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The used-car market offers a huge opportunity with its fast growth and stability. As buying and selling cars are transitioning online, this sector is becoming more attractive.
The car industry has always been cyclical, since owning a car can be the biggest purchase a consumer can make aside from a home; which, frankly, isn't happening that often nowadays! Just like choosing to keep an old iPhone instead of buying a new one, consumers are purchasing more used-cars. They simply can't afford to get the hottest and fanciest cars
To understand this effect, McKinsey ran a report in 2019 learning about the sales volume between the new and used-car segment. They found three things:
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The used-car market is more than twice the size of the new-car segment: This is a big indicator of consumer behavior, showing how we'd much rather pick the Toyota Corolla instead of the Cybertruck.. (For 2023, over 35.9 million used vs 15.5 million new cars were sold)
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The used-car market is less volatile during market downturns: During US recessions, consumers turn to used cars as a cost-saving measure. Lower depreciation rates of used cars also make them a more stable investment.
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Used-vehicle sales will increase faster than new-vehicle sales over the next five years: With companies becoming a new hybrid of in-person and online car sales, this segment is set to expand rapidly.
Shown below is McKinsey's illustration of how car sales volumes were impacted during each recession, comparing new and used cars 👇
The takeaway is clear: Used cars offer a countercyclical safe space from the dramatic sales highs and lows seen among new vehicles, with peak-to-trough declines averaging about 11 percent over the past two decades, compared with 23 percent for new cars.
"But Zach, what about online car sales?" Well, that's where things get really interesting. The used-car market is not just growing; it's evolving. More frequently, consumers are buying cars online, offering extreme convenience.
From Consumer Affairs, "Though less than 3% of consumers say they’ve purchased a car online, 29% would be interested in an online-only car purchasing experience for their next vehicle."
Online car-selling platforms (like Carvana or CarMax) are giants in the used-car market. They're offering a seamless buying experience, from browsing inventory, getting quick financing, and arranging delivery—all from your couch.
Consumers today are more tech-savvy and frugal than ever before. They're looking for reliable, affordable vehicles and are willing to forego the latest models for better value. This shift in consumer behavior is a tailwind for the used-car market, as more people buy pre-owned vehicles.
The used-car market's resilience during economic downturns, combined with the growth driven by digital platforms, makes it an attractive option for both consumers and investors.
For investors, the stability and growth of the used-car market is compelling. Investing in companies with less volatility and higher growth rates could be a smart move. Just like shopping on Amazon, only time will tell if consumers transition to online car shopping.