By Ben Bartosch, Manager of Forecast Analytics, J.D. Power

Yes, 2019 was a banner year for certified pre-owned (CPO) sales in the U.S. Overall, CPO sales outperformed 2018 by 4.1%, reaching 2.8 million units sold. Impressive indeed.

The growth in this segment of the market reflects a growing recognition—among original equipment manufacturers (OEMs) and franchise dealerships—of the multifaceted value CPO brings to the equation. In addition to capturing margins that are significantly stronger than conventional used vehicle sales, CPO programs have defined a customer-lifecycle journey that builds brand loyalty, providing a long-term pipeline for new vehicle purchases.

As a result, the groundwork has been laid for CPO sales in 2020 to experience another record year. The market will be supported by the fact that the high-quality inventory of CPO-eligible vehicles that underpinned the market last year will remain in place over the next 12 months. Sales also will get a shot in the arm from an increasing number of value-conscious buyers who are increasingly buying into CPO’s Goldilocks value proposition of “not being too expensive” while “being somewhat high-end.”

CPO Leaders by Volume & Growth

At the brand level, Toyota was the undisputed 2019 CPO sales leader, outselling its closest competitor by approximately 100,000 units. The next closest competitor was Honda, followed by Chevrolet.

From a growth standpoint, Ram Pickup saw the largest increase in 2019 CPO sales, posting an impressive 32% gain. Subaru posted the second-highest growth rate just over 16%, followed by Mazda at just under 16%. For premium brands, Volvo records the largest growth with 25%, followed by Land Rover with 17%.

CPO Emerging as Gateway to New Vehicle Purchases

It is for this reason that a growing number of OEM and dealership decision-makers see CPO as a gateway to new-vehicle purchases. Three-year-old vehicles coming off leases today— a major source of CPO inventory— have a lot more content than five or seven years ago, allowing consumers to experience “like-new vehicle” purchases. With proper targeting and ongoing brand engagement, executives believe a significant percentage of CPO buyers can get converted to a new vehicle on their next purchase.

“Ongoing engagement” is the critical phrase.

To maintain and refresh CPO inventories in response to growing consumer demand, franchise dealerships will have to improve their ability to recapture eligible vehicles in the secondary market. Today, roughly 40% of eligible vehicles are sold as CPO, which leaves a tremendous amount of growth. This means that a significant percentage of new-car buyers are not returning to the dealerships that originally sold them their new cars for trade-ins or re-sales. With CPO sales emerging as an increasingly important aspect of the industry’s balance sheet, dealerships should proactively develop strategies for reaching out to previous customers to entice them to bring their vehicle back when they are ready to sell so that it can get placed back into service as a CPO.

Competition from Non-Franchise Certified Programs Will Grow

That, of course, is easier said than done, especially with how frictionless and transparent the used-vehicle market has become in today’s digital economy. It has never been easier or more convenient for consumers to sell a car or truck.

Moreover, brand-specific franchise dealers are not the only players in the market that have noted the uptick in demand for CPO vehicles. We expect to see interesting movement among independent dealerships as they work to introduce or enhance their own certified programs to market. Carmax and Carvana are two major examples of non-franchise dealerships with certified vehicle initiatives that are growing in popularity.

As certified used-vehicle programs evolve, it will be important to educate consumers on the major distinctions, most of which revolve around who offers the warranties. In traditional franchise CPOs, the manufacturers back the warranty, while independent dealers underwrite their own certified vehicle initiatives. In 2020, we can expect to witness a race to see whether consumers can be made to care one way or another.