Soaring used vehicle prices haven’t cooled demand yet, Group 1 Automotive CEO says

Demand for used cars remains strong even though the price of preowned vehicles has soared throughout the Covid pandemic, Group 1 Automotive CEO Earl Hesterberg told CNBC on Thursday.

Hesterberg said on “The Exchange” that Group 1 has largely been able to raise sticker prices to offset higher acquisition costs because there are customers willing to buy them. It helped the company achieve record profitability in 2021.

Despite Group 1’s ability to successfully protect its margins, Hesterberg suggested there may be a point at which demand cools.

“I don’t know that we can do that indefinitely, and we move them pretty quickly,” he said. “Normally we have only about a 30-day supply of used vehicles, so we can react pretty quickly to market price changes.”

There’s a mindset among some people that right now is the “best time ever” to sell a car, Hesterberg said, which has both helped and complicated building up Group 1’s used vehicle fleet.

“Those cars are worth a lot of money. … We’ve had to be a little more creative in sourcing, but we’ve been able to keep our inventory pretty near ideal levels,” Hesterberg said.

Group 1 had 36 days of used vehicle inventory as of Dec. 31, compared with 32 days of inventory at the same point in 2020, according to the company’s earnings report issued Thursday. New vehicle inventory stood at nine days as of Dec. 31, compared with 48 days of inventory in 2020.

Group 1’s stock dropped more than 5% on Thursday, even as its earnings came in better than expected for the fourth quarter. U.S. stocks fell on Thursday after the consumer price index report for January revealed a 7.5% jump since the year before, marking the biggest rise since 1982.

Thursday’s inflation reading has caused some on Wall Street to believe the Federal Reserve will act more aggressively in raising interest rates. The central bank is expected to do so at its March policy meeting and then multiple times throughout the year.

Hesterberg said that he isn’t too concerned about the impact higher interest rates will have on demand for both used and new vehicles.

“The consumer has money and they want to spend the money. They would like to be buying more cars than we can supply. It’s never good when interest rates go up, but they’re just so low,” compared to historical averages, Hesterberg said. He added that even if rates do jump up for auto loans, vehicle manufacturers can offset some of those costs through incentives to keep sales flowing.

“I don’t see that being a headwind for us either in the near term,” he said.