Since the initial shocks of the COVID-19 pandemic began to wane midway through 2020, certified pre-owned programs have proved to be a strong lever for improving dealership margins in a difficult economy that has dampened vehicle supply and shifted consumer demand across the automotive industry.
To be clear, 2020 was a challenging year. Sales in all segments were down because of temporary dealership closures, supply chain disruptions and financial constraints on consumers.
Having said that, it was not all doom and gloom. While there were decreases in new-vehicle purchases driven largely by production constraints and higher prices, strong CPO and used-vehicle sales during the second half of the year led to higher used pricing which normalized in the final quarter of 2020. As a result, pricing behaved as we would typically expect for end-of-year sales.
This is exciting for lots of reasons. In a market in which we would expect brands to get pummeled, we saw unique opportunities for CPO vehicles. Volvo, Subaru, Dodge, Ram and Mazda put significant focus on certifications in 2020 and were rewarded with their strongest CPO sales ever. They set an important example for others to follow because profit margins for CPO vehicles widened against non-CPO cars, especially in the third quarter. Those that decided to forego investing in the certification process on eligible vehicles saw decreases in net profits.
One of the main drivers of margin delivered by CPO inventory was the fact that the vehicles moved off the lot faster than at pre-pandemic rates. What’s more, CPO inventory consistently sold faster than conventional used vehicles.
Another area in which CPO continued to deliver value for dealers was in the loyalty category. While overall CPO loyalty did see a slight drop in 2020, the margin between CPO loyalty and non-CPO for mass-market brands held. CPO vehicles performed about 10 percentage points better throughout the year than non-CPO cars — CPO loyalty held above 50 percent throughout most of 2020 before improving in the fourth quarter. Premium-brand CPO loyalty remained stable throughout the year, performing at times 20 percent above non-CPO counterparts.
Looking ahead, J.D. Power is projecting a slightly shaky first quarter as the country continues to assess the trajectory of the pandemic as well as its impact on the economy and consumer behavior.
However, while we also expect to see continued supply chain constraints, we do believe that the inventory on dealership lots will largely be made up of CPO-eligible vehicles.
How dealers choose to manage that inventory is the critical question.
That said, our mid- to long-term outlook is that the combination of stronger stimulus spending and rising consumer confidence will cause prices to remain strong in both the wholesale and used markets. It is for this reason that we encourage dealers to continue investing in certification.