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Monday, October 25, 2010

You Should Be Concerned About Auto Fleet Sales

Fleet sales are to daily rental companies, commercial, and government agencies. These are volume sales, not usually one at time but up to “thousands” at a time. Rental and leasing companies hunkered down during the recession and stopped buying new vehicles. They hung onto their old vehicles just like many individuals did.
But, as a result of the recession and fewer new vehicles being sold and more people buying used car than new, the value of used cars has risen. The big fleet buyers see that as an opportunity to sell their current used cars at auctions and replace them with new. It’s truly a buyer’s market for fleet buyers. Not only can they sell their old fleet for more money, but they can replace those cars at unprecedented low prices from the manufacturers.

Large fleets have always been able to buy cars for less money than you can because they buy in much larger volume. In most cases, they deal directly with the manufacturer and often buy cars for less money than the dealers can buy them for. Sometimes the sales transaction “passes through” the dealer, but the price is often determined by the manufacturer and the special, low prices are only for fleet buyers. Dealers also sell directly to fleets and even when these prices are not subsidized by the manufacturer, they are lower than you can buy the car for.
Manufacturers will actually sell cars to fleets below their cost! This is especially true in these bad economic times. Desperate manufacturers like Chrysler and GM who have recently declared bankruptcy and are struggling for survival need to keep their plants running and need to present a positive picture to the public and their lenders (us taxpayers). It’s actually less expensive for a manufacturer to sell cars below their cost than to close the plant down. When Chrysler or GM closes a plant and lays off workers, they encounter huge expenses. They have keep paying the UAW workers even though they aren’t working and the cost of stopping and restarting the assembly lines is very large too. They would prefer to lose a few thousand on each car and pray that the economy gets better.

GM is getting close to an IPO, selling stock to us taxpayers so that they can pay back the government. To keep that stock price high, they want to be able to report higher sales. This is what the press focuses on and amazingly they never differentiate between retail sales and fleet. Last month (September) 39% of Chrysler’s sales were to fleets. 25% of GM’s and 29% of Ford’s were to fleets. Only 7% of Honda’s and 9% of Toyota’s were “reportedly” fleet. I say “reportedly” with respect to Honda and Toyota because some of their fleet sales go unreported. Dealers can sell cars to fleets but they get counted as retail. The industry term for these kinds of sales is “fleetail”. The dealers can collect retail incentive money on these which they can’t on “official” fleet sales. Also fleetail sales count as retail toward their sales quotas, contests, and sales awards. Dealers are inclined to sell fleetail cars at or even below cost because of this. We don’t know how many Honda and Toyota retail sales are truly retail and which are fleet/fleetail.
Here’s why these fleet sales are bad for you. All of these cars that are sold to Hertz, Avis, and the US Government don’t just “vanish into thin air”. They come back on the used car market through auto auctions all over the USA. If you bought a Ford Focus this year and Ford also sold 20,000 Ford Focuses to the fleets, Ford caused your Focus to depreciate at a much higher rate than it would have otherwise. This is simply the economic law of supply and demand. The more used Focuses that Ford sells at the Manheim auctions in 2013 (the same year you are ready to trade yours in for a new car) the lower the price they have to sell them for. The bottom line is that that new car could cost you an extra $2,000 based on the lowered trade-in value of your Focus.

My advice to you is to carefully consider the number of fleet/fleetail sales the various manufacturers are making when purchasing your next new car. Chrysler is clearly the leader in fleet sales and I would avoid Chrysler products like the plague unless I planned to never trade it in. I’d lease a Chrysler product if I absolutely had to have one. You aren’t responsible for selling the used car at the end of the lease. Of course you already paid for the high depreciation in your lease payments unless Chrysler over estimated the residual which is possible. Ford and GM are also big fleet sellers. A good guide to consult is the industry “bible” for future used car values, called residuals. This is the Auto Leasing Guide, ALG. Every dealer and manufacturer has one. You can ask your dealer to see his copy (If he won’t just email or call me). This guide is the best estimate of what a new car bought today will be worth in 1, 2, 3, 4, 5, or even 6 years.

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