Measuring the relationship between wholesale and retail prices.

1. Q1 2016
Used Vehicle
Premiums: Measuring
the Relationship
Between Wholesale
and Retail Prices
AT A GLANCE
■■ Wholesale and retail price trends
■■ Changes in segment-level premiums
■■ Diagramming the “premium curve”
■■ Seasonal variations in premiums
NADA Used Car Guide and its logo are registered trademarks of National Automobile
Dealers Association, used under license by J.D. Power and Associates.

2. Used Vehicle Premiums: Measuring the Relationship Between Wholesale and Retail Prices
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Introduction
Used vehicle prices are usually discussed with
regard to how wholesale or retail prices are moving
individually, rather than how they’re trending in
relation to one another. Focusing on just one or the
other, however, leaves out valuable information that
can enhance our overall understanding of the used
vehicle market.
Changes in retail premiums provide a good example
of this.
While gross profit margins are regularly
scrutinized (and rightfully so), they factor in
expenses associated with selling a used vehicle:
reconditioning costs, auction fees, transportation
fees, floorplan expenses, etc. By comparison, retail
premiums strictly represent the spread between
used vehicle wholesale and retail prices. Spun
another way, retail premiums indicate the maximum
revenue potential carried by a given used vehicle.
So even though premiums don’t directly measure
profitability, they do play a role in determining its
outcome. Dealers have less margin for error when
dealing with vehicles with tight wholesale-to-retail
spreads than when dealing with vehicles with
wider spreads.
The dramatic change in the used vehicle market
over the past several years begs the question of how
retail premiums have been impacted. To answer this
question, we’ll first join wholesale and retail data
together to create a comprehensive view of used
vehicle prices. We can then examine the current
state of used vehicle premiums and identify the
unique factors that influence them.
Prices and Premiums,
Inextricably Linked
Wholesale used vehicle prices have gone through a
series of extraordinary transformations over the past
CALENDAR YEAR
NADA Used Car Guide Wholesale Used Vehicle Price Index | Source: NADA Used Car Guide
NADA Used Car Guide Wholesale Used Vehicle Price Index
Vehicles up to 8 years in age (2010 = 100).
60
70
80
90
100
110
120
USEDVEHICLEPRICEINDEX
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
+18%
Figure 1

3. Used Vehicle Premiums: Measuring the Relationship Between Wholesale and Retail Prices
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15 years. In the early 2000s, prices crashed under
the weight of heavy new vehicle incentives and
a glut of off-lease supply resulting from an over-
exuberant, and ultimately dysfunctional, attitude
toward new vehicle leasing. By 2003, wholesale
prices had tumbled to an average of $12,000 —
nearly $3,000, or 12%, below the level reached
just 3 years earlier.
Much of the loss was recovered by mid-decade
before used vehicle prices plummeted yet again
because of record-high gasoline prices, the financial
market collapse and the economic austerity of the
Great Recession. Collectively, these factors reduced
wholesale prices by more than 11% from 2007 to
2008, dropping them to their lowest point in more
than a decade.
Since then, wholesale prices have surged. In 2014
and 2015, low supply, stronger financial and
economic fundamentals, and an improved attitude
toward used vehicles in general (among both
consumers and dealers) lifted average wholesale
prices to an all-time high of nearly $16,000, up
18% from 2007 (figure 1, page 2).
Used vehicle retail prices have also improved
dramatically over the past several years, rising
17% from 2007 to 2015 (figure 2). While retail
price growth ended 2015 just 1 percentage point
lower than wholesale price growth, the trajectory
of the two was slightly different over the years. The
toxic combination of events that occurred in 2008
drove wholesale prices down further than retail
prices, -11% versus -8%, and the recovery that
occurred from 2009 to 2010 was more acute for
wholesale prices than for retail prices. From 2011
on, however, wholesale and retail prices essentially
moved in lockstep.
Naturally, differences in wholesale and retail
price movement affected the spread between
USEDVEHICLEPRICEINDEX
NADA Used Car Guide Wholesale and Retail Used Vehicle Price Indices
Vehicles up to 8 years in age (2010 = 100).
CALENDAR YEAR
NADA Used Car Guide Wholesale and Retail Used Vehicle Price Indices | Source: NADA Used Car Guide
60
70
80
90
100
110
120
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Wholesale Price Index Retail Price Index
Figure 2

4. Used Vehicle Premiums: Measuring the Relationship Between Wholesale and Retail Prices
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them. To assess changes in the spread over time,
NADA Used Car Guide linked wholesale and retail
transaction data at the model year and vehicle level
and aggregated up to get a general wholesale-to-
retail price spread measurement.
The transaction data were taken from two
exceptional sources, the AuctionNet®
wholesale
auction sales database and the J.D. Power and
Associates Power Information Network®
(PIN).
AuctionNet wholesale sales data is collected
directly from the nation’s leading auction houses,
including Manheim, ADESA, ServNet, ABC and key
independent auctions. AuctionNet captures more
than 80% of dealer-only wholesale transactions
occurring in the United States. PIN provides a
similarly robust database of new and used vehicle
retail data. Its unique electronic tracking system
gathers daily point-of-sale transaction data for both
new and used light vehicles from more than 7,500
franchise dealerships across the United States and
Canada. Combined, these two data sources provide
us with a representative view into used vehicle
price spreads.
As figure 3 illustrates, retail premiums followed
a slight upward trend in the years leading to the
financial crisis. As discussed earlier, the events
of 2008 drove wholesale prices down further
than retail prices; as a result, the spread between
the two increased substantially, rising by nearly
5 percentage points to roughly 41%. The spread
reached its narrowest point in 2012 at just over
33%, 3 points below 2007’s pre-recession average,
before steadily widening back up to 35% in 2015
due to a flattening out of wholesale prices and a
subtle, lagging rise in retail prices.
Figure 3
Used Vehicle Retail Premiums
CALENDAR YEAR
Used Vehicle Retail Premiums | Source: NADA Used Car Guide
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Vehicles up to 8 years in age.
34.0%
36.0% 36.7%
41.3%
36.7%
34.1% 33.6% 33.4% 34.4% 35.0% 35.3%
AVERAGERETAILPREMIUM

5. Used Vehicle Premiums: Measuring the Relationship Between Wholesale and Retail Prices
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Segment-level Trends:
Even More Detailed Insight
At an industry level, observed changes in premiums
will be due to changes in the direct relationship
between wholesale and retail prices, as well as
changes in age and mix within the pool of data.
Considering this, one can get a better idea of how
premiums have truly changed by reviewing data by
segment and age level because it is more distinct
and homogenous.
This exercise reveals that all segments have
experienced a reduction in retail premiums over the
past decade, and the changes are more substantial
than what has been observed at an industry level.
Using 3-year-old models as an example, wholesale-
to-retail spreads fell from an average of 30% in
2006 to 2007, to 22% over the course of 2014 to
2015 — a decrease of 8 percentage points.
Reductions were greatest for mainstream segments,
with some being quite dramatic. For example,
premiums for 3-year-old compact cars narrowed
by 11 percentage points, while reductions for large
cars, midsize pickups and midsize vans averaged an
even more substantial 15 points between the two
periods (figure 4).
Given the decline in percentages, dollar-based
premiums have also predominantly fallen over the
years, especially in cases where the percent change
has been more substantial (e.g., midsize pickups
and vans). Of course this isn’t true universally,
as some premiums remained flat or have even
increased. But even if a dealer were to retail the
same type of vehicle for $3,500 above its auction
price today, just like in the past, higher wholesale
prices and inflationary increases in other expenses
(assorted fees, reconditioning, etc.) would reduce
the economic impact of the figure.
Figure 4
AVERAGERETAILPREMIUM
Used Vehicle Retail Premiums, by Segment
Vehicles 3 years in age.
Used Vehicle Retail Premiums, by Segment | Source: NADA Used Car Guide
0%
5%
10%
15%
35%
30%
25%
20%
40%
45%
Compact
Car
Compact
Utility
Large
Car
Large
Pickup
Midsize
Car
Large
Utility
Midsize
Pickup
Midsize
Utility
Midsize
Van
Luxury
Compact
Car
Luxury
Large
Car
Luxury
Midsize
Car
Luxury
Midsize
Utility
CY2014–2015CY2006–2007

6. Used Vehicle Premiums: Measuring the Relationship Between Wholesale and Retail Prices
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Theoretically, the clear contraction in used vehicle
premiums should pose a challenge to dealer
profitability. However, increased access to market
data and sophisticated inventory management tools
have helped mitigate the issue by making used
vehicle operations more efficient. Dealers today
have far greater insight into knowing what to buy,
when to buy and how much to pay. This is evident
in used vehicle gross profit margins, which
National Automobile Dealer Association data
shows were roughly 1 percentage point higher in
2015 than in 2006 to 2007, despite the decrease
in retail premiums.
The Retail Premium Curve
Statistically measuring the difference between
wholesale and retail prices reveals that the
relationship between the two is not linear in nature.
While differences in retail premiums are fairly subtle
throughout much of the price spectrum, this pattern
quickly changes as vehicles become less expensive.
As seen in figure 5, retail spreads are initially
more than double wholesale prices before quickly
dissipating as wholesale prices rise. This extreme
curve can be explained largely by condition; as a
vehicle becomes older and cheaper, more has to be
spent to recondition it for retail sale.
Seasonality
Another important characteristic of used vehicle
premiums concerns seasonal variations. The gap
between wholesale and retail prices can vary by 5
to 6 percentage points from the annual average,
depending on the month (figure 6, page 7).
Wholesale and retail prices are closest throughout
the first quarter of a year, as dealer bidding activity
ramps up in preparation for the surge in consumer
Figure 5
EXPECTEDRETAILPREMIUM
Used Vehicle Wholesale-to-Retail Premium Curve
AVERAGE RETAIL PREMIUM
Used Vehicle Wholesale-to-Retail Premium Curve | Source: NADA Used Car Guide
0%
20%
40%
60%
140%
120%
100%
80%
160%
180%
200%
$1,000
$3,000
$5,000
$7,000
$9,000
$11,000
$13,000
$15,000
$17,000
$19,000
$21,000
$23,000
$25,000
$27,000
$29,000
$31,000
$33,000
$35,000
$37,000
$39,000
$41,000
$43,000
$45,000

7. Used Vehicle Premiums: Measuring the Relationship Between Wholesale and Retail Prices
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demand that accompanies tax refund season.
Premiums then gradually increase through the fall
as wholesale demand relaxes, auction depreciation
picks up steam and retail declines lag.
This pattern generally holds true for most vehicles
regardless of segment, but the degree differs at
times. For example, seasonal volatility is more
pronounced on mainstream models than luxury
models, while certain styles of vehicles (e.g.,
convertibles) can be subjected to vastly different
seasonal patterns.
On a final note, the monthly relationship between
wholesale and retail prices has changed over the
years, as it has for premiums in general. Monthly
price gaps are now tighter today than in the past,
particularly in the fourth quarter (figure 7, page 8).
The reduction in seasonal slack can be traced back
to the insight provided by data and technology, the
evolution of which has not only helped dealers with
inventory and sales planning, but has also helped
remarketers strategize when, where and at what
price to sell.
Conclusion
Analyzing wholesale and retail price data together
reveals information that would be impossible to
gather by just looking at one or the other. In this
report, for example, we see that the relationship
between the two is far from static. Instead,
premiums are more dynamic in nature and are
driven by a multitude of factors, including changing
used vehicle prices, time of year, the age and price
of a vehicle, and a vehicle’s unique functional traits.
Understanding how wholesale and retail prices
relate to one another and why is of particular
importance to dealers; spreads play a central role in
determining profitability. But this information also
has a bearing on remarketers, as a more detailed
understanding of the wholesale-to-retail price
Used Vehicle Retail Premium Seasonal Pattern
Average wholesale-to-retail spread per month. Vehicles up to 8 years in age (CY2011–2015).
CALENDAR YEAR
Used Vehicle Retail Premium Seasonal Pattern | Source: NADA Used Car Guide
August September October November DecemberJulyJuneMayAprilMarchFebruaryJanuary
15%
35%
30%
25%
20%
40%
45%
AVERAGERETAILPREMIUM
Figure 6

8. Used Vehicle Premiums: Measuring the Relationship Between Wholesale and Retail Prices
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relationship can help fine-tune resale timing and
pricing decisions.
We can expect to see further changes in used
vehicle wholesale and retail prices as the market
transitions from a period of incredible strength to
one stressed by growing used vehicle supply, higher
interest rates and, in all likelihood, larger new
vehicle incentives. The creative use of data and the
information derived from it will be critical toward
helping industry stakeholders stay ahead of the
changing marketplace.
Monthly Change in Used Vehicle Retail Premiums, Pre– and Post–Great Recession
The difference in used vehicle price spread between 2005–2007 and 2011–2015. Vehicles up to 8 years in age.
CALENDAR YEAR
Monthly Change in Used Vehicle Retail Premiums, Pre– and Post–Great Recession | Source: NADA Used Car Guide
August September October November DecemberJulyJuneMayAprilMarchFebruaryJanuary
-5%
-1%
-2%
-3%
-4%
0%
1%
2%
PERCENTAGEPOINTCHANGE
Figure 7

9. NADA Used Car Guide
Since 1933, NADA Used Car Guide has earned its reputation as the leading provider of
vehicle valuation products, services and information to businesses throughout the United
States. Its team collects and analyzes over 1 million combined automotive and truck
wholesale and retail transactions per month, and delivers a range of guidebooks, auction
data, analysis and data solutions. NADA Used Car Guide, a division of J.D. Power, provides
a seamless view of timely, reliable new and used vehicle price information that helps
automotive / truck, finance, insurance and government professionals make better business
decisions. Visit nada.com/b2b to learn more.
NADA Used Car Guide's Lender Advantage
Getting ahead is going to get harder, but Lender Advantage is here to help. Our team of
experts provides a full suite of vehicle analysis services that put you in the fast lane so you
can keep up with marketplace changes. From vehicle risk assessments to portfolio analysis,
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About NADA Used Car Guide
For more information on this white paper or about Lender Advantage, contact:
JONATHAN BANKS
VP, Vehicle Analysis
& Analytics
jonathan.banks@nada.com
703.749.4709
LARRY DIXON
Senior Manager,
Market Intelligence
larry.dixon@nada.com
703.749.4713
STEVE STAFFORD
Account Executive,
Financial Industry, Accounting,
Legal, OEM Captive
steve.stafford@nada.com
703.821.7275

10. Used Car & Truck Blog
Keep up with industry activity, get insight
into what lies ahead in the marketplace
and discover what’s influencing the
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Join the conversation at nada.com/usedcar
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truck sales database. Join the conversation
at nada.com/commercialtruck
Additional Resources
NADA Guidelines
Updated monthly with a robust data set
from various industry sources and
NADA Used Car Guide’s own proprietary
analytical tool, NADA Guidelines provides
the insight needed to make decisions in
today’s market. Sign up to receive NADA
Guidelines monthly at nada.com/guidelines
NADA Perspective
Leveraging data from various industry
sources and NADA Used Car Guide’s
analysts, NADA Perspective takes a deep
dive into a range of industry trends to
determine why they are happening and
what to expect in the future. Sign up to
receive NADA Perspective monthly at
nada.com/perspective
White Papers
NADA Used Car Guide’s white papers and
special reports aim to inform industry
stakeholders on current and expected
used vehicle price movement to better
maximize today’s opportunities and manage
tomorrow’s risk. Sign up to receive white
papers quarterly at nada.com/whitepapers
Q1 2016
Used Vehicle
Premiums: Measuring
the Relationship
Between Wholesale
and Retail Prices
AT A GLANCE
■■ Wholesale and retail price movement trends
■■ Changes in segment-level premiums
■■ Diagramming the “premium curve”
■■ Seasonal variations in premiums
NADA Used Car Guide and its logo are registered trademarks of National Automobile
Dealers Association, used under license by J.D. Power and Associates.
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nada.com/usedcar
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