With inflation at an all-time high impacting the price of almost everything, cost is top of mind for many of our fleet managers. Historically, the three big categories of fleet spend have always been depreciation followed by fuel and maintenance. As the largest spend bucket, depreciation averages 40% of the total cost of ownership (TCO). It represents the change in a vehicle’s value from acquisition to resale and, in the past, on average, represented a loss of 30% in the first year. Managing the deprecation cost is tricky but in today’s environment of unprecedented resale values, there is an opportunity to tackle the largest fleet spend category despite inflation.
New Car Prices
It is true that new car prices are also at an all-time high so replacing units now may seem counterintuitive. Not only have OEMs increased their prices, but dealers are often pricing above MSRP. Yahoo Finance Canada quoted Autotrader in May of 2022, “the average price of a new vehicle in Canada reached $54,048 in May, a 17.3 per cent increase from last year and up slightly more than 1 per cent from April, when prices last hit a record high.” In the US, The January 2022 edition of Car and Driver examined government data on prices today against the past several decades and described the increases as “dramatic.” In an article entitled “Pay Up and Up”, they illustrate the point: “Think of the rolling slope of the Great Plains before they hit the Rockies, then bam-the Rockies.” The Washington Post cites market research firm Edmunds to say, “More than 80 percent of U.S. car buyers paid above MSRP in January…That compares with 2.8 percent the same month a year ago and 0.3 percent in 2020.”
Adding insult to injury, the incentive programs that so many fleet customers have enjoyed seem like a thing of the past. According to Cox Automotive, after reaching an all-time high in 2019, incentive programs were down 17% in 2021 and more notable, “Program volume in Q4, at 4,713, was the lowest in 5 years, down 36% from Q4 2020.” So where is the opportunity in this environment? It is in the equally unprecedented used car resale market.
Used Car Prices
It is no secret that the used car market is hot. According to bettterdwelling.com, “Canada doesn’t track used car prices, but the US estimates annual growth hit 45% in January…Seeing the average price of new cars jump only 11.3% almost feels like a deal in contrast.” Manheim’s Used Vehicle Value Index rose to 222.7, up 9.7% from a year ago. And, the non-adjusted price change in May increased 1.1% compared to April, leaving the unadjusted average price up 12.1% year over year. All major market segments saw seasonally adjusted prices that were higher year over year in May, except for pickups.” And, while trucks are slightly down (2.7%) from last year, they’re still WAY UP! To illustrate the point, one of our Canadian customers in the chemicals industry has a fleet of mostly sedans and SUVs. They have seen average gross proceeds for their vehicles go from almost $6K in 2019 to over $12K this year.
Replace Now (If You Can)
Scott Underhill, Wheels Donlen’s Director of Business Intelligence, Strategic Consulting, is advising clients to accept the absence of incentives and price increases, “If you have the opportunity to replace, definitely replace. You will be taking advantage of the strongest resale market we’ve seen in our lifetime.” In recounting the details of a smaller fleet with mostly Ford Edges selling for $10K more today than in 2020, he drives his point home, “I need to find an investment that has this return.”
The bottom line is this: the increased values at resale drastically reduce depreciation and make the higher cost of acquisition far more palatable. Scott adds, “there is always the added benefit of lower maintenance and better fuel economy with a new vehicle.”