A while back I had initiated coverage on the used car channel in an effort to aggregate data that may become useful. The used car market was materializing slowly and in the end the numbers were not moving the needle in a substantial manner so I put the report on hiatus. I am glad to report that the time has once again come to begin to report on the used car market. The reasons are two fold: A) With some new deals the used car market has a push that it simply did not have before and B) There is a lot of confusion / expectations out there regarding this segment of the auto sector. Here are some bullet points to consider:
- On June 20th of this year Sirius XM announced that consumers buying any satellite radio equipped used car from 1,000 participating GM dealerships, regardless of brand, a 3 month promotional subscription.
- On October 6th Sirius XM announced that consumers buying any satellite radio equipped used car from participating Nissan and Infiniti dealerships, regardless of brand, a 3 month promotional subscription.
- In November of this year Sirius XM announced that the GM deal mentioned above had expanded to nearly 2,000 dealerships.
- In December of this year the company was stating that they are seeing a take rate in these programs in the mid 30's.
Obviously these are impressive announcements. However, before we run off thinking about how great this news was, we need to put it into perspective. There are 20,000 car dealerships in the United States. These two deals represent only 10% of the pie. That is the bad news. The good news is that these types of programs have plenty of room to supply growth going forward, and can help the company boost the gross additions line in a manner that was not happening before.
Now some other important data that we need to consider:
- There are about 20,000 new car dealerships in the United States
- There are about 40,000 used car dealerships in the United States
- There are thousands upon thousands of private sales in the used car market.
- Sirius XM has deals in place for about 10% of the new car dealerships that participate in their used car program (GM and Nissan/Infiniti)
- New Car dealerships tend to keep the better/newer cars, and send the older/inferior cars off to auction. Odds are that the many satellite radio equipped cars stay at new car dealerships or bigger used car dealerships.
- The take rate for these programs is about 35%
- While data varies, it is said that roughly between 4 and 4.5 used cars sell for every new car that is sold
- THIS ONE IS IMPORTANT - These promotional subscriptions ARE NOT counted in the subscriber numbers. The only way these cars become subscribers is IF the consumer elects to keep the service AFTER the trial and become a SELF-PAYING subscriber. This means that the benefit in Q4 comes from cars sold in Q3.
The trick at this point is trying to gauge the success of these programs, and to try to determine what they bring to the bottom line in terms of subscribers. While we could hazard guesses, it is perhaps more prudent to identify a methodology that gives us some numbers to work with. This is where used car superstore CarMax comes into the picture. CarMax is a national company that is responsible for 2% of the sales in the entire used car market. While 2% may not seem like a lot, it does give a decent idea of the types of inventory many new car dealers would have on the used car side of their business. One great thing about CarMax is that they allow you to search by any option, including satellite radio.
Each week I will track the used car market and establish some good data points from which we can extrapolate the used car space and the impact of the GM and Nissan deals. Today CarMax had an inventory of 30,647 vehicles. Of that total, 13.542 were equipped with satellite radio. This means that 44% of the inventory at CarMax is equipped with satellite radio.
Now to some number crunching:
- Assume that the used to new ratio is 4 to 1, meaning 4 used cars for every new.
- Assume that 70% of those cars go off to auction and 30% stay at dealerships. New car dealers usually supplement their inventory from auctions , but we have to start somewhere, so I am assuming that they keep 10% of trades and acquire another 20% from auctions.
- The items noted above would bring about an assumption that for every new car sold there are 1.2 quality used cars sold. I am applying a 1 to 1 ratio based on an evolving spreadsheet that I started developing to track this several months ago.
- Assume that the type of inventory at CarMax, for the most part, is representative of the type of inventory a new car dealer would stock for used cars.
Given these assumptions, we can begin to look at what the used car market programs such as the GM and Nissan deals will bring in Q4. As I mentioned earlier, we need to look at Q3 sales data to get the real impact in Q4. In Q3 new car auto sales were at 3,182,000. If we use the 1 to 1 ratio, we get a quality used car market of 3,182,000. If we then take 10% of that number to equate to the dealerships that participate we 318,200. We then need to consider that about 40% (being conservative) are equipped with satellite radio. This would bring the potential pool down to 127,200. The next step is applying a 35% take rate to the mix. This would bring potential subscriber additions in Q4 to 44,520 from these deals.
Bear in mind that my spreadsheets for used car data are a work in progress, and I used very similar methodology in Q3 to account for this market. My Q3 projections were too generous. I fully realize that having so many assumptions can create errors in the data, but this type of deal only started impacting this company last quarter, so the error could be anything from a slow start to the program to a bad assumption somewhere, but as stated, we need to start somewhere, and I learn from each quarter as I can analyze the numbers.
Based on all of this I would say that these used cars will bring 44,000 subscribers to the table in Q4. The number might not be as impressive as many want to hear, but every little bit helps. Also bear in mind that Sirius XM gets other subscribers from Certified Pre-Owned deals and people simply becoming subscribers when they buy an equipped car.
In summary, it is great to get excited about the used car deals, but we should not get carried away. What will bring real excitement is that the current deals account for about only 10% of the dealerships, and more and more similar deals will certainly be announced. Used cars equipped with satellite radio are growing more and more as each month passes. This new supply bucket will really help the company in garnering new customers.
Certainly readers will see many people come up with this number or that number. However, very few take the time to pull the data on a consistent basis the way I do. Crunching these numbers takes time and dedication that most simply will not commit to. You can see any number of people saying the quarter will bring hundreds of thousands from here, there, or everywhere, but in the end are they crunching numbers or telling you what they think based on some headline that says sales are great relative to last year? I am not afraid to be wrong, but would rather be right... that is why I crunch these numbers the way I do.