Three Take-Aways From Honda’s Used Vehicle Stop Sale

March 17, 2016

It’s been a little more than a month since American Honda Motor Company told its Acura/Honda dealers to stop selling used vehicles affected by the airbag-related recall.

In that time, Honda has informed dealers how it plans to make up for the disruption the “stop sale” will create in their used vehicle businesses.

As I’ve talked to Acura and Honda dealers, I’ve been struck by three things.

First, while the dealers may not be happy about the unprecedented nature of the stop-sale order and the as-yet unknown financial risks it will create, they aren’t uniformly railing against their factory partner.

“You can’t be a fair weather dealer,” a Northeast Acura/Honda dealer says. “You’ve got to be in for a penny and a pound with the manufacturer. Sometimes these things are going to happen. We all wish it wouldn’t happen. But if a Honda dealer doesn’t like it, they could always sell their franchise.”

Second, it seems to me that Honda has done a fairly decent job thinking through how to make things right with their dealers. The stop sale affects an estimated 10 percent to 15 percent of used vehicle inventory for Honda dealers, and up to 40 percent of inventory for Acura dealers.

Honda has articulated plans to provide financial assistance. The plan appears to account for the costs of dealers’ capital tied up in used vehicles they can’t sell, as well as the costs of depreciation, potential “lot rot” and storage for the vehicles until replacement parts become available.

As one Honda dealer says, “It’s better than nothing, but there’s really no way to know if it will go far enough.”

In particular, some dealers are really and rightly worried about how Honda plans to account for the depreciation of vehicles that might sit for six, nine or even 12 months. The current plans calls for capturing a vehicle’s Black Book wholesale value on the day it gets parked, and its wholesale value 60 days after the vehicle gets fixed and goes back on the market.

This approach sounds good on paper, but I share the concern of some dealers that it won’t be enough. Think about it: If replacement parts and repairs occur at roughly the same time, Honda dealers will see a six-, nine- or even 12-month supply of used vehicles entering the market at exactly the same time.

The spike, which a West Coast Honda dealer likened to a rogue wave, will likely cause wholesale values (and retail prices) to drop like a stone in the water, with a corresponding upward spiral of Market Days Supply.

I share the belief of some Honda dealers that it could reasonably take four to five months for the market to normalize after these vehicles return as retail units—a reality that Honda’s current plans to account for depreciation don’t seem to sufficiently capture. It may serve the interests of Honda and its dealers to devise some type of retail-focused incentive that would further iron out the market volatility and financial risk for dealers.

My third take-away is that every franchised dealer has a stake in the current Honda predicament.

To me, the Honda stop-sale order is really a sign of things to come. We operate in an era of ever-more complex and technology-filled vehicles, where recalls seem to only grow in number and scope, and the National Highway Transportation Safety Administration wants everyone to do a better job on behalf of vehicle owners.

It’s not inconceivable that some other factory, and their dealer partners, will find themselves in Honda’s shoes. When that happens, they’ll look at past precedent to determine how to proceed.

I sincerely hope that they take a cue from Honda’s example, and craft an earnest, if not perfect, plan to help their dealer partners avoid undue harm.