The benefits of certified pre-owned programs are as varied as those of a five-tool baseball player: in addition to the consumer peace-of-mind and brand-building perks, they can help protect residual values and soak up off-lease volume bumps.
But there’s a tricky dynamic, says Anil Goyal of Black Book, who points out that there is a bit of competition between CPO prices and those on new cars.
“I think there’s more room to grow from a CPO (sales) perspective, but it’s not going to save the day, because at the end, it still competes with the new-vehicle sales,” Goyal said during an interview here at the NADA Convention & Expo.
“And as it becomes more and more difficult to make that new sale happen without incentives, you’re competing more with that certified pre-owned … Would I pay $2,000 or $3,000 more just to get into a new vehicle, rather than a certified pre-owned?” he said.
“As that certified pre-owned starts to get closer to the new-vehicle value — because of incentives — it becomes more of a challenge.”
Another interesting dynamic is the relationship between certified sales and off-lease volumes, which the latest Manheim Used Car Market Report called “beneficially linked.”
The report indicates off-lease volume gains create “both the need and ability for further growth” in CPO, a market that Manheim expects to reach a seventh straight year of record sales.
It should be noted, however, that last year was the first time since 2011 that off-lease volume was higher than CPO sales, according to a chart in the report citing Manheim Consulting and Automotive News.
The report projects off-lease volumes reaching a record 3.6 million units this year before passing the 4 million mark next year.
In 2016, there were north of 3.1 million off-lease units, Manheim said, with CPO sales coming at 2.64 million, according to Autodata Corp.
“It wasn’t a channel that absorbed every off-lease (unit),” Goyal said of CPO.
You’re still likely to see growth in certified, but some of the “low-hanging fruit” that boosted the allure of CPO — i.e. more dealer participation — has been picked, Goyal said. So the opportunity may come in other forms.
“I think there will be more opportunities for CPO product from the manufacturers to make it more attractive,” Goyal said. “There are some who are already doing unlimited mileage warranties on CPO … I think more has to be done around the CPO product, both in terms of the marketing of it and making that product better for it to continue to grow.”
Manheim touched on potential certified growth in its report, saying that much of it will come down to automakers giving dealers more room for profitability in CPO.
“It will be a matter of how much marketing muscle the manufacturers want to put behind the programs — and, of course, the dealer’s ability to continue to earn good profits on the sales,” the report said.
“It’s that last fact that restrained the growth of CPO sales in 2016. Lease returns, off-rental volumes, and late-model trade-ins were skewed more toward compact and midsize cars than current customer preferences would desire,” it said. “As a result, the potential gross profit on the subsequent retail sales of those units was skinny. So skinny that dealers decided the lift from CPOing the unit would be inadequate relative to the associated costs. They retailed the unit without CPOing it.
“Relatedly, manufacturers continued to offer attractive lease deals on new small sedans, which often made the monthly retail payment on a competing CPO unit uncompetitive,” Manheim’s report said. “Some of the pressures above should ease in 2017, and thus, CPO sales will continue to grow.
“It is important, however, that manufacturers design programs that allow dealers to benefit financially.”