Car dealerships have started buying cars directly from consumers to improve profit margins and reduce prices when these cars are sold as used models.
However, this is familiar as car dealers previously rushed to buy used cars off the streets during the pandemic. With production hampered and supply chains choked, the influx of used cars off the street helped bolster inventory.
Dealers Still Focusing On Street Purchases
Even though inventory pressures have eased in 2023, car dealerships are still looking for street purchases whenever they can. These purchases generate more profit than buying cars at auction. In the latter scenario, dealers have to bid and pay various fees and transportation costs. Street purchases are also different from trade-ins, where a car dealership will buy a car from a consumer at the same time they sell one.
There have also been some shifts in the habits of car owners that make it easier for car dealerships to complete street purchases. Consumers have more interest in selling to car dealers as they believe they can get a solid offer. This is partially thanks to online dealers like Carvana that mainly buy cars off the street.
The Carvana model has essentially changed the game for car dealerships nationwide. Many dealerships are moving away from auctions and exploring how they can buy directly from consumers.
Higher Profit and Quality
The profit and quality of vehicles bought directly from consumers tend to be higher than buying at an auction. Dealer representatives have said that buying cars off the street translates to a profit margin of hundreds of dollars more than cars from auctions. Car dealerships have an advantage in these negotiations as they typically have a more accurate idea of what used cars are worth.
In other words, consumers are less likely to know what their car is worth versus other dealerships at wholesale auctions. This gives the car dealership the advantage of offering a price. In 2022, up to 14% of used car inventory at franchise dealerships came from street purchases.
On the other hand, inventory from auctions went down to 17% from the previous number of 25% during the same time period. Dealerships acquired the rest of their inventory from trade-ins.
Total Used Car Sales Declined In 2022
However, used car sales were down in 2022 by 11% to 36.2 million. This is after a record number of 40.6 million sales in 2021. The shift to street purchases is largely a result of cars becoming more expensive to buy and more valuable for car owners to sell.
Used car prices have stayed high since the pandemic. In October, the average wholesale price was 37% higher than pre-pandemic, but also 4% lower than just one year ago. Consumers are finding ways to sell used cars. For example, if a teenager moves out of the house, or because they no longer need another vehicle due to someone working at home.
Consumers can also get competing prices as many car dealerships will offer a higher price if a competitor outbids them.
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