Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, June 18, 1995 TAG: 9506220007
SECTION: BUSINESS PAGE: BUSINESS EDITION: METRO
SOURCE: SHANNON D. HARRINGTON STAFF WRITER
DATELINE: LENGTH: Long
Selling a car was a simple process back then, he said. "You could just sell a car by fixing up the title and hand them a receipt," he said.
Today Peck's Automobile Exchange on Williamson Road is still in business after a relocation from Centre Avenue, operated by his two sons. Peck works part time.
But after 44 years in the business and selling 40,000 cars, Peck says his family hasn't changed the way it operates. It's had some of the same customers for years and continues doing business with a low-pressure, laid-back style, even though the average price of a car on his lot has risen to around $3,000.
Peck is not exactly the stereotypical used-car salesman. But then, the business is not what it used to be either.
Looking around him, Peck sees an industry that has changed and grown. He doesn't cite economic shifts or marketing analyses to describe what has changed. But he has seen it.
The used-car industry is much more sophisticated today. No longer are used cars viewed as inferior automobiles.
Because new-car prices have risen sharply in recent years, especially in comparison to incomes, fewer people are able or willing to buy cars straight from the factory. And the industry is offering more reasons for the consumer to buy so-called "pre-owned" cars with extended warranties and service contracts.
There has also been a dramatic increase in used-car sales. In fact, demand for used cars is at its highest level.
Since 1990, used-car sales have risen about 20 percent nationally, while new car sales have remained nearly stagnant. The reasons are complex and range from factors as obvious as consumer sensitivity to higher new-car prices to more technical explanations of limited supplies of cars vs. heavy demand for late-model cars.
For Paul and Carole DeLawter of Roanoke, for example, the reason is as simple as price. The couple recently purchased two used cars. In the past, the DeLawters have owned at least one new car, but sticker prices have been discouraging, sending them to used-car lots instead of showrooms.
"Some of these new cars are costing as much as a house did in the '50s and '60s," Carole DeLawter said. She also said burdening costs such as personal property tax, high interest rates and insurance are deterring many new-car buyers.
But the average American also is faced with other economic reasons for settling on a used car.
For example, the prevalence of two-income families has generated greater demand for more cars per household and, therefore, more affordable vehicles, said Art Spinella, vice president of CNW Marketing Research in Bandon, Ore., a company that studies the national market for used cars.
His theory is supported by the Peck family at Automobile Exchange.
"We're usually the second car or work car or the son or daughter car, said Ralph Peck Jr., sales manager. "That's where we've made our living."
Stuart Peck, a dealer for Automobile Exchange, believes this type of buyer will never change. "They're just looking for affordable transportation," he said.
Americans today have many more items on their wish lists besides a car, according to a CNW Marketing survey, explaining some of the shift away from new-car sales.
In 1984, for example, the new car was one of the hottest items on the average American's list of things to own. Today, new cars are outranked by personal computers and home entertainment equipment, the research firm reports.
And while desire for new cars dropped during the same period, used-car demand rose, according to the survey. In 1984, 31.4 percent of Americans who could afford a new car said they intended to purchase one. That number dropped to 13.3 percent this year, while almost 30 percent intend to buy a used car.
One economic factor that has permitted the increased sales is the greater supply of used cars. The used-car pool has virtually split into two groups of cars, according to a report by CNW.
One group is of cars that are 5 years old or older, which typically come in as trade-ins, wholesale purchases and automobile auctions. Another, and newer group is of cars that are 2, 3 and sometimes 4 years old, placed on the market at the end of leasing contracts. The large volume of the latter is a product of a recent boom in the leasing business.
Cars that return to the market after a lease can fall by between 25 and 52 percent from the original manufacturers suggested retail price, said Fred McElmurray, sales manager at Saturn of the Roanoke Valley.
Just this year, about 2 million leased cars are expected to return to the market, Spinella said.
Cars leased by businesses and governments and rental cars also will contribute to this used-car pool. These cars are purchased in large numbers and return to the market in unpredictable "bursts," according to the CNW report.
An improved economy between 1992 and 1994 and greater consumer confidence in used cars have boosted the demand for 2- and 3-year-old cars, according to the report.
Finally, a large number of consumers who held onto their cars during the recession of the early '90s gained interest in the younger cars on the market. "Consumers wanted to drive something newer and felt their personal economic condition would support the purchase" of used cars, the report said.
New-car dealers quickly caught on to this trend, said Bill Pinkerton, owner of Pinkerton Chevrolet GEO Inc. in Salem. They now "realize the need to be in the used-car business, Pinkerton said.
New-car dealers are having no problem selling used cars today, Spinella said. In the 1950s, new-car dealers faced problems with an oversupply of used cars from trade-ins. They were forced to promote heavily the used cars to make room on their lots for new models.
But for about the past four years, dealers have reverted to selling used cars. This time, it was because of the demand for used cars rather than the supply generated from trading them for new models.
"Dealers have become the most involved in used cars since the '50s and '60s, but with different motivations," Spinella said.
For example, Pinkerton said, for every new car sold on his lot, he will sell three used cars, at profit margins that are nearly the same for both new and used vehicles.
New-car dealers aren't the only ones jumping in the used-car game. Circuit City Stores Inc., the Richmond-based consumer electronics retail chain, put its foot in the market two years ago, opening the first of three used-car stores called CarMax: The Auto Superstore.
High volume, a computerized inventory and a "no-haggle" policy make CarMax unique to the market, said Ken Gassman, a retail analyst with Davenport & Co. of Richmond. The first CarMax was opened in Richmond in 1993 with 500 cars. Since then, two more branches have opened, with about 600 cars in Raleigh and 800 in Atlanta. A second CarMax will open soon in Atlanta.
"They really have revolutionized the used-car market," Gassman said. "Their growth has been quicker than they first planned."
CarMax's success has been difficult to track because Circuit City refuses to disclose any financial results apart from its total corporate returns. But an analyst's report at Sanford C. Bernstein & Co. in New York shows that CarMax sold, in 1993, three times more cars than the average new-car dealer and 30 times more than the average used-car dealer.
Richard L. Sharp, Circuit City's chairman, president and chief executive officer, last week told shareholders that the company is learning more each day about the used-car business and is optimistic about future growth.
``It will be awhile until we have a result consistent and lengthy enough to feel comfortable about its long-term expansion prospects,'' Sharp said. ``It is still too early to tell.'' He said the company will test its CarMax dealerships for several more years before deciding whether to expand the business nationally.
As a result of an upscaled market and new interest in used cars, the stigma that used cars once faced has all but diminished, Pinkerton said.
"More and more people are willing to go out and buy a late-model used car," he said. Also helping the market's image was the consumer realization that a new car drops to used-car value "as soon as the buyer drives it off the lot."
"Everyone drives a used car," Pinkerton said.
On an average, new cars can depreciate up to 20 percent or 30 percent, dealers say.
But some dealers say the stigma is something they have tried to overcome for years.
Dealers have worked to improve the market's image by offering extended warranties and service contracts, said Bill Stephens, owner of General Imports in Roanoke. Some dealers - especially those selling luxury vehicles - now refer to their cars as "pre-owned" instead of used.
Along with CarMax, some dealers, both new and used, are establishing "no-haggle" policies which they say makes purchasing a car more attractive to the customer, though not necessarily cheaper.
Automobile Exchange has always used this philosophy, said Ralph Peck, Jr.
"We tell [the customers] to make themselves at home, look around, and we don't put any pressure on them," he said.
"We don't call it no-hassle buying, and we don't coin it as a phrase. We just treat people right," Stuart Peck said.
However, some dealers believe that "no-haggle" can be a hassle to buyers.
"It's nothing but a marketing technique," Stephens said. "I've seen studies done that show a huge percentage of people still like that part of the deal."
Nonetheless, consumers can expect even more sophisticated marketing techniques as the market continues to grow. And some analysts predict that lower prices for 2- and 3-year-old cars may be on the way.
With a surplus of used cars predicted in the next few years, there is a risk that the supply could outweigh the demand, said Michael Schroeder, an analyst with First International Asset Management in Naples, Fla. This in effect could drive prices down.
"The real question is what's the demand side going to be like," Schroeder said. "If it stays healthy, it shouldn't create excess supply."
But reports from CNW Marketing predict that the demand will drop in 1996-97 because of the flood of leased cars that will return to the market.
As leased cars come back to the market and satisfy the consumer's pent-up need for 2- and 3-year-old cars, the continuing demand will decline, according to the CNW Marketing report. And with a smaller number of buyers, prices also will decline, Spinella said. CNW views it as the "water behind a dam" theory.
Spinella predicts that prices for 2- to 4-year-old cars may taper off as early as next year. One segment of the market that will face lower prices, in particular, are intermediate cars such as the Ford Taurus, Honda Accord and Toyota Camry, Spinella said. Supply in this segment will be the highest.
The lengths to which car dealers are going today in order to sell used cars is one indicator of where the market is headed.
Saturn of the Roanoke Valley, for example, recently announced that it will participate in a corporate program that certifies its used cars and offers a money-back guarantee. A used car with less than 36,000 miles and 3 years old or younger will carry a four-year or 50,000-mile warranty. Cars with more than 36,000 miles when they're resold will have a 12,000-mile or 12-month warranty, said McElmurray, sales manager. The program should begin within the next two weeks, he said, and is similar to one that Lexus adopted.
Also, Saturn will offer a three-day, money-back guarantee and 30-day, trade-in guarantee.
"Our philosophy of selling new cars will transfer to our used cars," McElmurray said.
by CNB