Cox Automotive chief economist Tom Webb fully expects this year’s certified pre-owned vehicle sales total to surpass what the industry generated in 2015, which was 2.55 million units.
During his quarterly conference call with the media and other industry observers this week, Webb projected that this year’s CPO sales figure might land near 2.7 million, perhaps even 2.8 million units, which means the industry is likely to produce a robust or perhaps even record-breaking quarter to close 2016.
According to Autodata Corp., CPO sales came in just above the 2-million mark through Sept. 30, a figure 3.7 percent higher than the amount registered at the same point last year. The industry is coming off consecutive quarterly performances that established a new record (the Q2 figure of 678,169 units) as well as the second-best figure (the 675,725 units turned in Q3).
During the fourth quarter of last year, the industry moved 624,624 CPO units for a 4.8-percent hike. Webb indicated “the year-to-date increase we’ve had through September might end up being a little bit less by the time we get to the end of this year simply because there were some high sales last year.”
And with off-lease volume projected to hit 3.6 million next year and likely to approach 4 million lease returns in 2018, the raw material is there for plenty of CPO sales, according to Webb.
“Certainly the off-lease units create the inventory for those programs,” Webb said. “They also put some pressure in terms of the lessors supporting the programs in order to protect residual values for end-of-term units.
“To a certain extent, it relies on the efficiency of your dealership network because there are certain franchises, primarily on the luxury side, where in terms of the dealer’s lots, it’s basically all CPO units or a very high majority are CPO units of that brand,” he continued. “Do they have the potential for greater throughput there? Once it’s outside the franchise network, it’s no longer going to be certified.
“The decision to CPO a unit or not CPO a unit is the dealer’s, so that it’s a profit opportunity to do or not to do that,” Webb went on to say.
Beyond the raw sales figures, Webb said it’s that opportunity to generate margin that’s driving dealerships to move CPO metal.
Dealerships’ certified divisions, in part, have turned the tide of diminishing margins. Webb pointed to performances of the publicly traded dealer groups as evidence of the trend.
“There has been some players out there in terms of the publicly traded who are doing a good job and have actually tried to protect gross margins on the used-vehicle side,” he said. “It was getting a little dicey there as they kept driving margins lower. I think there is a little bit of protection of that gross margin and to a certain extent you sacrifice volume because of that.
“We just got to a point where the margins got as low as they can get. A lot of the easy efficiency gains in order to allow that margin reduction had already been achieved. I think we sort of level off from here,” Webb added.
And to keep margins steady, it’s the certified pre-owned model that’s literally the vehicle to get dealers there, especially within franchised operations.
“Typically the bulk of their sales are units under 5 years old unless they’re setting up a separate lot to handle those older units,” Webb added.