Captives and lenders are feeling confident in the used-vehicle market, but some dealers are feeling the pressure as full-time used-vehicle retailers are making the space more competitive for franchise dealers, Paul Ritchie, president of Hagerstown Honda and Kia, told Auto Finance News.
“The dedicated full-time used-car lots, like CarMax, are starting to get into the franchise dealer side of the business as consumers favor used cars, and we have to work really hard to remain competitive,” Ritchie said.
Used-car retailers serve as significant competition because “they can buy all the cars that they want,” Saif Kadri, sales manager of Carson Nissan, told AFN. “That’s the problem with places like CarMax in the used market, and [used-car retailers] could potentially drive the values higher.”
If a franchise dealer goes to an auction, they have to pick and choose which cars they pay for, but used-car retailers have the advantage since they don’t have to be loyal to a specific brand. “I used to go to the auctions often,” Ritchie said. “And if [used-car retailers] are looking for off-lease cars, they don’t care what they pay for any used cars. They keep their hand up at the auction until they get the car.”
However, franchise dealerships do have the advantage of certified pre-owned programs coming from their captive finance arms, which help dealers manage their used-vehicle lots by providing a great landing spot for off-lease vehicles.
“[Honda and Kia] have been doing more CPO cars because customers are willing to pay the extra mile for that extra warranty and financing that the captives put out there,” Ritchie said. Another benefit to CPO programs is that it gives dealerships the chance to build loyalty with consumers. “A CPO owned Honda acts like a new Honda owner because they come back to us for service and they don’t go to the service station down the street.”
Though CPO programs are great for the used-car space, consumers aren’t buying new cars — and that isn’t exactly beneficial for the dealer trying to make a higher profit.
“For a 2018 Nissan Altima, [consumers] are looking at paying $20,000 – $23,000,” Kadri said. However, consumers have the option to purchase a 2016 Nissan Altima, but it’s $14,000 and certified pre-owned, and that’s where people see a lot of values in those cars. “The CPO market is huge right now — we can CPO [consumers’] cars, and that gives 7 years and 100,000 miles of warranty from the in-service date.”
While strong CPO programs provide certain benefits for the dealers selling used cars, dealers will always push to sell new vehicles because of the incentives that OEMs put on new models.
“If [a dealer] sells new cars, the factory will pay the dealer extra money,” Kadri said. “The OEM will say, ‘sell 125 new cars,’ and if the dealers do then, that’s extra profits.”