SAN DIEGO, California (November 8, 2010) Close to 300 attendees turned up at the Manchester Grand Hyatt hotel for this third annual CPO conference, said Bill Zadeits, president of the Cherokee Automotive Group (which publishes Auto Remarketing magazine). "Last year," he said, there were a "lot of crazy things going on" at the Forum in Phoenix. This year, dealers and observers anticipated a more stable situation for the coming season.
Although the used-car market in general has had its ups and down over the past couple of years, certified pre-owned vehicles - inspected and brought to specific standards - continue to attract a sizable following. Many consumers (and dealers) believe the certified vehicle provides much of the merit and satisfaction of a new model, at a significantly lower price - though clearly higher than an ordinary used car of the same make and model. CPO vehicles may be certified by the vehicle's original manufacturer, or by an independent organization.
In the first Forum session, Arianne Walker, director of the automotive marketing group for J.D. Power, stated that J.D. Power forecasters are "expecting a slow, progressive recovery" in the new-car market. This year, they estimate 11.5 million total sales (9.1 million of them at retail). In the next couple of years, the total could edge back toward 16 million. Compact vehicles will take a bigger share, she believes: about 35 percent.
As new cars dipped, used cars were "sort of following," Walker said. "We saw these fleet sales go down dramatically." Leasing also declined. As a result, fewer candidates for certification could be found. There were a ."lot fewer two-year-old vehicles in the marketplace," she said.
Gross Return Rate is the factor dealers consider when deciding if it's worthwhile to invest in used cars. This includes the cost of the vehicle, profit, and days to turn (how long it takes to sell the car). A while back, dealers were making 30 cents on the dollar, Walker said. Lately, it's been about half that amount.
Turning to certified pre-owned vehicles, Walker explained the buyers of certified pre-owned (CPO) vehicles have different expectations than other used-car shoppers. Just over half of buyers in general expect to get the same quality for less money, but 63 percent of CPO buyers have that opinion. Affordability is an issue to 42 percent of used-car buyers, but only 32 percent of those who turn to the certified pre-owned market. Almost four out of five CPO buyers planned at the outset to purchase a certified vehicle.
More CPO buyers found their desired vehicle on the Internet (42 percent, versus 32 percent of used-car buyers in general). Some 92 percent of CPO buyers go to at least one independent web site, and 85 percent go to a dealer and/or manufacturer site. Only a tiny number consult newspaper web sites.
Kelley Blue Book leads the list of independent web sites, and is considered especially useful for pricing information. Auto Trader is in second place, followed by Edmunds.com. "Edmunds looks a little bit more like a manufacturer site," Walker said. Exactly half of CPO buyers said a salesperson at a dealership caused them to consider a certified vehicle.
Respondents cited several reasons to go certified, led by near-new condition (71 percent) and low mileage (65 percent). Less than half of the time did the salesperson mention either of those factors, but 73 percent of salespeople mentioned extended warranty coverage, which was reason number three. "People expect to get that warranty coverage," Walker said. CPO buyers expressed the highest satisfaction with the program's features. Condition ranked second. Price was always last (providing the least satisfaction). Actually, 15 percent said the most influential reason was that the "vehicle they wanted just happened to be certified."
"Satisfaction with the sales process is important for loyalty and advocacy for the brand and dealer," Walker said. "Being honest about the vehicle and condition" helps.
In the past, said one person in the audience, only one-fourth of buyers knew that certified cars included an inspection and specific warranty. That shouldn't happen today, Walker responded, because "there's so much great information out there on the Internet."
Named Certified Pre-Owned Dealer of the Year, Brian Benstock presides over Paragon Honda, a dealership first established in 1929 - just ahead of the Great Depression. This particular part of Queens is one tough neighborhood, according to Dale Pollak of vAuto, who introduced Benstock to the Forum audience. Furthermore, Benstock is no ordinary car dealer.
Operating "in a very difficult, chaotic environment," Pollak said, Benstock manages to sell astounding numbers CPO vehicles: 13,711 in all, and 2,358 Hondas (plus 950 Acuras) in the first 10 months of 2010. This is a neighborhood, for example, where metered-parking violations are vigorously enforced. "Dialogue heard in the closing boxes" at the dealership could be any of a hundred languages. Benstock, newly turned 50, had just finished running in the New York Marathon. "He's the lion of that urban jungle," Pollak said.
"There are no secrets in today's automotive climate," Benstock began. Transparency is the answer.
"We're experiencing some good dominance in that market," Benstock admitted; but his way of operating the dealership has changed dramatically. Back in 2006, Paragon Honda showed profits close to $6,000 per car. Since then, there's "been a cultural change in the way we do business."
Benstock listed a simple three-prong strategy:
1. Find
2. Certify
3. Sell
Simply put, he looks for cars with the "fastest turn" (which are likely to see the quickest). He can now target specific cars that are needed. That includes "weaning ourselves from the auction," and using other methods to obtain vehicles that can be certified and sold. At the auction, he pointed out, "the dummy with his hand up last pays the most." Benstock is no dummy.
To obtain a sufficient number of cars that are eligible for certification, "you need a strategy for acquisition," Benstock said. That includes buying trade-ins directly from vehicle owners, at a fair price. Benstock's employees get a lot of cars from the dealership's service department, simply by asking people who are there for maintenance or servicing if they're interested in selling that vehicle. It's like a "CPO vehicle factory," he said. "You're manufacturing your own certified cars."
Benstock's people create an "autobiography" for every car. Folder should include reports from the service department, Carfax vehicle history reports, repair orders - whatever is relevant. "Take the mystery out of the history," he advises.
Certifying a Honda or Acura costs an estimated $1,500, according to Benstock. "The good news is that we keep 72 percent of that," he said. His service people restore parts to factory specifications, using all new components. Selling each car fast is the key. "The time when you're going to get maximum gross [profit] is the first 15 days of its life." That's the "sweep spot," in his view.
Picking the right salespeople is another vital technique. "I don't need the Houdini, the bamboozler guy," Benstock said. "Instead, I can hire someone nice." He pays each one by the number of units that are sold, not by gross profit (the traditional method). "It's really opened us up to a new breed" of salesperson. He suggests that dealers ask themselves: Would you let a newly hired employee babysit your son or daughter?
Setting the proper price is crucial, too. The woman who prices his cars has never sold a car in her life. "We've turned it into a math problem," Benstock said, with no egos involved. "We're pricing the cars to turn" (sell rapidly). "If you want to make a lot," Benstock asserts, "make a little."
During the recession, like other dealers, he added a "normal" $2-3000 profit to the inflated prices his people had paid for cars at the wholesale auction. Not anymore. "Don't be a gonif," he warns. "Don't be a pig."
Turning to selling, Benstock suggested that "this is the fun part." His goal: to have a car in each segment, from each model year, "priced the lowest in the market." He prefers to start out at a logical transaction price, not "pie in the sky."
Paragon Honda ads differ from the norm in that they low payments and daily payments. He lists them as "$6 a day" cars, "$7 a day," and so forth. All the "6 a day" cars are position together on the lot., $8. "Let's make it easy to people to do business with us," Benstock suggests.
Craig Belowski, from Action Toyota in Littleton, Colorado, calls himself an "Internet dealer." Last year, he sold 1,000 CPO vehicles, plus 600 regular used momdels. His Internet department has "kind of traditionally fought" with regular salespeople, Belowski said at the dealer panel. He's "worked really hard to get the rest of the salespeople on board."
Belowski estimates that he spends an average of $1,200 to recondition his vehicles. "We don’t determine the price of the car based on the reconditioning," he explained. He also remains untied to guidebook price valuations. "I haven't picked up a book in three years," he said.
Photos of used cars for sale have become a prime focal point for internet ads, and Belowski doesn't hold back. In fact, he's established a baseline of 20 photos per car, reaching as high as 26 in some cases. He also reminded the audience of a simple fact about dealing with customers: "Everybody wants to hold the trade to the end," he said, "and then surprise us with it. We're not surprised."
As for acquisition of inventory, Kevin Nachbar of the McCarthy Auto Group noted that what's crucial is "understanding primarily what your market is." In his own area (Kansas City), the mix is 67-percent domestic.
More people, largely well-informed, are just showing up at the dealership, Nachbar said. "That’s where the business is going," and Internet leads are shrinking. He reommends having “relevant information. No spin, no hype. Get rid of the car lingo [and use] quality photos." His ads typically include 14 photos of each vehicles. "Don’t waste people's time," Nachbar warned. "They don’t have it." Better ads translate to more people just showing up at the door.
Nachbar says his people "don’t use the guidebooks that much." Instead, "I try to gauge what I can retail the car for," not what it costs to buy it. "We’re probably spending $1,400 a car" for reconditioning, whether the car is to be certified or not, "and half that’s profit for the service department."
If a car doesn’t sell in 14 days, Nachbar might drop the price by $1,000. After 30 days, $1,000 more. At 60 days, he believes there's probably no profit left, noting that what you’re losing is your reconditioning costs.
Nachbar hasn’t been to a physical auction in five years. He doesn’t buy any cars for resale in Kansas City, either. He estimates that he saves a couple of thousand dollars, typically, by going to both coasts to make purchases. Freight is about $600 per car.
"Build an evidence manual" about the car, Nachbar suggests, adding that the reasons he had for buying the car at wholesale are the same points to be made to sell it. "Salespeople don’t have to be that good, if you have the right stuff."
Howard Hakes, CEO of Hitchcock Automotive Resources, recommends using 14 to 18 photos of each car, "making sure they’re the right photos. He might even include a "shot of the speedometer.” Hakes spends about $1,200 to recondition a car, but more for BMWs.
“The market has really changed,” said Ivan Mendelson of Toyota Carlsbad during a session on non-luxury CPO dealerships. The used-car department can no longer be supplied with vehicles mainly by the dealer's new-car department. This dealership used to have a 4:1 new/used ratio; now, it's 2:1. Instead of buying cars for high wholesale prices due to the short supply, Mendelson said, “why not pay our consumers, who are doing business with us, rather than pay the auctions.”
“To a certain extent, you burden the vehicle” with extra costs by certifying it, said Dale Pollak of vAuto. Yet, “in the end, you’ll get a lot happier customer.” In Pollak's view, it's a matter of strategy, people, and process. "Proper strategy that's well executed" is the only thing that works, he said.
Delivering the Forum's keynote speech, Pollak recalled that in the past, “happenstance strategy” was the rule. Today, “we’re not getting the trade-ins that we once did.” So, it's time to try “engineered inventory.”
Three simple steps are needed:
1. Identify the hottest vehicles in your market.
2. Pick the ones that are least obvious. They might be the easier ones to get for the right money.
3. Use a different way to determine what they’re worth to you, the dealer
Pollak says dealers have to ask themselves: What will it take to retail that car? To answer such questions, a data analyst or inventory analyst might be needed, but “not necessarily a high-paid person.” It's essential to find out which cars are getting the most searches online.
According to Pollak, certification does not always make a vehicle sell faster, though that's generally the case. In his view, some manufacturers do a mediocre or terrible job of promoting CPO value.
The one thing that hasn’t changed in the last 50 years is the reconditioning process, Pollak concluded. Some dealers do no reconditioning at all, but sell cars "as is" to customers who simply need transportation.
“We feel that these are tools," said David Nelson of First Look, and they're "only as good as the way you use them.” Car people “are backward-looking by nature. They know what happened, but they don’t know why.”Online buying of cars by dealers is a growing trend. "The day of hanging out at auctions is probably coming to an end,” Nelson said. “More people have to get comfortable with buying cars online.” It's a matter of "creating your own inventory." CarMax, he explained, has data analysts who do that all day, “in an unemotional way.” Most successful dealers, Nelson believes, are combining the position of used car manager with that of internet manager.
What's desirable is “increasing the satisfaction of your customers,” Nelson said. “You must be able to describe that value online” in terms that are easy to understand, thinking like the consumer. “You may know the certification program," Nelson added, "but does your mom?" Ask yourselves, he concluded: “Are we doing all the right things to sell the value of the certification program?”
Doug Hadden of Dealer Track suggests that dealers “certify the high performers” only. “If they cannot sell that value,” certification may simply be wasting money.
Gamble, Guess and Gut, the three Gs, “doesn’t work anymore,” Hadden said. “Let’s start sourcing by our return on investment,” and look first at existing customers as potential sources for salable vehicles. One dealer he knows appraises every car that’s in the service lane for maintenance or repair work. Ask yourself, Nelson suggested: "If you missed a trade-in appraisal for a customer" a while ago, "can you bring him back?
Pricing is inherently an uncertain process, Nelson said, because “no two people call the car the same way.” It's like “different languages.” A Toyota dealer may evaluate a Tahoe far differently than a Chevrolet dealer would.
Everyone knows that certified cars cost more. But how much more? Surveys that purport to show how much extra retail customers are willing to pay for CPO cars have been somewhat inconsistent.
Because each CPO program is different, you can't state a specific price add-on for certification, said Ricky Beggs, managing editor at Black Book (a prominent wholesale price guide). “It’s a challenge to get regular money, much less certified money,” from financing sources.
Dealers need guidebook assistance most for “that car that they don’t normally deal with," Beggs suggested. "If I was a dealer, I’d want every tool I could get my hands on.”
Add-on figures for certification already are included in the pricing guides issued by Kelley Blue Book (kbb.com). Alec Gutierrez, lead valuation analyst at KBB, pointed out one danger. A year-old BMW 3 Series or Mercedes C-Class could be selling for 85 or even 90 percent of its original new-car price. If an add-on was tacked onto the used-car valuation, that total figure could approach the car's original price. This would defy a basic rule of economics, whereby (except in extraordinary circumstances), commodities are expected to lose value as they age, not gain it or stay even.
“Demand for used vehicles has been very strong,” Gutierrez said, perversely complementing a “drastic reduction in trade-ins. While demand has increased, supply has decreased.”
“Savvy is the new status symbol,” according to Matt McKenna of Auto Trader. Consumers do much more comparison shopping than in the past, and 57 percent are looking around for sales. Three out of five of those surveyed are less likely to make a spontaneous purchase. The “savvy shopper now has a sense of prestige.”
To many used-car shoppers, "savvy" behavior means considering CPO. Certified pre-owned sales amounted to 10 percent of new-vehicle sales in 2007, McKenna said, rising to 15 percent in 2009 (admittedly a slow year for new-car sales), then easing slightly during 2010.
Though many shoppers know about CPO vehicles, they're don't necessarily understand the details. Too often, McKenna said, the manufacturer “is lost in the mix.” Instead, customers have a "dealer-centered focus," even though it's usually the manufacturer that backs up the CPO vehicle. Once they do understand what CPO is all about, there's a "40 percent lift in consideration among used-car shoppers.”
Customers “get that it’s going to cost more,” McKenna said. CPO shoppers attribute $2,366 to certification, while other used-car shoppers perceive an extra-cost figure that averages $1,932. New-car shoppers value CPO a little lower, at $1,753 extra.
McKenna cited the top reasons to buy a CPO vehicles, as surveyed by J.D. Power:
1. Condition like new (71 percent)
2. Low mileage (65 percent)
3. Extended warranty (64 percent)
4. Original new-vehicle coverage (51 percent)
5. Car is recent model year (51 percent)
6. Vehicle desired just happened to be a CPO (43 percent)
7. Know and trust CPO brand (42 percent)
8. More features for less money (36 percent)
9. Inspection process (35 percent)
Charlie Vogelheim issued a set of awards from IntelliChoice, for best CPO programs. When evaluating manuacturer programs, IntelliChoice considers the extended warranty, inspection criteria, title verification, roadside assistance, special financing, return/exchange policies, and brand value factors. Mini took the honors for best program of a popular brand. Best premium CPO program went to Volvo (for the fourth straight year).
Opening the CPO Forum, Bill Zadeits pointed out that the Pre-Owned Automobile Dealers Alliance (POADA), which is owned by Cherokee Publishing, now has more than 600 dealer members. CarMark, a vehicle certification program operated by POADA, launched in late September and "Gives the dealers a tremendous profit opportunity," Zadeits said. POADA advises franchised new-car dealers to continue to use manufacturer-backed certification programs to certify the makes they sell as new. CarMark lets the dealer also certify other vehicle makes, which are not part of his new-car sales department.