New-vehicle Sales Up, but Margins are Squeezed: Enter CPO, Bringing New Profits to All!

If there is a bright spot in the economy these days, it’s the auto industry. Pent-up demand, lower interest rates, great product, and easing gas prices are driving consumers online and into showrooms, ramping up sales for dealers across the country. But it is not all sunshine – at least for new car dealers, who are feeling increasing pressure on margins (attributable to some of the same factors that are also driving sales[1]), with consumers paying, on average, $500 less for a new vehicle than they did a year ago.[2]

Advantage used? We think so.

As any dealer will tell you, margins are traditionally higher on used vehicles (more than ten times higher according to NADA data[3]), and while constricted inventories in a hot used car market dampened that opportunity of late, this year's robust increases in new sales are bringing growth in trade-ins (56% of new car buyers who own a vehicle intend to trade it in!), providing more precious used inventory. Analysts are predicting strong sales ahead for used dealers, and inside that relatively rosy used car story is another even brighter ‘margin’ story ready to break out, the CPO story.

Consider: June 2012, was the 2nd-best month in the history of the certified pre-owned vehicle market. Yep! The second best month in history! Certified pre-owned sales are up 9.5% in 2012 following a steady three-year growth trend. This is fantastic news for the used car industry … and a huge opportunity for dealers…especially as new certification programs mean they’re no longer limited to only OEM programs when it comes to offering the type of comprehensive certification that consumers will actually embrace. Industry data confirms that OEM-certified vehicles move faster and that consumers will pay a premium for them, and while this is good news and means better margins, only a fraction of a dealer’s used vehicles will qualify. That’s where high-quality, non-OEM certification programs, that extend the scope of eligible vehicles, step in. For instance, SureSale program and other programs which allows dealers to certify vehicles up to 15 years old and 150K miles.

But do the same margin advantages apply with these new CPO programs? Today we can give a resounding “yes” to that – according to the aggregated data from SureSale Certified program.

This data shows that, surprisingly, not only are non-OEM certified vehicles selling faster than the OEM-certified variety, they are dramatically increasing those all-important margins. This is not just happy news for independent dealers, who have been without access to a truly effective CPO marketing program, but for franchised dealers who are feeling the crunch of compressed margins, even as new vehicles are flying off their lot. Because far more of those trade-ins they’re taking from over 50% of their customers are now eligible to wear that consumer-friendly, profit-driving certified badge of honor, participating dealers can go a long way to making up those lost new car margins. Consider the eye-opening results dealers are reporting after just six months of participation in a Certification program: these certified vehicles are moving at a rate that is over 60% faster[4] than that of the average used vehicle (and 10 days faster than the average OEM-certified vehicle) – and they are pocketing an additional 23% (or $2,300) per-vehicle sales premium on average.[5] Plus, because the program smartly integrates extended protection plans, dealerships are generating an average of $1,500 in additional revenue on those one in four customers who are opting for that program.

There are about 35 million used vehicles on the market and yet less than 2 million were sold through OEM CPO programs last year. With CPO sales happily rocking the profit center of the used car market, we believe that that center can significantly expand, and that far more of those other 30+ million vehicles can be properly and rightly certified. The customers that are shopping ‘used’ want and deserve the peace of mind of more high-quality certified programs and vehicles – and dealers deserve the marketing differentiation, rapid turn, and yes, above all, the increased profit margins they provide.

To stay current on the CPO industry, go to www.jeffreyschwartz.com.

[1] According to NADA - http://www.autonews.com/apps/pbcs.dll/article?AID=/20120716/RETAIL0...

[2] According to Kelley Blue Book - http://mediaroom.kbb.com/new-car-prices-down-500-year-over-year

[3] In 2011 the average dealer made $23 in profit on new vehicles and $269 on used – so more than ten times more profitable, according to NADA, 2012

[4] Based on March-May sales data, 55% of SureSale vehicles turn within 20 days. The average days in inventory for a used vehicle is 49 days (TrueCar.com - http://blog.truecar.com/2012/05/22/may-2012-truetrends-shortest-and...)

[5] Based on analysis of SureSale vehicles' sale price + addl. VSC revenue averages (all SureSale vehicles 5 yrs and older sold March-May) compared to averages on similar vehicles (Y/M/M) from KBB suggested values (average of wholesale + 'as-is' + retail pricing).

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Comment by Bill Gasson on August 28, 2012 at 1:07pm: Jeff,

I alway's sensed this but some new stores want to sell the warranty rather than certify the car ,1 apple is better than none.

Thank you

Comment by David Ruggles on August 28, 2012 at 11:49am: Credit Unions Bring Residual Based Financing to Certified Pre-Owned

Ask any used vehicle manager specializing in Certified Pre-Owned (CPO) vehicles who their most formidable competitor is and he/she will tell you it is the New Vehicle Department of his or her own Dealership. With aggressive subventions, often available from OEM captive finance arms on new vehicles, and with premium CPO caliber vehicles bringing a premium price at wholesale, subvented lease payments on the new vehicle can be very close to conventional financing payments on CPO inventory. Dealers have been looking for a residual based option to help their CPO operation compete on monthly payment with these OEM captive subventions. Offering the consumer a reduced residual based payment on CPO units preserves the price advantage consumers expect on a pre-owned vehicle while giving the Dealer the opportunity to maintain a strong gross profit margin, a ready supply of “organically grown” pre-owned inventory, and a more predictable and accelerated cycling of customers.

After a Dealer has cut interest rate and extended loan term, residual based financing is the only way to reduce monthly payment without curtailing gross profit.

A network of Credit Unions has been offering a residual based balloon financing option through Houston Texas based Auto Financial Group (AFG). According to AFG CEO Richard Epley, “The program is a true fully insured “walk away” balloon payment contract with payments up to 40% less than conventional financing payments on a term by term basis. On a 36 month balloon, the consumer pays 35 payments and can walk away from the 36^th, which is the residual/balloon amount. There are no prepayment penalities. The buyer can also trade the vehicle in to the dealer or sell it outright, all with no sales tax penalty. The consumer can win, but not lose.

The AFG program offered through member Credit Unions provides better customer retention than conventional financing, similar to that of a lease. The end of term process is designed to bring the consumer back to the Dealer for another vehicle and to the Credit Union for the financing. The title is in the owner’s name during the duration of the contract, which keeps insurance costs low.”

The lender contract used is the same as for conventional financing and the program itself is quite similar to the old GMAC SmartBuy, Ford Motor Credit’s Customer Option Plan, and Chrysler Credit’s Gold Key Plus, with most lenders using the Reynolds and Reynolds Law Contract. Epley says the current strong vehicle wholesale values are making for solid residual values and exceptional payment advantages over conventional financing, even while maintaining strong Dealer gross profit and shortening contract term. “While the AFG program is quite competitive on new vehicles, with the possible exception of the enhanced residuals and below market rates on certain OEM subventions, the consistent “sweet spot” for Credit Union balloon payments is CPO,” says Epley. “We’ve been in business for over ten years and have experienced a few auto business cycles and periods of fuel price volatility. We’re still here and looking to the future. We’re entering a new phase where demand for premium pre-owned vehicles is accelerating and OEMs are emphasizing their CPO programs to bolster their own residual values. With our Credit Unions partners we intend to own the CPO residual based financing space.”

George Shaffner, General Manager of the Lou Bachrodt Auto Mall in Rockford, Illinois is enthusiastic about the program available to him through First Northern Credit Union. “To participate fully in the BMW factory CPO program we have to commit to purchasing a high percentage of our own off lease vehicles. Being able to offer residual based payments on those units enables us to move them more quickly while still maintaining good gross profits. In some instances, the ability to offer lower balloon payments is the difference between retailing a CPO vehicle, or losing money at the auction when it becomes over age.”

Mike Jensen, General Manager for Joe Cecconi’s Chrysler Complex and Ideal Nissan in upstate New York says, “We have been doing significant volume with Credit Union balloon financing for our new vehicles and we see a significant opportunity for our CPO operation.“

Says Duane Sanders, General Manager of Santa Barbara Auto Group in California, “Now that I know this is available, I will be recruiting my local Credit Union to join the AFG program, so we can offer their balloon payments on our own CPO inventory.”

Quoted in a column for Credit Union Times, Chad Merrihew, Vice President of Operations for Security Credit Union in Flint Michigan said, “Our CU’s balloon payment activity is a 50-50 split between new and used vehicles. By offering a lease-like loan, members have been able to get cars they normally wouldn’t be able to afford through an average savings of 30% to 40% on their monthly payments.”