Issue: Apr 2004


Windecker



Pay Attention to the Depreciation

by Ray Windecker

Automotive Industries is primarily product oriented, but occasionally, a distribution or sales concept cries out for clarification, or at least the examination of a specific problem.

The problem is a recent rash of comments, often by dot.com dispensers, concerning usedcar residual percentages and dollar values, often presented as fact, not as estimates. These comments are often then taken up and repeated by the general daily press and monthly auto magazines.

A prime example is the Retained fiveyear values of a BMW Z8 and a Mini Cooper. According to my memory, neither has been on the market for five years.

Another common misrepresentation is showing retained value as a percentage of MSRP. That comparison is only a necessary working tool, not a correct conclusion. It all sounds so simple. Two 2004 vehicles of approximately equal size and equipment sell within a few MSRP dollars. Five years later, vehicle A is expected to retain 31 percent of its MSRP for an $8,100 value at tradein time. Vehicle B returns only 24 percent and $6,400.

A simple open and shut case; vehicle A is projected to be the best way to hang on to some of your money. Unfortunately, that conclusion ranges from wrong to really wrong, as the concept of transaction price has been totally ignored for the sake of telling a quick and often inaccurate story.

The attached example follows the money trail using Buicks LeSabre and Toyotas Avalon as real-world examples. Both enjoy high quality and sell well, the LeSabre outselling Avalon at a ratio of 2.3 to 1.0 in calendar 2003. The money trail is, as are most money trails, a bit complicated. Thankfully, the basic clues, MSRPs and used-car values are publicly available. As a start point, the example assumes a trade-in five years from now, with about 75,000 mi. on the clock.

The four necessary steps, euphemistically listed as easy, are detailed in the example. As shown, it is a hard fact of life that vehicles with a higher retention percent from MSRP and a higher dollar trade-in value can end up with the greatest depreciation from the actual transaction price. The example shown here is not a selective oddity, many rebated vehicles have low depreciation. As for leasing, that is an entirely different stand-alone subject as the details are even more convoluted and murky than the purchase process.

It is rather expected that there will be exceptions taken to this article, but please sit down with the available public data and do your homework. Dot.com used-car values were not included because dealers I surveyed use primarily the dealer-centric Black Book and a bit of Kelly but almost never dot.coms for trade-in evaluation.

Fortunately, a few data-source organizations have always understood the MSRP vs transaction quandary, and recently, some of the dot.coms and commercial used-value services have repudiated or modified their previous use of retention from MSRP and some have circulated vehicle used-value rankings, some without specific source or supporting data.

One solution to the dilemma is to check out the publicly available data and form your own opinion. Always keep in mind that MSRPs, dealer discounts and rebates are constantly changing. You can, for totally new vehicles, develop used-value patterns from existing similar vehicles.

Make sure you do your homework and remember the mantra current transaction less historical depreciation pattern equals expected depreciation.

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