You remember the old saying: “You never get a second chance to make a first impression?”
David Paris is a senior analyst at J.D. Power Valuation Services.
Photo courtesy of J.D. Power.
It is a phenomenon that is very likely at work when it comes to the conventional wisdom that still exists when it comes to the impact of rental fleet vehicles on residual automotive values. This is especially true for those who may be carrying over decades-old memories of their car rental experience.
To be fair, those memories are real.
In the not-so-distant past rental cars and rental car companies had an earned reputation of buying — and putting into service — very basic, stripped-down models. If you knew anybody within the past 20 years who was driving around in a sedan that had manual rollup windows, you could safely conclude your acquaintance had purchased the vehicle from rental car inventory.
Today, however, the realities around the rental fleet are much different.
Rental companies continue to buy and sell millions of cars each year. Rental fleets purchased 1.74 million units in 2019 and continue to be the biggest purchasers of vehicles in the world. If you include corporate, government and non-profit fleets, that number jumps to over 3 million units.
The main difference today — as opposed to a decade or so ago — is that rental companies are now buying vehicles that are actually desired by consumers. Buyers in the rental fleet have proactively incorporated greater numbers of mid- to upper-level trim models in their fleets. The days of going to a rental branch and seeing rows and rows of basic beige sedans appear to be over. That’s not to say there still aren’t a lower-trim rental vehicles, it’s just that today, there is a much better mix of trim levels.
What has changed?
We can probably start with competition and transparency. Consumers renting cars today have much better access to a wider array of choices. They have a much greater ability to compare and contrast price and features to quickly — and cost-effectively — determine what experience they want to have when they rent a vehicle.
But in upscaling, rental company leaders have also discovered that there is a significant opportunity emerging on the back-end of their vehicle lifecycle management strategy. When it’s time for rental companies to sell off their fleet in the marketplace, strategic investments in fleet mix are ensuring that car auction houses are not flooded with a thousand of the same generic vehicle model. In fact, they are now selling vehicles that consumers actually want to purchase for themselves.
The move has had an extremely positive effect on the ecosystem.
- Strengthening Residual Values: When it comes to the used vehicle market, residual values are always stronger when you have the correct level of supply and demand to address the different demographic segments. By diversifying the mix, rental fleet managers have stopped oversupplying the low-end of the market to more rationally address the needs and desires of more consumers. This is having a very positive effect on overall residual values.
- Strengthened Relationships with OEMs: Given the volume in which they purchase vehicles, rental car companies have always had a special relationship with car manufacturers. This relationship has now been enhanced as OEMs work hand in hand with rental fleets to meet the needs of different car renters. While this helps rental companies become more competitive — and profitable — it is also creating a “lab-like” environment for OEMs by providing early bird insight into what consumers want.
- Strengthened Dealer Relationships: The move to a more diversified portfolio of vehicles has been a boon for dealers who now have the opportunity to buy clean, late model rental units, that have been well maintained with service records. These are not the stripped down models of the past, but desirable examples packed with the latest technology and safety features, the things that consumers really want in the marketplace today.
- Opportunity to Educate Consumers on the Value of Rental Fleet Resales: The one thing that the pros in the industry have always known — and the average consumer has not — is that rental fleets receive exceptional maintenance while they are in service. Far from the prevailing view of being ridden hard and put away wet, rental cars have been critical assets that are valued and well cared for. As a result there is a huge opportunity for the industry as a whole to educate consumers. Not only have these vehicles been well maintained, many of them tend to remain under manufacturer’s warranty and eligible for Certified Pre-Owned programs. Consumers have an opportunity to purchase cars that are packed with the latest and greatest safety technology features without paying new car prices. As more consumers are made aware of this dynamic, residual values will be further supported.
At J.D. Power, we expect the positive influence of rental fleets on used vehicle valuations to continue into 2020 and beyond. In fact, we’re expecting even more rental units to enter the used market. While there may be slight downturns in new vehicle purchases in 2021 and 2022 — we’re talking about just a couple thousand units — this will only serve to put upward pressure on pricing and value.
David Paris is a senior analyst at J.D. Power Valuation Services. He is responsible for the creation of data-driven insights on new and used vehicle market performance and is the author of Guidelines, a monthly in-depth review of the automotive industry.