According to a report published jointly by Black Book and Fitch Ratings, the vehicles that are between two and six years old are expected to depreciate by fifteen percent throughout the year 2016. The rate of depreciation for the previous year was recorded at 13.2 %.

What are the reasons behind this added depreciation?
This year, there is a likelihood of a higher number of cars being traded in because the sale of new cars is expected to increase marginally. Moreover, a high volume of leased cars are expected to be returned during this year. This will further increase the used car supply, resulting in price reduction.

Cars and Trucks are not the same 
The lower depreciation rate throughout the previous year was caused to a great extent by the trucks. The rate of depreciation for the year 2015 was recorded at 9.2 % only. The same rate for cars was recorded as 18.2 %, almost double the depreciation rate for trucks. The depreciation rate in 2015 also varied remarkably across segments. The range for the trucks varied across segments by 2% to 23%. On the other hand, this range was between 14% and 22% across segments for cars. This disparity became more prominent as the year neared its end. The same trend is expected to continue throughout the year 2016. Some of the industry experts feel that cars are now reaching its lowest point, as far as depreciation is concerned. This, however, means that the rates are likely to improve in the near future.

Its significance for the user car dealerships
As a result of quicker depreciation of vehicles in 2016, it is expected that the ANL (Annualized Net Loss) will increase marginally. This will put the dealers under pressure to be extremely attentive about ensuring profitability of their old cars. Most of the dealerships tend to keep a close eye on the cost of labor and parts. Therefore, a dealership’s ability to control the costs will require streamlining of their process of reconditioning. With more trade-ins of used vehicles and lease termination, the inventory is expected to increase. In this scenario, it is important for the reconditioning process to yield adequate return for the process to be economically viable.

It is possible to streamline a reconditioning process in the following ways
  • A baseline cost should be established for the reconditioning process.
  • To make the process fast, a dedicated team should be created for reconditioning.
  • The departments involved in reconditioning should be rewarded by incentives and bonuses for meeting goals.
  • Outside vendors involved in the process should be provided approval in advance.
  • Instead of inaccurate tracking methods, use Simple Recon software to track and monitor the reconditioning process.
  • The labor charges should be less than that of retail.
  • Wherever there is an opportunity, utilize OEM (original equipment manufacturer) parts for replacement.  
The rate of depreciation as well as inventory is expected to increase throughout 2016. Therefore, a lot of adjustments are required for the used car dealers to maximize their profit potential. The bottomline of a dealership may get negatively or positively impacted by each used car. By stringent monitoring of the reconditioning process, it will become much easier for the dealerships to keep prospering in this market environment.
 
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