Motor Vehicle Dealers

SIC 5521

Companies in this industry

Industry report:

This category covers establishments primarily engaged in the retail sale of used cars only, with no sales of new automobiles. These establishments also frequently sell used pickups and vans at retail. Establishments that sell both new and used cars are classified in SIC 5511: Motor Vehicle Dealers (New and Used).

Industry Snapshot

Used vehicles sales totaled 41.7 million units in 2007 before declining to 36.5 million in 2008 and 35.5 million in 2009. The entire U.S. auto industry was in crisis late in the decade as an economic recession, a credit crunch, and volatile gas prices combined to push auto dealers to near the breaking point. Already working with low profit margins, dealers had fewer, and wary, customers entering their doors. By mid-2009 both General Motors and Chrysler had declared bankruptcy (and were later bailed out by the U.S. government). However, not all the news was bad for the used car industry. With new car sales slumping to near 30-year lows in 2009, more consumers were looking at used cars as an alternative. Also helping the used car industry was the lack of supply as fewer new cars were being introduced. The lack of supply helped push used car prices back up during the first half of 2009. Another factor that helped buoy the used car business during the recession at the end of the first decade of the 2000s was the availability of in-house financing.

Nevertheless, revenues in the used car industry declined at an annual rate of 6.7 between 2006 and 2011, according to IBISWorld. However, by the beginning of the 2010s, things seemed to be looking up. In 2010 sales rebounded somewhat, reaching 36.9 million, and the number-one used car retailer, CarMax, recorded a 3 percent increase in used vehicle sales in the fiscal year ending February 28, 2010, selling a total of 357,129 vehicles. According to IBISWorld, the used car dealers industry overall was expected to grow about 3 percent annually from 2012 to 2016.

Organization and Structure

According to the National Independent Automobile Dealers Association's (NAIDA) Used Car Industry Report: 2011, used car sales were fairly evenly distributed among independent dealers, franchise dealers, and casual sales, with franchise dealers and independent dealers holding approximately 35 percent of the market share each and casual sales holding approximately 30 percent. About 4,000 independent dealers closed their doors during 2008, unable to sustain viability in the tough economic environment, and more followed in 2009 and 2010, dropping the number of independent dealers to 37,717 establishments by 2011.

Background and Development

The used car industry grew out of the automobile manufacturing industry. When manufacturers began encouraging their customers to trade in old cars and purchase new models, used cars became increasingly available. By the mid-1920s, used car lots were a part of the American landscape.

The abundant availability of inexpensive used cars put car ownership within reach of almost everyone. In 1927 the average four-year-old "basic transportation" car sold for approximately $100, and although low income families were unable to buy new cars, even on installment, approximately 64 percent of American families did own an automobile of some kind.

During the Depression, sales of new cars plunged, but car usage declined only slightly. In 1929, 26.7 million vehicles were registered. The number fell to a low of 24.16 million in 1933. People kept their cars longer and turned to the used car market when replacement was necessary. Used cars and trucks also served to carry thousands of displaced farmers from the Dust Bowl region into California.

As the nation emerged from the Depression, car sales increased. Vehicle registrations in 1937 topped the 30 million mark. Strengthening new car sales served to fuel the used car market. In 1938 the nation's first automobile auction was held in South Carolina, where the first car auctioned was a 1932 Ford Model A.

Used cars also played an important role during World War II. During the war, production of civilian automobiles halted, and once again people held on to their cars as long as possible. Sales of parts soared, and as cars wore out, people turned to used car dealers for replacements. Used car prices were controlled by the Office of Price Administration, but according to automotive historian Stephen W. Sears, "under-the-table dealing frequently raised the price of old clunkers to more than they had cost new."

Following the war, auto manufacturers were slow to return to full production and demand for cars was high. The shortage enabled used car dealers to continue the brisk business they had enjoyed during the war. By 1948 the number of vehicles on American roads exceeded the number of American households.

Short supplies and heavy demand led to abuses within the industry. During the 1950s, legislative efforts were made to protect buyers from unscrupulous dealers. Most states passed laws requiring dealers to give potential buyers accurate information regarding the condition of vehicles. In addition, laws were enacted prohibiting tampering with odometers.

To help handle the volume of used cars in the American marketplace, auto auctions expanded. During the 1970s, there were approximately 180 auctions throughout the country. Until new car dealers increased their participation in the nation's auction network during the late 1980s and early 1990s, auctions were attended almost exclusively by used car dealers.

Most new cars were eventually sold on the used car market. According to a study by the Federal Highway Administration in 1984, average vehicle ownership was 7.2 years, but average vehicle lifetime was 12 years. A typical vehicle's lifetime mileage was 120,000 miles.

Federal legislation aimed at protecting used car buyers was enacted in May of 1985 but not enforced until 1987. Under the terms of the so-called "Used Car Rule," dealers were required to post window stickers called "Buyer's Guides" describing a car's warranty. The stickers were required to state whether the car came with a full warranty, a limited warranty, or if the car was sold in "as is" condition with no warranty. The Buyer's Guides were legally part of the used car sales contract and superseded any other claims. In addition, many states added protections, claiming that "as is" sales contracts carried implied warranties that cars were drivable.

Government agencies also addressed the problem of odometer tampering. In 1985 federal officials and the Pennsylvania Attorney General's Bureau of Criminal Investigation began an investigation into an odometer fraud scheme. Participants were accused of setting back mileage readings and fraudulently obtaining altered titles. The practice permitted unethical dealers to purchase low-cost, high-mileage cars and sell them at substantial profits.

During the early 1990s, with a sluggish U.S. economy, used car sales surged. For the first time since World War II, sales of used cars and trucks surpassed sales of new vehicles at new car dealerships. In 1990 an estimated 32.1 million used vehicles were purchased from dealerships, used car dealers, and through private transactions.

The NIADA reported that there were 58,750 independent dealers in the United States in 1998, controlling 24 percent of the used car market. The average price of the used vehicles they sold was $7,172. NIADA also stated that 52 percent of the independent dealer market procured credit through finance companies, accounting for 49 percent of buyers at auctions. In the United States, retail sales of used vehicles totaled approximately $300 billion annually.

Legislative control over used car sales also continued during the early 1990s at both the federal and state levels. In 1992 Congress passed a law requiring that all states use the same information on titles. One item of concern was the inclusion of permanent salvage brands on auto titles in all 50 states. The bill created a federal task force to focus on eliminating "title washing," a fraudulent procedure that cost U.S. consumers an estimated $3 billion annually. Title washing occurred when unethical used car traders were able to purchase salvage vehicles and transfer them to a state that did not require a salvage notation on the title. Cars were rebuilt, retitled, and transferred back with clean titles.

According to J.D. Power and Associates' 2003 UsedAutoShopper.com survey, online used car sales remained at 47 percent for 2002 and 2003. Scott Weizman, senior director of Internet research for J.D. Power, noted that "zero percent financing and aggressive incentives may have dampened Internet usage." However, Weizman forecast that online sales would increase in the coming years. Between 2002 and 2003, the average age of online shoppers for used cars shifted from 40 to 44 years old. The study concluded that consumers still liked to make a trip to the dealership prior to purchasing their used car online. In addition, although Kelley Blue Book and Yahoo Auto were popular sites for used car searches (as high as 90 percent) in the early years of the first decade of the 2000s, some 74 percent of consumers visited specific manufacturers' websites, such as FordVehicles.com and Chevrolet.com. Another 52 percent responded that manufacturers guided them to a used car dealership.

According to industry statistics, there were an estimated 12,654 used car dealers in the United States in 2005. Collectively, these establishments sold some 21 million used cars, resulting in a year-over-year increase of 5 percent.

In 2005 the National Automobile Dealers Association (NADA) reported that an estimated 5 million vehicles were rendered "totaled" for diverse reasons, but were refurbished and put on the market for resale. Of the 5 million or so, 500,000 were from Hurricane Katrina-ravaged Florida. For this reason, on July 20, 2006, Senator Trent Lott introduced a bill (S. 3707), the Passenger Vehicle Loss Disclosure Act, which held insurance companies accountable for the release of "total-loss information commercially." One such insurance company, State Farm, disclosed that it resold 30,000 vehicles over several years with no "salvage titles." According to J.D. Power and Associates' 2006 Used Vehicle Sales and Certification (UVSC) Study, 34 percent of used car buyers checked a vehicle history report (VHR) prior to buying. Another 53 percent admitted they would not purchase a used vehicle if they were not able to view the VHR.

According to information from CNW Marketing/Research Data that was reported in Auto Remarketing magazine, during July 2006 used car sales slipped while dealerships focused on moving their new cars in order to make room for 2007 model year cars. While some used vehicle dealers were successful, during 2006, franchised dealership used car sales declined 9 percent, while independent dealership used car sales fell 5 percent.

With new car sales falling to near-record lows and General Motors and Chrysler in crisis, many dealers were looking at the used car segment to sustain their businesses during the economic crisis at the end of the first decade of the 2000s. In May 2009, Indiana dealer Courtney Cole told Automotive News that she had stopped ordering new vehicles. "Everyone is going to turn to used cars. That's the new thing," she noted.

In an effort to bolster the new car industry and improve environmental ratings of cars on the road, the U.S. Congress passed the "cash for clunkers" bill in 2009. The bill basically provided a financial incentive for consumers to trade in cars that got 18 or fewer miles per gallon fuel efficiency and buy a new car that gets at least 22 miles per gallon. The amount of the incentive was debated and then settled at $4,500. The benefit of the incentive for the U.S. economy was debated.

Despite the used car industry's advantage over new car sales at the end of the first decade of the 2000s, the industry was far from booming. Dealers were turning to used car sales more often in desperation to keep their doors open than in hopes to make a substantial profit. For example, in 2008 leading retailer AutoNation reported a year-on-year 21 percent decline in new car sales volume and a 10 percent decline in used car sales volume, selling 30.3 million new cars and 15.7 million used cars in 2008. However, the corresponding drop in revenues was 23 percent for new car sales and 19 percent for used car sales, combining for year-on-year revenue loss of over $3 billion. Revenue loss was attributed to difficult credit terms and price pressures, which drove vehicle prices downward. To cut costs, the company eliminated 3,650 positions in 2008.

Into the early twenty-first century, used car dealers obtained their vehicles through a variety of outlets. Chain and independent auto auctions offered vehicles retired from rental fleets. Auctions also made consignment sales on behalf of new car dealerships and insurance companies. Dealership cars most frequently came from trade-ins and insurance company offerings resulting from totaled or theft-recovered vehicles. Other sources of used cars included street purchases, purchases of government-owned vehicles, repossessions, and seized vehicles.

Some used car dealers sold cars to customers who made traditional arrangements for financing. Others provided their own financing to customers who were unable to arrange for conventional financing either because they were unable to make a sufficient down payment or because they were judged a poor credit risk. Used car dealers who provided financing were sometimes referred to as "note lots." Note lots charged high interest rates to cover the expenses associated with high default levels.

The popularity of leasing new vehicles continued to provide a steady supply of cars and trucks to the used car market. The addition of late model cars and trucks increased the public's interest in purchasing a used car. The improved quality and reliability of used cars and trucks, along with the monetary savings of purchasing them, expanded the used car market to 40 million transactions a year.

The strength of used car activity also brought large franchise dealers into the market. Used vehicle superstores often used a "no-haggle" one-price sales approach in their retailing philosophy. Used vehicle retailing had been a highly fragmented industry that, historically, had no single market share leader. The megastore concept changed that.

Advanced computer technology offered many possibilities to the used car industry. One system that was in use by the end of the first decade of the 2000s was the Automated Vehicle Information Network (AutoVIN), designed to help match buyers with available cars. The system permits used car dealers to list vehicles for sale. Car shoppers can then call a toll-free number to obtain a list of cars matching their needs. The system is funded through a fee charged to the dealers, and although it was not expected to take the place of more traditional forms of advertising, it acted as a beneficial, supplemental form of advertising.

Computers were also being used to track car inventory costs. Some dealers feel that charges for items such as detailing and repairs are easily overlooked during the negotiating process. Computer programs help ensure that all expenses associated with a particular vehicle are considered and that a sale is profitable. In addition, computer software helps determine which cars sell the fastest, which are most profitable, and which are not moving. Other specialized software packages help dealers perform tasks like appraising such special interest vehicles as antiques and other collector cars.

A different type of computer technology was used to develop diagnostic equipment. Dealers can more precisely determine the mechanical condition of cars on their lots and even offer printouts of specific tests to potential customers. One diagnostic tool uses ultrasound testing to determine if a car has been repaired by "clipping," a procedure in which the vehicle is cut in half and the damaged half is replaced with parts from the same type of automobile.

Current Conditions

According to the National Independent Automobile Dealers Association (NIADA), used car sales reached a 10-year high in 2010, with 36.9 million units sold. Prices of used cars also had increased. In 2011 McLean's reported that the average price of a late-model used car had risen more than 50 percent since 2008, from $15,000 to more than $23,000, based on Kelley Blue Book figures. The trend continued into 2012. According to Jonathan Banks of the NADA in Entertainment Close-up in February 2012, "Consumers shopping for either a new or used vehicle will benefit this year from higher trade-in values along with loosening credit." In addition, "For dealers, reliance on customer trade-ins will increase as they strive to meet the challenges of growing demand in a supply-constrained market."

Industry Leaders

The nation's largest retail dealer of used cars in 2012 was Richmond, Virginia-based CarMax Inc. CarMax specialized in used cars that were less than six years old with fewer than 60,000 miles. It also sold older cars with more miles under its ValuMax program. The firm had about 100 superstores in 25 states and conducted approximately 260,000 in-store auctions per year. In 2011 CarMax had revenues of $8.9 billion with 15,565 employees.

Other top auto dealers were AutoNation, a publicly traded company headquartered in Fort Lauderdale, Florida, that employed 19,000 people in 15 states. In 2011 the company was the number-one new car dealer in the United States and the second-largest used car retailer, recording overall annual revenues of $13.8 billion. With 14,800 employees, Penske Automotive Group of Bloomfield Hills, Michigan, was the second-largest automotive dealership in the United States. In 2012 the company operated approximately 325 dealerships in 15 states as well as more than 140 international franchises. Imports like Audi, BMW, and Honda accounted for 95 percent of sales. Group 1 Automotive in Houston, Texas, was another industry leader, employing almost 7,500 workers at 95 dealerships. Annual sales were $6 billion in 2011.

Research and Technology

One way that some used car dealers continued to sell their products to consumers with poor credit ratings at the end of the first decade of the 2000s was by installing a starter interruption device. The device, about the size of a deck of cards, fits under the dashboard and is linked to the ignition system. It is programmed to warn the purchaser when a payment is due soon by emitting a series of beeps. If payment is not made, the device can prohibit the car from starting. Dealers who installed the devices reported that they were able to secure better credit terms for high-risk customers. In another attempt to cut losses from high-risk customers, some credit providers and dealers also installed global positioning systems on their products. If payment became delinquent, the car could be easily located for repossession.

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