🔒 If you’re not a Premium subscriber yet, upgrade today to get full access to this issue — and every issue. 🔒
In today's edition:
đźš™ CPO Sales rose 2.5%. Is that good or bad?
đź’Ž Everyone wants a luxury car, but do we know what they are?
đź› 10 ways the car business is broken
🧨 What happens if Carvana goes bankrupt? 🔒
⚡️ Lightning round with CDG: Vroom's nice profits | Driveway opens physical store 🔒
Reading time: ⏱ about 4 min 36 sec
Was this email forwarded to you? Subscribe here to get real-time insights from the dealership floor.
đźš™ CPO Sales rose 2.5%. Is that good or bad?
Car dealers have earned record profits while car manufacturers have struggled with filling the pipeline. To somewhat remedy the situation automakers turned to CPO programs.
Certified pre-owned (CPO) sales in October inched 2.5% higher, from September to finish at 207,547, but the total is still lower by 9,000 than the October of the last year. For the year, CPO sales represent only 14.1% of total vehicles sold.
Cox Automotive
2019 was the last big year of growth in off-lease units, which in turn fueled strong sales of higher-priced “gently used” vehicles that pass CPO certifications. Leasing dried up during the pandemic, and so did the supply of these high-quality units, which resulted in the drop of CPO units on the market.
Lexus and Kia CPO programs ranked the highest last year as having the best coverage, the most stringent eligibility requirements, inclusion of roadside assistance, and other perks.
There has been a sharp contrast between how premium and mass market brands approached their CPO programs according to the survey by Auto Remarketing.
Most premium manufacturers are heavily invested in working with dealerships to maintain high standards of their CPO programs. Buying process improvements that make them attractive to consumers. Promoting CPO programs is a part of the strategy to address inventory shortages allowing consumers to find manufacturer warranty-backed used vehicles when the new ones were not available.
Some mass-market manufacturers though are extending qualification requirements allowing them to include older vehicles with higher mileage into CPO programs. While it helps to increase the number of vehicles that are eligible, it dilutes the value of CPO by blurring the lines between regular units and the “special” CPO-eligible ones.
In the future, I expect the sales of CPO units to grow as increased new vehicle prices and high interest rates will push consumers towards more cost-effective options. The value of an extended warranty can be easily justified to consumers, especially when ownership and repair costs are rising.
đź’Ž Everyone wants a luxury car, but do we know what they are?
Sky-high car prices are all over the news, but how much of this spike is attributable to shoppers gravitating towards luxury cars? Luxury cars account for 17.7% of all vehicle sales in the United States, with New Jersey leading the way with a whopping 27.9%, and Wyoming is at the bottom, with only 5% (according to iSeeCars).
For the “cars are expensive” crowd, this is at least one reason why.
We’re all spoiled MFers and want our touchscreens and lane departure warnings 🤢
— CarDealershipGuy (@GuyDealership)
Nov 6, 2022
When I tweeted about it a reasonable question came up. What defines a luxury car? A generally accepted definition is that luxury cars are the ones offered by luxury brands, such as BMW, Lexus, Mercedes, and others. Is the Tesla Model 3 a luxury car? A lot of people would peek inside and disagree, despite the fact that you have to spend over $50K to drive the Model 3.
What about these entry-level models from luxury brands that lower the barrier to entry into the luxury space? Mercedes A-class starts at $35,000, which is not too far from the new Honda Civic. The difference between them becomes negligible when looking at 2-3 year old cars – Civic is a more reliable choice.
Let’s not forget the latest trucks. Amenities and craftsmanship that they offer are very comparable to those of top luxury brands. Remember when RAM 1500 won the Cars.com 2020 Luxury Car of the Year award?
What do we call this new segment of luxury evolving in front of our eyes? A new breed of $90K+ super tricks are challenging luxury SUVs and sedans. I see quite a few RAM TRXs, Ford Raptors, and Wrangler 392s. They are not only luxurious but also capable on and off road. A rolling proof that we can have it all (as long as we are willing to pay for it).
RAM interior
The quarterly KBB survey of luxury car shoppers, in a traditional definition of luxury, revealed that BMW is the number one most-shopped luxury brand today. Tesla, while still being in the top 10 contenders, fell from its leadership position, yielding to Lexus, Cadillac, Mercedes, and Audi. (Some Tesla shoppers are a special breed and would not even consider other brands).
The top 5 factors for luxury shoppers are:
Durability / reliability
Safety
Driving conform
Driving performance
Affordability
These top 5 are unchanged since 2017, but fuel efficiency is now the #6 on the list.
So who are these luxury car shoppers? A study from CarGurus conducted earlier this year has some answers. They are passionate, see their car as a form of expression, they are ready to buy having done exhaustive research. As I mentioned in one of my earlier newsletters, their brand loyalty is not as strong as before: they are readily switching teams when their desired car is not in stock.
[ content from this week's sponsor ]:
DIMO has a simple mission: make your vehicle data valuable by helping you be a better car owner.
DIMO is excited to share a new feature of the DIMO app: automatic valuation tracking. We source and track valuations for your vehicle including an estimated private sale and trade in values as well as real offers from Vroom, CarMax, and Carvana.
You can use DIMO to see real time what your car is worth — and get insights into your vehicle's health and performance.
Download the app today to get started.
đź› 10 ways the car business is broken
Last week I asked the question to my Twitter audience: what do you think is the solution to fix the traditional car buying process that is hated by most people. I got plenty of valuable opinions, read through all of them and now will share a few major themes.
Source: CDG anonymous poll on Twitter
The top complaint about the current process revolves around the fact that people despise the amount of time it takes to complete the transaction. Even when shoppers come in with pre-approved financing or a cashier’s check, it still takes over 3 hours to get everything done.
Closely related to the issue of the time spent at dealerships, is the desire for having a seamless hybrid online/offline process, where some parts of the transaction can be completed online. Vehicle search, negotiations, financing, digital paperwork - all steps of the process have been listed as candidates to be done online. Some people said that buying a car should be just like buying a MacBook or shopping at Target. Remember the vending machine?
Another suggestion is no-haggle pricing, Typically shoppers are split into two groups: there are people who are hard negotiators and will fight hard to emerge from the “us-vs-them” battle with a good deal. The other group is where people simply want to pay a fair price without the emotional pressure of negotiations. Smart people highlight that the “no-haggle” concept is good in theory, but it is not universally consumer friendly since dealers that adopt the “one price” policy usually don’t have the best prices and shopping around may yield a better deal.
Unpacking the no-haggle pricing further, price transparency is what consumers are truly after. People want to see all transaction details upfront. Price of the car, taxes, government and dealer fees, and a menu of add-ons, such as warranties or insurance. Some want to take the transparency to the extreme and have an insight into the dealer's cost to acquire and recondition the vehicle. (Why aren’t they asking for the same transparency when buying shoes or kitchen cabinets?)
People feel like they are being taken advantage of because of all the poorly-explained and confusing fees that appear in vehicle purchase transactions. While the process has become more digital, there’s still a huge disconnect between prices and payments quoted online and what happens during the actual transaction. The numbers that customers see online almost never materialize in the store causing negative experiences.
Some people believe that a lot of tension can be solved by improving the post-purchase experience. A mechanical breakdown is a top concern when buying a used car. Shoppers want to remove the uncertainty of buying used by having some safety umbrella in place: a return policy, a reasonable breakdown insurance, and a service experience that addresses their post-purchase concerns. This is where transparency also comes into play in the form of a full disclosure of a vehicle’s condition plus a detailed inspection report that lists all repairs that have been done during reconditioning.
Consumers rightfully expect that dealers will not sell them vehicles with hidden defects that will add financial and time burdens. Despite signing the “as-is” addendum, shoppers believe that the selling dealership bears the responsibility of addressing mechanical issues for a reasonable period after the purchase. They are obviously upset if presented with a large repair bill shortly after completing the transaction.
Lastly, quite a few people mentioned the word “experience” with many different facets of it. In a recent survey, 64% of auto consumers said that the customer experience is more important than the actual price when buying a car online. End-to-end customer service plays a crucial part making the experience enjoyable. Opportunities to create a remarkable experience exists at every touch point with the shopper: knowledgeable and consultative sales approach, prompt and informative email responses, assistance with navigating financing and fees, efficient service lane processes, and so on.
🧨 What happens if Carvana goes bankrupt?
In my previous newsletter I took a deep dive on Carvana's 3rd party marketplace. Today, I want to explore the looming bankruptcy as a likely scenario for Carvana. I did some research and spoke with a bankruptcy attorney. Here's what he said. The management expects a decline in number units and profit per unit in Q4. Carvana has over $6.6 billion of debt but not nearly enough cash to cover it. The bankruptcy may have already happened if Apollo, an investment company specialized in distressed debt, didn’t give them a $1 billion loan earlier this year.
Chapter 11 is the likely scenario here because there is value in continuing running the business. The reorganization will be run by company executives, typically headed by someone from a big investment bank.
Subscribe to CarDealershipGuy Newsletter to read the rest.
Become a paying subscriber of CarDealershipGuy Newsletter to get access to this post and other subscriber-only content.
Already a paying subscriber? Sign In