Digital Dealer - February 2020 - 34

S A L E S & VA R I A B L E O P S

CPO

By
Jeffrey Schwartz
President and Founder,
SureSale

The Great CPO Disconnect
Consumer demand for CPO rises, so why aren't franchise sales keeping up?

Raise your glass and celebrate

the ninth consecutive year of record
CPO sales! In 2019, manufacturer
certified programs sold more than
2.7 million vehicles. But after we
pat ourselves on the back, let's take a closer
look at the real trend. Not everything is
champagne and caviar. While AutoTrader
reports that shopper interest in CPO has
increased 25% over the past three years,
and Google reports a similar increase in
searches for the term "certified pre-owned,"
actual CPO sales during that same period
have grown less than two percent.
In the face of rising consumer interest
in certified vehicles, why is the CPO sales
trend so anemic, and what can be done to
better match this growing interest in certified vehicles with actual sales?
Let's quickly dispense with the most logical question: Are sluggish CPO sales a result
of a weak used car market? The answer
is no. According to Edmunds, used vehicle sales are at a tipping point, and there
continues to be ample reason for buyers
to migrate from new to used. Affordability tops the list as new-car prices are at a
record high (around $38K); average new-car
payments now top $550 (and even higher
for the substantial number of buyers who
are burying negative equity in their trades);
loan terms and balances continue to grow
(69 months and +$900 respectively), and
rising interest rates continue to add to the
ballooning costs for consumers.
While CPO seems a logical and compelling entry point for displaced new car
buyers, franchise dealers' sales trends do
not reflect any meaningful change as a
result of these market shifts. Certified sales
as a percentage of total used sales have
remained flat at around 18.5%, while total
used car sales have grown at only about 2%
over the past few years. On the other hand,
independent and more innovative models,
with more flexibility on CPO, are capturing
a greater share of the used vehicle market.

[ d i g i t a l d e a l e r. c o m ]

For example, the used sales growth rate
has been 3x faster for independent dealers
than for franchise dealers, while CarMax
and Carvana, who ostensibly sell CPO even
though they don't brand it as such, are
respectively the largest and fastest-growing
sellers of used cars.
When we add this all up, something
doesn't make sense. Consumer interest in
CPO is at a record high, and the used car
market is primed for growth, yet franchise
dealers' certified vehicle sales rates remain
flat. This disconnect means there are
structural impediments to the growth of the
CPO market which limits consumers' ability
to buy certified vehicles. Following are the
friction points preventing "certification at
scale" include the following:

Manufacturer CPO Eligibility
Requirements: The average eligibility

for manufacturer CPO programs today
is around 5.5 years and 72K miles. This
hits the mark for the sizeable number of
vehicles that are coming off-lease, but constrains inventory availability and skews the
affordability of many CPO vehicles. About
23% of franchise used sales are 3-year-old
vehicles, and the average transaction price
for a certified vehicle now tops $27K, which
is about $5K higher than the average used
car. Expanding model year and mileage
eligibility would mean greater affordability
and more inventory, opening up CPO to a
much broader range of buyers.

Off-Brand Restrictions and
Independent Dealer Limitations:

Franchise dealers cannot certify off-brand
vehicles while independent dealers have
very limited, to no, certification options.
This dramatically limits inventory selection
for CPO buyers and has the effect of reducing the number of certified vehicles that are
purchased by consumers. A new category of
CPO programs could open up the certified
market to off-brand for franchise dealers
and allow some independents to distinguish
a segment of their inventory as CPO.

Lack of Independent Standard &
Consumer Awareness: Manufacturer
CPO programs lack a common standard, and
they suffer from an overall lack of consumer
awareness. Meanwhile, there is significant
consumer confusion in the market about the
term CPO: according to J.D. Power, many
consumers consider buying a "CPO" vehicle
at local and national independent dealerships
and online used car vendors, which means
that in the car buyer's mind, CPO does not
necessarily mean manufacturer certified. Independent certified programs that reinforce
a certified quality standard could fill this void
and help expand CPO as a category.
All this leads to the conclusion that the
CPO market could be dramatically expanded if the friction points to growth can be
addressed in a way that extends the ability of
dealerships to certify vehicles while reinforcing the strength of CPO branding. Used
car shoppers want to buy more CPO, but the
structure of the retail market limits their
ability to do so. Moving beyond CPO as we
know it today is the solution. Programs that
market and brand the key components of certified (e.g., clean title and free vehicle history
report, certified and transparent inspection,
etc.), expand eligibility and reinforce a used
vehicle quality standard could solve the
disconnect between rising demand and unrealized sales. Moreover, focusing CPO on the
mechanical and safety quality of the vehicle,
while documenting its cosmetic condition
could expand the CPO market by reducing
reconditioning costs.
The disconnect between consumer
demand for CPO and the structure of the
current market will be further exacerbated
by digital retailing. According to McKinsey,
between 25% and 50% of used vehicles will
be sold online by 2030. A clear and transparent vehicle quality standard will be more
important than ever before. CPO will be table
stakes, and the manufacturers and dealers
who better embrace the new rules of the
game will, in the end, win the game.

February 2020

http://www.digitaldealer.com

Digital Dealer - February 2020

Table of Contents for the Digital Edition of Digital Dealer - February 2020