#224 - Will Wholesale Prices Crash w/ Larry Dixon

You are listening to the Independent Dealer Podcast with hosts Luke Godwin and Jeff Watson. Hello and welcome to the Independent Dealer Podcast brought to you by Buckeye Dealership Consulting. Luke, the used car market is like a roller coaster of ups and downs and ins and outs and our prices crashing or are they staying? It's like, it's kind of like my wife's emotions. I'm never really sure what I'm going to wake up to. She doesn't listen to the podcast, but we have a familiar face.

You know, we have somebody that might know a little bit about that. Mr. Larry Dixon, VP of auction data. Now, you said something to supply. No. What did you say?

Auction Data Solutions.

Solutions. Okay.

All right, so we're going to talk everything auction related when it comes to pricing, supply rates, all these good things that make us dealers cringe and not want to go to the auctions. Larry, so hey, you've been on the podcast before, but now you're in a different role. Can I tell everybody where you are, what you're doing and all that good stuff? Yeah.

Thanks, Luke. First, thanks for having me back on. It's really good to see you guys. I've missed you over the last couple of months. So I was really looking forward to this. But yeah, so I am with the National Auto Auction association or the naa, as their Vice president of Auction Data Solutions. What does that mean? So NAA collects sales data from over 260 individual auctions and those include all Manheim Auctions, Odessa Auctions, Servnet, all the big independent folks out there. The data set is the most robust, really, I would say actionable wholesale sales database in the country. Not just because of the volume. It's not just Manheim's data. Obviously Mannheim is very big, but because you're collecting all the volume from other auctions, but also because it's an open, competitive bidding environment, right, where you guys, dealers are competing against one another to buy a vehicle. That's not something that you see obviously in a trade in scenario it's not quite as clean as you guys know very very well. Right. There's some things that go on with over and under allowances there in trade in situation. So this data set is extremely clean and very actionable. So all of the OEMs will, or most OEMs I should say, will use this data and their captive finance partners and other lenders as well to gauge their remarketing performance and to strategize in terms of how they want to go to market, when they want to go to market and at what price? So it's extremely important and valuable to many large stakeholders in the industry, including.

So yeah. Do they use that for residuals as well, Eric?

Absolutely, yes. I mean, you guys know residual is a forecast or a projection for a wholesale price, right. So where's the, what's the wholesale auction market price going to be three years from now, as an example?

So why doesn't NAA put out a booking tool like you guys don't have a black book or a JD Power or an MMR that's like yours?

No, we do not. And that is, that's a great question. But that is, it is more difficult to do. As you, as you guys know, there's going to be low sample size cases. Right. So then you have to put some analytical insight into deriving a value in those cases. You certainly, depending on the client type that you're catering to, you don't necessarily want to follow the volatility of the wholesale auction market because that does not oftentimes and in many scenarios that does not support a given client's business case. Even mmr. MMR is smoothed out.

Okay. Yeah.

You guys know that they came out with an mmr. I think they call it MMR retention.

Yeah.

So that's meant to reflect the spot price at auction in a given day or a given week and its relationship relative to that smoothed out MMR figure. So long winded way of saying that's not as easy to do. So really what we do is we feed the data to other entities and then they incorporated into to their analytics and you will see it in some way, shape or form in a v auto or you know, other an auto NIC solutions like that.

So these guys like Black book. I mean did they or how do. How does me, the dealer, if I trust NAA and think you guys are the gold standard for getting that data, who do I use or what third party do I have to sign up to get your data? Because I can't get it straight from you. Right. I can't go to you guys and say, hey, give me this subset. You say, hey, here's some providers that buy it from us. Autonique or Black Book. These guys are integrating NAA data into their numbers. Right? Right.

Yes.

Okay. Okay. You guys are a wholesaler.

Wholesale data data. Yes.

That's a good way to wholesaler and wholesale data. So that breaks up a ton of questions for me. And I know we're going to get into the forecasting. You're going to pull your crystal ball out for Us. But before you get there, can I ask a couple of questions? And if you can't answer these, just tell me, where do I buy the cars? Because you. I imagine again, you have the data. You know, there's certain auctions where things just bring a premium. Right? And I use the standard of MMR. If I'm looking on backlots or ACV or CarMax or, you know, I'm running stuff through my Vincue, I'm always booking it to mmr because it seems like for me, MMR always leaves me in a safe spot. I can always be, like, great. If I can get it at mmr, I've got room to recondition and still retail it and make some money. Nine times out of ten, every so often, yes, MMR is out the window. Is there like a. I mean, so the issue, the scenario, Larry, I'm on backlots and I'm bidding on a car. I have to go put that VIN and mileage in MMR so that I know the basis based off its trim level, of what that thing's actually trading for today. Right. Like, I have an idea based off historical. But of course, that's all out the window weekly. Is that. Do you have. Is there, like, a certain auction I should be going to where you're like, hey, guys, this one's a little softer than the others?

Yeah, well, I certainly can't speak to that.

That was a long question. I get no answer.

That was a horrible question, Jeff.

What the heck? But you know that there's places, right? Everyone's like, oh, CarMax. Those cars go for all the money. Why are you buying a CarMax? You're paying way over at CarMax. Sure, right.

It's gonna vary, Jeff, and it's always going to vary. Okay. But it's even more volatile now. So if prices are less than MMR at a given auction. Okay, we'll just use a simple example. That word is going to get out at some point in time. And so that's ultimately, at the end of the day, it's going to drive up prices at that particular auction. So you're gonna constantly have this, you know, ebb and flow of where the arbitrage is at.

Well, and a lot of people know that they can buy trucks in Texas and bring them to, you know, Southern California or vice versa. There's a lot of these wholesalers that have got the game figured out that, yes, a truck in Texas can be taken to Montana or vice versa. And with shipping costs and everything, the arbitrage Is there?

Yeah, you got, you have to worry about, you know what, who has the most availability of trucks? Well, Texas does.

Right.

And so the same could be said about really high end luxury cars. Well, there's more high end luxury cars in California. So that market's gonna be a little softer. There's more Tesla's, but there's also, so.

You can, there's also guys, there's wholesalers here that buy everything off of ACV and just flip it right over to Manheim. They're just literally flipping from one auction platform to the next and, and making a spread on that and that's their whole business model.

So one question Larry may not be able to answer. What's the deal with Carvana and Odessa? Are we going to see Odessa auctions anymore?

Absolutely. Well, yeah. So you know, you guys both have read the papers, you're reading Automotive News or what have you, or auto remarketing and there's certainly some publicized concerns out there about Carvana's ownership of ADESA and what's going to happen with Odessa. But if you look at the information that Carvana has put out to the investment community and what their mid to long term plan is, Odessa figures very prominently in that they are going to invest up to a billion dollars into Odessa facilities. They really need the odessa facilities, the 56 locations, to scale their reconditioning operation and to allow the company to grow the way that it needs to grow. I think more importantly what's often overlooked is Odessa is making money perhaps under cars ownership, maybe at times not as much as they would like to have made, but they're making money nonetheless. Carvana is not making money. So they need an entity that is making money. Right? Yeah. So not only does it allow them to become more efficient and reduce their expenses, they're also going to realize revenue from it as well. So I think that while I understand the concerns, I think that they're going to be relatively short lived because it behooves Carvana to treat Odessa almost as a status quo in some regards, which they're doing with their leadership team too.

So well, you think about like when I go to the local Manheim, Carvana has almost a third of the acreage roped off for their car. So they're renting. I mean they got to be paying six figures a month to rent this space, whereas now they're going to move across the freeway to their Odessa location that they own. They financed it long term. I'm sure they're not selling any stock to finance that Improvement. They'd have to sell the whole thing. But it's. That's an interesting thing. What happens to all those, all the GM financials and the, you know, the fleet leases, Are they all going to be like, forget you, Adessa, we're not going to dump our off lease stuff in a Carvana auction. That's our direct competitor. Hey guys, real quick, Pastime gps. You guys know they're a sponsor of the podcast. Great. Guys, if you're needing to track your assets, we know just like Larry said, things are costing more. They're coming down a little bit. So whether you're buy here, pay here or your retail, you do need to keep an eye on all your little assets that are running all over the place.

Cars are too hard to get to lose, Jeff, so make sure you protect them with, with the Pastime gps.

Sure. Yeah, I'm not exactly sure. I'm sure you saw this article in Automotive News. I think it was last week or the week before where they reported that some consignors had pulled out of Odessa and they specifically pointed out Toyota Financial Services. So yeah, again there's going to be some of that. Or there has been some of that. The degree to which that's occurred I can't really speak to. But again, I think longer term Odessa is going to be just fine.

Mannheim's just friggin tucking their napkin into their shirt. They're all excited to welcome all these big fat flea.

Not just Manheim, but other, other independent auctions too. You know, they'll benefit a little bit from, from this short.

Yeah, Manheim Manheim has been selling all the Carvana cars trade ins and repos and all that things. So they're going to. Manhattan's going to lose a little bit of revenue here too. So it's.

Well, and the rental from the spaces they were.

Yeah, it's going to be, it's going to be something there, but yeah, they're going to be fine.

Let me, let me ask one more question before you move on. So again with the data, and you may not be able to answer this, but again my anecdotal evidence is that when I'm bidding in Lane or if I'm bidding at a live auction, I am paying more for a car than when I buy it through sign. When I buy it through like an ove or kind of a buy it now type situation, is that backed up by data that when I get bidding against Luke in Lane or online that I'm just naturally creeping up in price because of the Auction push.

So let me make sure I understand the question.

So is the data prove that an inlane auction or an actual auction date with the guy dropping the hammer? Does that bring more money for a car than if I just do a buy it now during, you know, during the week.

Gotcha. So I'm gonna go back to my. My time with J.D. power because I do not have the data to answer that question right now. I will, but I don't have it right now. It was actually the inverse that there was more upside. Prices were higher if you were simply buying outside of the lanes. Exclusive of the lanes.

Yeah.

Than in the lanes themselves or even via simulcast, where someone's in the lanes, you have someone physically in the lane and someone's also bidding online at the same time. Right. There was a little bit more of a premium to those upstream of auction lane sales. Right now that could have changed a little bit, but I wouldn't imagine that it's changed a ton. And there was also adverse selection where upstream historically, prior to Covid. Right. You're going to have higher quality vehicles there. So that would affect the upstream pricing too.

Yeah, the stuff that. It's just, it's funny to me. And I don't know if you see this, Luke, but I'll be watching a car and it'll have a, you know, it'll have a buy it now at 10 grand and then I go watch it. You know, it also has an auction listing. So then it runs through the lane, you know, later in the week, and it goes for like 11. And I'm like, guys, you could have bought this for 10 this morning or yesterday on a buy it now. And yet you're bidding 11 in lane. Like what? Sure, I see that happen all the time.

I think that's the. That's not what normally happens. That's a. I don't think that's the case.

Yeah, I think what we might be seeing there too is unlike two years ago, pre Covid, you have rental companies that are aggressively bidding for used vehicles. I mean, going back to Carvana, you have them in the lanes as well, the drive times of the world. So there's more competition than in the lanes and via simulcast than what you had.

Yeah. I just wonder if the data backs that up these days. And all these can. All these sellers are like, no, no, I'm sending to the auction. I'm not going to do it by it now. I want to see what the market does because I think it's going to push it up. I want Luke to bid against Jeff and get in a pissing match over this car.

Yes.

And take it through the roof.

Yeah, I mean, I think that happens. But you know, the one thing you do see is that selfies are less before they're less on upstream than they are in the lane.

So there's your odd and your simulcast fees are. Yeah, you're.

There's some value to buy it.

Yeah, sure.

The biggest thing we've heard over the last six months, Larry, is inflation. And in the last year, I mean, I saw 40% inflation in the used car market. Where are we now? Are we still inflated like that, that we see this coming down softly? Do we see it dropping precipitately?

Where are we? Yeah. So if we're talking just about used vehicles specifically, yes. Obviously prices are still up year over year rather dramatically, 20 to 30% for Mannheim, but they have drifted lower since the end of 2021. So you guys know how the, the market typically works in the spring. Prices will kind of be flat as we go through January. February, then they start to go up in March, which coincides with tax refund season. We didn't see that this year. We saw prices actually soften through March. They started to go up in April, but just modestly. And that coincided with a really slow kind of, I won't call it a trickle, but much slower than what we'd seen in years past pre Covid in terms of tax, the issuance of tax refunds. Consumers receiving their tax refunds, I think we're at about 70 to 75% in terms of issued refunds relative to where we were back in 2019, which is about almost 100%. So as of the beginning of May, almost 100% of refunds had been issued. That's the number, not the dollar amount. Okay.

In 2019.

In 2019, right now we're at about 70 to 75%. So we still have a ways to go as that's concerned. The dollar amount is also higher too, which I know you guys have been hearing a lot about. Heck, even since the end of last year, the projections were that the average refund amount would be up this year to an all time high, which is. We are seeing that. So that's a great thing. But we still have some Runway to go in terms of every consumer receiving their refund or every consumer that is going to get a refund actually getting it. So that speaks or bodes well for used vehicle demand over the next, let's call it month to two months. But I think the signs are Clear that we are going to see demand, soft, consumer demand soften and prices themselves soften somewhat. So again, let's go back to what happened since the beginning of the year up to early April. Like I said, prices had softened then. You take inflation in general. You guys know this is extremely widely reported that prices for everything are up. Gasoline prices on average across the nation, $4.60 per gallon. I mean, that's just incredible. So consumers are consumers of used vehicles. In particular, their household income and disposable income is taking a significant hit. Food, baby formula, gasoline prices. Just about every facet of the economy is being hit by higher inflation. And too, when you see companies like Walmart and Target, right, These are discount retailers where they're reporting softer demand, lower revenue, that's another sign that consumers are going to be less inclined, willing or even have the ability to buy a used vehicle down the road. New vehicle consumers, it's not going to have as much of an effect. Right? Higher inflation, higher interest rates. Okay. The Fed is, folks are projecting that the Fed will increase rates up to a range of 2, 2 and 3/4% to 3% by the end of the year. That's another two points above where we are today. So that, that's a big increase in interest rates and that's just going to make the cost of everything go up. Houses, durable goods, non durable goods, credit cards, everything.

Let's talk about the way interest rates affect car dealers, Larry, because that's huge. I know LIBOR doesn't exist anymore and honestly, I don't know if much floor plan exists for new car dealers currently. It still does for used car dealers because new car dealers just aren't, they're not stocking much inventory or don't have the inventory. What does the rising interest rates look like for the car dealer? Not on the consumer side, but we can talk about the consumer side, but on the actual dealer side currently. Yeah.

So certainly not only is it going to affect your businesses, but, but your, your floor plan, your holding costs. Right. For those that actually do, you know, have a floor plan, line of credit or some other line of credit, that's going to be the biggest hit. So it's, you're going to have this scenario where prices may be softening or may soften from where they are today, but they're still going to remain very high. But then your holding costs are also going to go up. Okay. You are going to be in an environment of extreme competition as you have been with other dealers and large dealer groups. And the Carvanas of the world. So that's going to put some pressure on retail pricing. So you're going to have to do a very good job and be very smart in terms of how you control your expenses and where you price your vehicles at.

Do you think it's going to affect prices at the auction? Sorry for the break in here, but we do have to talk about Buckeye dealership consultant. They big fans of our podcast and they're big supporters of ours and reinsurance and selling aftermarket products is the way we kind of have to make money because prices are so elevated, right Jeff?

Yeah, yeah, you said that. Where you're like, hey, you know, Carvana and these big guys, they just keep their hands up in the lane and bid, but they have to bid to get it on their lot because for them it's maybe more about, it's not so much about gross, it's more about back end products and maybe the interest they're going to make on the loan when they sell it over to their wherever. That's an interesting way to look at it, you know, and you say, okay, maybe the old model isn't there anymore and I'm not going to make four or five grand upfront gross, but I'm going to make my back end.

And, and the best way to make more backend is to own your own. Your service contract that you sell, Jeff, not only you're going to make the, the margins on the customer, but if you don't, they don't have to use that. You make that money in your reinsurance company too. So yeah, service products are so important. And if you don't know how to sell it, Buckeye is great. They will teach you how to sell it. They will make sure you have a good plan in place. They'll train your people. So Buckeye is a great asset to our business.

I think there's certainly the potential for that to occur, but I think it's what would affect prices more would probably be consumer demand and the steep consumer.

And so if we talk about consumer demand, rising interest rates, you think that will soften consumer demand because payments are going to be that much more higher.

Not not only payments, but what they're paying for everything else. Right? Food, gasoline, everything. And we're, listen, I'm not an economist, but I think the consensus is that we are going to be in a state of high inflation for some time, despite what the Fed is actually doing. I mean now we could, we could revert to a recession. And I think more and more economists are anticipating that that is going to occur. But I think that that would only from a consumer standpoint, put your consumer hat on. That's only going to. It kind of exacerbate their willingness or lack thereof and ability to go out and buy a used car. Right. So if there's a recession, then you would probably have jobs being cut, some jobs being cut in response to that. So that, of course, is going to affect a consumer's willingness or ability to go out and buy used vehicles.

You know, it's funny to me, like, I don't. Maybe I'm too simplistic about this Because I don't know if my brain wraps around the full economy, But I go to the dollar store, right. It's not a dollar store anymore. It's a $25 store. Right. I don't think they're going back. No, I don't think they're ever going to go back to a dollar. Right. There's so many components in whatever reason, they decided to make it a dollar 25. So for us. And I deal in the bottom of the car segment. Right? Right. When my cars are done, they go to the scrapyard. But right now, there's no $3,000 car anymore. There's not really a $5,000 car. We're talking wholesale, right? Wholesale. So things are worth five or six or seven or eight grand until they're worth scrap metal. And that's because of all the components that go into it. If I got to rebuild an engine and tires and all these things, that now makes it worth for me to keep a car at five or six grand, Even if I got to dump a ton into it. So when I think about, like, okay, even if demand softens and people stop buying cars or it slows down and there's more on the market and maybe a ton of repos hit or people are buying new because the new supplies picked up, it's like, does it ever really go back? Even when you think about the recession, 2008, back then, we used to be able to buy a $3,000 car, get it to the front line, and sell it for, you know, 69, 79, 99. It's like, even in good times, we didn't go back to that. Even during COVID we never went back to that. Like, so. So I just don't know if we ever go back.

No. If you go back any. If we go back particularly anytime soon, then that would be. That would reflect cataclysmic conditions in the market, for sure.

Like, everything. Everything would have to go on sale.

Inflation. Deflation's way worse than inflation.

Yeah, I mean, listen, prices, I do expect them again to drift lower again. I don't expect them to drop off precipitously, particularly given that used vehicle supply is trending lower. It's a fact it's going to continue to trend lower. You get used vehicles based on new vehicle sales.

Right.

So we've lost roughly in 2020 and 2021 based on what was expected pre Covid. Somewhere in the neighborhood of. And we'll add 2022 to this as well. Somewhere in the neighborhood of four to four and a half million units. Right. And then the timing, the disruption of things. Okay. In terms of when rental vehicles would come into market 12 to 18 months after the fact, you're not. You don't have that anymore. They're not even making it to auction. They're buying used vehicles. And that's going to continue. You know, they're still buying new vehicles at a 50%, 40 to 50% below where they were buying them pre Covid. So that's just going to reverberate for years to come. So while demand may soften, and I fully expect it to soften the used vehicle prices, I do not expect to drop off precipitously, in part because supply is going to continue to. To trend lower moving forward.

There's probably dealers out there listening to this that weren't in the business when we had the last big recession in 08 to 12. But what you will know, those folks will know this, that it's hard to find 08, 09, 10 model cars, they don't exist. So we're going to have the same problem with 21s, 22s, and 23 model cars. So everybody needs to be prepared for that. And that is the reason cars won't fall quickly.

And the problem on that, Luke, is everything that was produced or manufactured in 2008, 10 11, are a lot of the worst cars on the road. Like some of these manufacturers, gm, Chevy, that is the junk of the junk. And we call those recession cars. Right. What about 2020s, 2022, the cars that are going out that got made last year, that are being shipped without chips and with makeshift things that they just grabbed some other parts supplier so they could get the car out there. All these Covid parts that use subpar material just to roll the car off the line. Like, dude, when those start becoming used cars, I bet we're going to have.

This whole like, I don't even want.

Rotten section of COVID cars. That work their way through the market.

Yeah. That's interesting. I hadn't thought. I considered the subpar materials or parts because or in response to Covid. Now, you guys know. The cars today in 2022, or we can even go back to 2020, 2020, are vastly superior to what was being produced back in 2008 and 9. So the durability should be a heck of a lot better. But that's a good point you raise and a good question.

But look at some of these. Like, I mean, you still have the same problems because they're still being pushed with all these EPA standards and materials and lightweight. So, I mean, it's the Tundra engine that is junk right straight off the showroom. These 2020, 2021 Tundras are just grenading left and right, from what I hear. And I don't have any facts, but I don't know that everyone says they last longer and they're better cars.

They aren't.

That's yet to be seen. If any 2021 can make it 200,000 miles.

I don't know overall, if you look in the. At the. At the data. So if you look at, like, JD Powers initial quality study data or even their vehicle dependability study. So one is based on 90 days of ownership by the. By the original owner, the other just after three years. I mean, it's just consistently getting better and better. But where the problems do reside mostly with the. The more modern technologies. Right. Either adas or electronics, things like that. Yeah, exactly. So there could be.

Yeah, it's like this little computer screen goes out, and it's like a 10,000 grenade button that's connected to everything in the car. And you're like, well, that was smart. Oh, and guess what? We only did it for one model year, so good luck finding an aftermarket because we switched it every single year.

That could certainly pose issues. You're right. In terms of replacement parts down the road. And it's horrible.

And it's ridiculous. These guys, like, era. I mean, you think the old Honda Accords, it's like you got a frickin. It was in, like, every single car that was produced from 2000 to 2010 across, like, three different models. So it's easy to find it now. It's like they change it every six months. So you got to know exactly what production day you had and fit. And then. And then, like, dormant.

We decided. We decided on last week's podcast that Jeff is a doomsday or. And doomsdayers moved to Utah he's probably got several. He's got a bunker in several.

I have food storage. Do you have food storage?

No, I do not.

If the grocery. If Diesel went to 10 or $20 a gallon and those trucks could not make it to your Food lion or Winco or whatever you shop, you would be out of. You'd be. You'd be dead by a couple weeks.

I'd be okay with that. It's not a big deal.

You'd be fine being dead.

Yeah. Okay. What am I going to care about?

If I'm dead, I'm gone, Larry. So back on track. Auction values, car prices. What do you recommend for dealers? Like, you say it's back to a normal depreciation, or you said prices will kind of chill, right? Yes. Not drop precipitously is the word you used. But that's normal. It's like people are like, oh, no, prices are dropping. You're like, no, no, no. They're back to a normal depreciation. Like, this is what used cars do. It's a downward line.

Yeah. I don't even know if we're gonna get back to normal depreciation. I'm saying there will be some depreciation.

We're gonna be like a slight grade. Yeah.

Yes. Yeah, exactly.

Should I not be buying cars? That's what I want to ask you, Larry. Right now, I'm running super slim. Instead of having them stacked two or three deep in the back like I normally am, I like, I have open concrete in the back, which has got my mechanics freaking out that I'm tightening my own.

I think it's a. I think that is a smart approach. It is good to be a little bit more cautious, recognizing what the drivers of consumer purchases are like right now, this time of the year. We talked a little bit about tax refunds earlier.

Right.

I think there is still some Runway there. But once those tax refunds start to, you know, you get into that 90% range in terms of overall returns, that's when you need to start pulling back, you know, because we have seen prices continue to drift up. Right. And so consumers are buying a little bit more now, but that's only going to last so long. So you just need to be. I would be very more conservative than you have been in the past. You're not going to see vehicles appreciate and this, you know, consumers be rabid to go out and purchase because there's no additional monies coming down the road for them to do so. And in fact, even though wages are up significantly, inflation's up Even more so. So I think being cautious and a little bit more conservative than dealers have been in the past, I think is certainly the smart way to go.

Let me ask you this, Larry. Is the average mileage. I saw something the other day that said the average car on the road is like 67 years old or something. I don't know, something crazy. Are you seeing that at the auction? Is the average. Do you track that the average car going through the auction is both older and has higher miles?

That's correct, yes. Now, some of that's a function of the report that you're referring to. And they even pointed this out. I think it was S and P Mobility that put that out. The former IHS Automotive. Because new vehicle sales were down. Right. So all else equal, if you, if you take away younger vehicles from the overall population, then that's going to lead to an increase in the average age of vehicles on the road. But that trend's been in existence for some time. Vehicles, the average age of vehicles on the road, even under normal circumstances, have been going up because vehicles last longer.

I said I think the average owner was keeping their car 12 years. Average new car owner or something like that. Something to that effect.

Yeah.

Which is. Which is a very high number. But like I said, we've seen cars lasting longer and so we're fine with that. The last question I have for Larry is, is the lack of inventory on new car stores lots. And the lack of manufacturing. Is this something we're going to see from now on is that it's going to be more of an order based type system? And if so, how does that, what does that say for. I mean, that keeps prices up too, right?

That's a great, great question and great point at that end there. So from a semiconductor standpoint and a supply chain standpoint, all signs point to this lasting well into 2023. And yes, that does support used vehicle demand and used vehicle prices, used vehicle demand in terms of replacement demand. But I think we've seen a lot of that already used up, if you will, when consumers had money coming from Uncle Sam last year along with their tax refund checks. So that volume based new vehicle volume and inventory is going to stay low for the foreseeable future simply because of the semiconductor issue. It helps. Prices on the new vehicle side of the market are going to stay up. Incentive spend is going to stay very low. And that, that allows used vehicle prices. You don't have that downward pressure.

Yeah, that's.

So does that create an upward pressure, Larry? Does that create Upward, like not only from a, from a. Hey, I'm not like, if the dealers don't. Or manufacturers don't have to offer incentives to unload these cars that they're pushing onto the dealers because A, they're not producing them and B, they're doing like a production, a build to order type thing, those prices stay high. Right. Not to mention just the price of new cars is just ridiculously high now. Right. And I don't see them going back anytime soon. Does that create this vacuum that like sucks up the price of everything? It's like, well, if new's a hundred, then near new could be 80 and half life could be 50, which means my junker is now worth 30 because that's just the spread. Yeah.

It certainly can allow used vehicle prices to grow more, but it's not really the primary underlying driving factor behind that.

Right.

You need to have. Consumers need to demand more used vehicles supply equal. Right. For prices to go up. Higher new vehicle prices will help support that. But we can still have. Let me put it another way. You can still have very high new vehicle prices while at the same time used vehicle prices drift lower.

Okay, interesting.

Now, Luke, back to your question. So once we work through the semiconductor issue, which, who knows when that's going to occur, will OEMs go back to a production environment where franchise dealers have roughly 3 million units in inventory? Because that's what it was. Right now we're at about 1 million units of new vehicle inventory on franchise dealer loss. Probably not, because they see from a profitability standpoint what occurs when you do run leaner inventory. I would expect things to go up from 11 million or 1.1 million units, but it's not going to get anywhere near or go anywhere near 3 million units of new vehicle inventory at any given time.

Do new car stores need to have cars a lot to sell cars? That's the question, right? Yes, sure.

I mean, I want to. If I'm an impulse buyer, I want that car. I'm showing up on Saturday. I'm driving out with a new Tundra. Like, I don't know, man. Sometimes that whole production and weight thing is.

Yeah, but you don't need as much inventory as they thought that they needed before. Consumers in condition now to wait. I mean, heck, you have guys waiting for Bronco Broncos, a unique case. Okay. Waiting for years to get their new Ford, Ford Bronco. So this. You know what?

Because they sell their Volkswagen Jetta and they need something else to drive, I guess.

Get it?

Yeah, yeah.

We're Conditioning consumers right now to wait. Now no one wants to wait six months or nine months or even 12 months, but you could certainly wait three months. You know, that's much more reasonable. And if you build up enough inventory to where you can satisfy the Jeffs of the world that want to walk in and buy, you know, you want to buy that day while at the same time preserving profitability and revenue by keeping inventory low, I think that that's very possible.

Well, the key would be like more of an Amazon style where sure you have distribution hubs or you have very quick production. It's like, hey, we're producing and our lead time is only two weeks, you know, or a week to get the exact trim and color that you want because we're so on top of it. You don't have to have them all sitting there in every make, model and color. But I can get you that and ship it to you within a reasonable period of time.

Sure.

You know, that to me makes a lot more sense. Here's the problem. What it also does is the new dealers going along with it. Now all of a sudden the manufacturers are like, why do I have a middleman? Why do I have to ship this from my place where I produced it to your place where it's going to sit for 24 hours so you can just deliver it on to the end user? They're all going to go all the Tesla and just drop it right in your house. Right?

Yeah, you're, you're already seeing, you're always love that with Tesla and with Polestar and what they're trying to do, the Volvo EV spin off, you know, so.

Because you're going to hear more and more about that movie dealer addendum thing. And we've said it before, they're shooting themselves in the foot because the manufacturer's like, don't mark this car up. And the dealer's like, I have to mark this car up because you only sent me one of them. So I got to make an extra 50 grand on this Mustang or this Bronco so that I can cover my overhead. And that's going to be that kind of self inflicted wound where the manufacturer says, guess what? Then we're not going to give you any. You know, we're just going to send them directly to the consumer and then the consumer can turn around and flip it for 50 grand. But.

Well, Larry, thank you for being with us. The things that you've told us today scared the bejeebus out of most of us and hopefully we can, hopefully we can still be in business this time next year, but who knows? Anyway, Larry, you're awesome in the industry and we appreciate your time. Jeff, got anything else?

That's it.

Thanks for having me, guys. I really enjoyed it.

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