By Jeffrey Schwartz, President & Co-Founder, SureSale
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 26% 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 five 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.
Consumer CPO Demand
26%
3-Year Growth Rate for Used Shoppers Considering CPO
68%
Used Car Shoppers Considering Buying a CPO
cpo sales
5%
3-Year Growth Rate for CPO Sales
7%
CPO Sales as a Percentage of Total Used Car Sales
While consumer demand for CPO continues to increase, CPO sales lag behind and still only represent 7% of used car sales.
Is this a CPO hot streak, missed opportunity, or both?
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. 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 sizable 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.
ARTICLE BY Jeffrey Schwartz
Jeffrey Schwartz is president and co-founder of SureSale, a leading certification platform for pre-owned vehicles. Jeffrey is an experienced entrepreneur with 20+ years of automotive and technology experience.
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