate the OEM reimburse the dealership at retail rates. That is good money! While most service departments currently enjoy plenty of business, many are missing out on revenue that is guaranteed by the manufacturer due to the sales department selling vehicles faster than they can repair them. There is no guarantee that a consumer who purchases a vehicle with an open safety recall will return to the dealership to have the safety recall repaired. These consumers may have it repaired at a more convenient competitor or, even worse, never.
The potential of a used car calamity is akin to a snowball rolling down a hill. The further it travels, the more snow it gains and the faster it goes, exacerbating the issues. We are already seeing recall repair completion rates decrease at a time when the numbers of recalls are increasing. That can only be attributed to the accelerated demand for used vehicles. If this continues, we’ll simply see more unsafe cars on the road. And that is precisely what our mission is to avoid.