Pointers to Help You Play in Today’s Challenged CPO Market

A recent report from Cox Automotive highlights a pain point many dealers will know all too well—if you want to stock one- to three-year-old vehicles, it’s almost impossible to acquire them without stepping up to a price point you may find uncomfortable.

The high cost of near-new vehicles owes to the drop in new vehicle production and lease deals that largely occurred in 2020 and 2021. The report quotes Cox Automotive analyst Jeremy Robb outlining how these conditions are likely to persist:

“We are just beginning to see lower lease maturities for the key 3-year-old segment, and that impact will be felt over the rest of this year and into 2025 and 2026. As supply tightens for this key segment for the used vehicle market, we expect to see variances from historical average depreciation rates.”

Such market dynamics have contributed to an overall softening of certified pre-owned (CPO) sales by dealers for the past three months. The Cox Automotive report notes that while July’s CPO sales tally increased 1.4 percent compared to June, July’s total came in 6 percent less than total CPO sales in May, and 8.5 percent less than in July 2023.

In my conversations with dealers, some believe that the CPO programs they relied on in pre-pandemic years to attract near-new-minded buyers are a non-starter in the current environment. If you can’t acquire the vehicles for less than you expect to retail them, what’s the point?

It’s understandable that some dealers may prefer to sit on the sidelines, but the fact remains that while new vehicle affordability remains challenged for many buyers, the next-best alternative for many is a near-new vehicle that offers buyers the confidence and trust that many CPO programs offer. From my perspective, however, it seems that the reluctance on the part of some dealers to pursue CPO vehicles creates an opportunity for dealers who know how to source these vehicles and treat them once they arrive in inventory. Here are pointers to help on both fronts:

Mine your service drive for CPO-eligible units. Dealers who take service lane acquisition seriously report that a decent share of the vehicles they take in qualify for their factory CPO programs, even if they all don’t fall in the one-to-three-year-old sweet spot. Better still, service drive sourcing, if done right, can lead to CPO-eligible vehicles with a higher ROI potential than if you acquired them in the wholesale market. What’s the key to doing them right? It’s a blend of dedication and discipline, wherein your sales and service teams understand the important role that CPO vehicles play for the entire dealership. In addition, your service drive acquisition process and related payplans must minimize the friction points between the teams that have historically derailed many dealers’ efforts to acquire vehicles directly from their service customers.

Recognize the investment distress on Day 1. For many ProfitTime GPS dealers, the share of Bronze vehicles, or the units with the least ROI potential, runs close to 40 percent of their overall inventories. No surprise, a sizable share of the Bronze units are CPO vehicles, which dealers often paid up to acquire and recondition to make them CPO program-eligible. Top-performing dealers recognize the risk these vehicles hold and price them to move quickly on Day 1 to realize whatever gross or ROI potential they offer. A far larger share of dealers, however, subscribe to “hope,” wherein they price the vehicles to achieve the gross or ROI they expect, and end up retailing the vehicles for far less than they would have achieved if they’d been priced correctly on Day 1.

In the current CPO-challenged environment, it’s also important for dealers to remember why CPO sales played such an important role in your used vehicle departments in years past, when acquiring and selling CPO vehicles was much easier: Every CPO sale holds the potential to help you secure a satisfied customer, an F&I opportunity, additional gross in service for reconditioning and a trade-in, all of which seeds the ground for future business.

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