Tackling Depreciation – Using Today’s Resale Market to Manage the Largest Fleet Cost
By Julie Leicester
August 4, 2022
With inflation at an all-time high impacting the price of almost everything, cost is top of mind for many of our fleet managers. Historically, the three big categories of fleet spend have always been depreciation followed by fuel and maintenance. As the largest spend bucket, depreciation averages 40% of the total cost of ownership (TCO). It represents the change in a vehicle’s value from acquisition to resale and, in the past, on average, represented a loss of 30% in the first year. Managing the deprecation cost is tricky but in today’s environment of unprecedented resale values, there is an opportunity to tackle the largest fleet spend category despite inflation.
New Car Prices
It is true that new car prices are also at an all-time high so replacing units now may seem counterintuitive. Not only have OEMs increased their prices, but dealers are often pricing above MSRP. The January 2022 edition of Car and Driver examined government data on prices today against the past several decades and described the increases as “dramatic.” In an article entitled “Pay Up and Up”, they illustrate the point: “Think of the rolling slope of the Great Plains before they hit the Rockies, then bam-the Rockies.” The Washington Post cites market research firm Edmunds to say, “More than 80 percent of U.S. car buyers paid above MSRP in January…That compares with 2.8 percent the same month a year ago and 0.3 percent in 2020.”
Adding insult to injury, the incentive programs that so many fleet customers have enjoyed seem like a thing of the past. According to Cox Automotive, after reaching an all-time high in 2019, incentive programs were down 17% in 2021 and more notable, “Program volume in Q4, at 4,713, was the lowest in 5 years, down 36% from Q4 2020.” So where is the opportunity in this environment? It is in the equally unprecedented used car resale market.
Used Car Prices
It is no secret that the used car market is hot. Manheim’s used car price index shows increased year over year values for all categories (except pickups) to be between 9.3% for SUVs and 23% for vans. And, while trucks are slightly down (2.5%) from last year, they’re still WAY UP! A clean sale F-150 with 100K miles would’ve sold for $14-16K in 2019. At the peak last year, that same truck was selling for $27-28K and now it’s selling for $24-26K. One of our customers who sold 34 units in their financial year 2022, saw proceeds at $20,000 per unit nearly doubling the value. That extra $10,000 per vehicle goes a long way towards offsetting increased acquisition costs making up for missing incentives.
Replace Now (If You Can)
Scott Underhill, Wheels Donlen’s Director of Business Intelligence, Strategic Consulting, is advising clients to accept the absence of incentives and price increases, “If you have the opportunity to replace, definitely replace. You will be taking advantage of the strongest resale market we’ve seen in our lifetime.” In recounting the details of a smaller fleet with mostly Ford Edges selling for $10K more today than in 2020, he drives his point home, “I need to find an investment that has this return.”
The bottom line is this: the increased values at resale drastically reduce depreciation and make the higher cost of acquisition far more palatable. Scott adds, “there is always the added benefit of lower maintenance and better fuel economy with a new vehicle.”