Appreciating Depreciation

Appreciating Depreciation
The Jeep Wrangler (2014 MY shown here) has been the winner for nine straight years in the Compact Crossover/SUV category. (Photo: FCA)

There’s more to winning CBB’s annual awards than meets the eye.

In February, Canadian Black Book revealed its 12th annual Best Retained Value Awards. These awards always measure the retained value of four-year-old vehicles, meaning that the 2019 awards calculated 2015 model year vehicles, in 23 categories. Specifically, we look at the total percentage of original MSRP held over the first four years of those vehicles’ existence.

We do this for two equally important reasons: 1) To recognize OEMs that produce quality models, which offer the features and reliability that Canadians demand and trust, and 2) To shine some light on those winning models and OEMs to help consumers understand the importance of taking depreciation into consideration when shopping for or buying that next vehicle.

We want the OEMs to want to win our awards and for them to know that it is not easy. In order to do so, first and foremost, the OEM must be an enthusiastic and steadfast steward of its brand. The OEM, the dealers and the brand itself have to exude the ideology of proudly and vehemently standing behind the products they sell. This mentality has to hold through thick and thin, through recalls, delays, sales slumps, poor economics, and more. Consumers have to believe in your brand as one of quality and one they can ultimately trust. They spend a lot of money on a vehicle, so the relationship moving forward had better be good, or else they may move on.

The categories

This is why, three years ago, we began presenting the ‘Overall Brand’ awards in three categories— Car, Truck/SUV, and Luxury. Toyota took the honours in both the Car and Truck/SUV categories and Porsche won in Luxury. These distinctions are unique in that they measure the full menu of OEM products in those categories and average out the overall retained value. We feel that these awards are earned through the consistent delivery of quality products that keep pace with style and technology, trusted corporate and dealer communications, cultivating customer loyalty, and strong a brand.

If a given vehicle has a poor reputation for reliability, is missing key features, or has features that do not quite hit the mark of the needs of today’s drivers, holding value for trade-in or resale will not be easy. So much of what creates strong retained value is simply consumer demand on the used market. What are the vehicles that Canadians love, want and buy? This creates the supply and demand curves that shape pricing in the market.

Retained value superstar

The best example of this would be the Jeep Wrangler, winner for nine straight years in the Compact Crossover/SUV category. In 2018, the 2014 Wrangler scorched all models by holding the highest percentage of original MSRP over four years EVER, retaining an astonishing 91%. This year we saw the 2015 Wrangler keep 85%, again leading the way across all models for the 2019 awards, by a wide margin.

This may seem crazy, but Canadians love this model for its style, reliability, off- and on-road capability and even its interesting history. When these used units go up for sale, they don’t last very long, the demand is there, but not many people get rid of them, which keeps the values high. To put it in perspective, the average for the entire market is 52% retained value after 48 months.

Other examples would be the perennial winners of ten straight years each, the Toyota Tacoma in ‘Small Pick-up’ and the Toyota Tundra in ‘Full-sized Pick-up.’ Let’s take note that these two categories, similar to ‘Compact Crossover/SUV’ are examples of the types of vehicle’s Canadians are increasingly moving into. Certain categories, not just models, hold value better. Again this is a symptom of market demand.

Declining demand for sedans

On the flip side, fewer sedans and small cars are being sold on the used market, as demand declines for those types, while supply stays relatively strong, bringing values down. Our awards help illustrate this, where we see ‘Sub-Compact Cars’ on average, across the category holding only 43% of original MSRP. Even worse is the 2015 “Luxury Car” segment, which held only 37% on average across all models.

Back on the topic of brand stewardship, it must also be understood that standing behind your brand can be seen in brands that need few incentives to lure new buyers. Incentives are an effective tool to use to market and sell cars and give immediate benefit to consumers. However, that same customer will feel the sting of that incentive through that vehicle’s immediate and eventual depreciation. If a given incentive was for $5,000, down the road, for trade-in or valuations purposes that same $5,000 is immediately taken off the original MSRP, then input and added to the actual depreciation percentage.

In my mind, OEMs need to “appreciate depreciation” (I love that line) as much as consumers do. The reason being that if their vehicles hold onto their value well over time, it shows that consumers like and want their products, new or used. It’s one way to emphasize that they are doing things right.

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