Dealers turn to Craigslist to meet used-car demand

Mike Stedem has been scouting classified ads for inventory for the better part of five decades. But in that half-century, there have been few times when sourcing used-vehicle inventory from the street was as integral as it is now.

With fewer trade-ins coming in the door, the used-vehicle inventory "is as tight as I have ever seen it," said Stedem, the principal of Hyundai of Slidell in Louisiana.

"Last week we drove 90 miles to go buy a truck that we'd seen an ad on," he said.

It is a sign of the changing and challenging used- vehicle landscape, as new-vehicle sales cool off and both new and lightly used vehicles become more expensive.

In the past, Stedem said, scouring social media and Craigslist ads for cars was a waste of time. "But now I've got empty shelves," he said.

Stedem said that 10 years ago, his salespeople seldom sold vehicles with 100,000 miles on them. Now they often do. Five years ago, they never sold vehicles with 200,000 miles on them. Now they do.

The sweet spot for sales is also an elusive one: cars and trucks in the $10,000 to $20,000 range, Stedem said. "There is no such thing as a cheap vehicle anymore."

Like many dealers hungry for inventory, Hyundai of Slidell advertises that it will buy cars and trucks from consumers, even if they aren't shopping for a replacement.

"Every dealer on the strip has the same sign," he said.

Jonathan Banks, general manager and vice president of vehicle valuations at J.D. Power, said he is not surprised that dealers are struggling to find inventory. Things will likely only get tighter this year, he said, as demand for used vehicles is expected to stay strong. Factors that drove the used market last year could accelerate further.

The last time he saw a similar trend was in the wake of the Great Recession, he said, when the 2008-09 collapse in new-car sales led to a shortage of used vehicles about three years later. But that was "purely a supply thing," he noted. Now, the used market seems to be driven by a "pure demand play," he said.

Some of that pure demand appears to be from young buyers finally in position to buy a set of wheels, particularly the Gen Y and Gen Z buyers, or those in their mid- to late 20s, Banks said.

"You're starting to see the incomes of that demographic increasing," he said. At franchised dealers, that demographic is buying 63 percent used, he said. At the same time, J.D. Power saw price increases in the range of 2.6 to 3.4 percent for small and midsize cars in March.

But the main factor driving demand continues to be affordability — or unaffordability — of new vehicles. Showrooms sparkle with sophisticated, content-rich vehicles that are beyond the budgets of many consumers, even at today's relatively low interest rates. Monthly payments on used vehicles run about 31 percent lower, Banks said.

Even big dealership groups have had to get more aggressive to serve used-car shoppers. In September, Lithia Motors invested $54 million in the online used-car retailer Shift and has since increased its stake in the San Francisco company. Part of the attraction was Shift's broad exposure to the used-car market and its potential to help Lithia procure more used vehicles, Lithia CEO Bryan DeBoer told Automotive News.

Shift's artificial-intelligence technology "will tell us how much to pay," he said, "but procurement is about being in front of the customers at the right time."

Dealers looking for lightly used vehicles for their certified pre-owned fleets will have an easier time. A record number of vehicles are expected to come off lease this year.

But the most profitable vehicles many dealers seem to be looking for are the 4-, 5-, and 6-year-old cars and trucks, said Patrick Janes, business development director for Cox Automotive's Stockwave and vAuto products.

"That's a tough vehicle to find — tough to find at auction," he said. "You've got to be really savvy to find those by other means."

Janes said he has heard from a lot of dealers who were saying they had plenty of trade-ins as recently as last fall, so they stayed away from wholesale auctions, where they'd have to compete with disrupters such as CarMax and Carvana.

"We're starting to see that weaken," Janes said. "I can even see it in our vAuto activity where we're starting to see appraisal activity slow down."

Citing data from the National Automobile Dealers Association, Janes said 43 percent of dealers' inventory on average comes from trade-ins on new vehicles, and 23 percent from trade-ins for used vehicles.

So for the typical franchised dealer, "we're looking at about 65 percent of their business relies on that trade-in," Janes said. "If that starts to constrict, particularly the new-vehicle trade-in, they usually go to auction for about 26 percent of their inventory, and they go to street purchases for about 5 percent."

Those street purchases and auctions become more important as the other channels ebb.

"Our biggest challenge right now is acquisition," said Tony Thorstad, who works in e-commerce for Smart Motors Toyota in Madison, Wis.

Speaking on the sidelines of the Digital Dealer conference in Orlando this month, Thorstad said the dealership's trade-ins are down significantly because of lower new-vehicle sales.

Typical monthly sales run 250 to 300 new vehicles at the store. "February, we did 100," he said. "So that's pretty significant. That affects the used-car department and acquisition."

Thorstad said Smart Motors had avoided auctions entirely until about a year ago, opting to acquire cars solely through trade-ins and private purchases.

"But when we wanted to move our number, because we were doing about 150 used cars, we knew we needed to get out and find other ways to acquire these cars," he said.

Thorstad said the store now has a process and team in place focused solely on buying off the street.

"We buy everything," he said. If it can't be resold, his staff will take it to auction and hope to squeeze some kind of margin out of it.

"But if it runs and they'll take our offer," he said, "we'll buy it and figure out what to do with it after that."

Jackie Charniga contributed to this report.