Car & Truck Blog

CPO is Performing Better Than You Think

There is way more than meets the eye when it comes to understanding the Certified Pre-Owned (CPO) environment. As we reach the halfway point of 2019, a basic analysis of the CPO market shows a solid -- if unremarkable -- performance.

 

While the CPO market grew by 2% in terms of sales this year, a cursory evaluation might lead to the conclusion that dealers are better off sticking with regular used-vehicle inventory -- since that market expanded by 6%, or three times the rate of CPO.

 

However, when taking other factors into account -- such as rate of return, days to turn, finance and insurance, and vehicle costs -- a very different picture emerges. When you look at all of the data in context, it becomes clear that the CPO market’s average gross rate of return actually increased by 4-percentage points -- compared to only a 2-percentage point rise in the general used vehicle market. Given the cautious market outlook that we all shared at the beginning of the year -- over interest rates concerns and slowing sales -- the success of the used vehicle market -- and especially the CPO market -- during the first 2 quarters of 2019 is a welcome surprise.

 

Segment by Segment CPO Market Analysis

 

There were several brands that saw an increase in CPO sales from the first half of this year. In terms of CPO sales percentage in the mainstream market, Mazda saw the largest increase with Subaru coming in second and Volkswagen at third. The leader in sales share was Toyota. For luxury bands, Volvo led in growth of sales percentage, Mercedes kept its place at the top in sales share, and Audi saw the largest increase of nearly 2-percentage points in its sales share. 

 

Historically, in the second half of the year, CPO sales begin to weaken, and gross rate of returns begin to decline. However, as the 2019 used vehicle market continues to power along, the expected declines may only be slight...if they occur at all. 

 

Although sales are important, one of the key indicators for the CPO market worth examining revolves around what is going on in terms of “days to turn.” Several manufacturers reported to J.D. Power that they are significant improvements in this area for CPO. Of mainstream brands, Hyundai reduced its CPO inventory days to turn by 18 days with Mitsubishi posting a reduction of 15 days.

 

Looking at the luxury brands, Land Rover CPO vehicles made a significant improvement by lowering its days to turn by a whopping 41 days, and Mercedes followed by decreasing its days to turn by 26 days compared to Q2 2018.

 

Another, and highly important factor measuring success and improvement in CPO programs, is gross rate of return (GGR). The rate of return in the CPO mass market showed Mitsubishi leading the way with nearly 20% growth over Q2 2018, while Honda took over the top spot from Nissan with the highest GGR, 33.8%. On the luxury side, Lexus moved into the top spot with strongest GGR for Q2, 19.7%, while Jaguar’s GGR grew by the most, 8.9%.

 

CPO Delivers Margins in Tightening Used Vehicle Market

 

With an increasing number of CPO vehicles leaving dealer lots at quickening paces, J.D. Power has consistently observed that the balance of value and price seems to be the key component in this category of the expanding used vehicle market. As new car, truck and SUV retail prices rise, many consumers looking to purchase a vehicle are making their decisions based on affordability.

 

That is why we believe that the CPO market is such an important element in the portfolio. As market dynamics put downward pressure on used vehicle prices, the ability of CPO to generate higher margins -- while keeping consumers loyal to the brands they love -- seems like a key ingredient in the recipe for success as we move into 2020 and beyond.

 

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Ben Bartosch is manager of forecast analytics at J.D. Power. Previously he was an analyst, Public Sector Consulting, for IHS Markit.