Remarketing Strategy: Growth Continues As Gas Prices Rise

By Tom Webb

Wholesale used vehicle prices have continued to show exceptional strength in 2011.

Although the overall market as measured by the Manheim Index declined in February on a seasonally adjusted basis, prices actually rose before the seasonal adjustment. Moreover, results for the first half of March indicate that the Index is set to rise this month. And, for end-of-service fleet units, auction prices are already at an all-time high.

With the two primary drivers of retail used vehicle demand – labor market and credit conditions – continuing to improve, should fleet managers fret over future residuals?

Well, there is that issue of gas prices. Between New Year's and St. Patrick's Day the price of a gallon of gasoline rose by more than 50 cents, and three-fourths of the increase came within the 30 days before St. Patrick's Day. That's not comforting since the strongest seasonal upward movement in gas prices normally comes between now and Memorial Day.

Already 81 percent of shoppers say that gas prices are influencing their vehicle purchase considerations, according to a Kelly Blue Book survey. But exactly how are buyers planning to respond? The two most popular choices were "decrease engine size" and "decrease vehicle size." That should play right into the hands of fleet managers since they have been increasing the fuel efficiency of their fleets for years. Indeed, many companies have been on the leading (sometimes bleeding) edge by incorporating hybrid and alternative fuel vehicles into their fleets.

A detailed analysis of depreciation curves continues to show that, in most instances, hybrid and alternative vehicles provide environmental benefits, but not economic ones. Auction pricing for hybrids, however, is sensitive to fuel costs, and as such, their pricing has improved even more than the overall market in recent months.

But what about those large SUVs in your fleet? Certainly their prices went down as gas prices went up, but the overall decline has been substantially less than that indicated by reports that do not adjust for the higher-mileage these units now have. Given the supply/demand dynamics currently existing in the wholesale market, we think the concern over higher gas prices should be focused on their negative macroeconomic implications, rather than on the possible disruption in wholesale used vehicle pricing.

Tom Webb is chief economist at Manheim consulting. He shares insights on this automotive industry through his blog, www.manheimconsulting.typepad.com, and via Twitter (TomWebb_Manheim). Tom will be presenting at the NAFA Institute & Expo on April 11 in Charlotte.

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