CPO sales rebound amid new-vehicle shortage

Demand for used vehicles has been high this year, and flooding this month from Hurricane Ida just sent more customers clamoring for cars at Planet Honda in Union, N.J.

Planet Honda isn't alone facing that growing demand. In times like these, General Manager Bill Feinstein said he and other dealership leaders he knows are choosing to sometimes not certify used vehicles that would otherwise qualify for automakers' certified pre-owned programs. Dealerships, particularly in parts of the Northeast hit hard by Ida's flooding, simply need to get cars and trucks ready for sale to meet demand.

"There [are] some [dealers] saying, 'Hey, you know what, it's going to take an extra three hours in my shop to make it a CPO, and I don't have enough cars on the lot,' " he said. "I think you can make those decisions."

While the need has intensified in recent weeks for Feinstein and others because of the storm, it's been a persistent theme for retailers across the country this year as new-vehicle inventory dwindled, putting more pressure on them to bolster their used stocks and quickly get those vehicles ready to sell. Yet, nationwide, CPO sales have risen anyway, swiftly rebounding after dipping in 2020.

Last year, driven by the drop in demand at the onset of the coronavirus pandemic, sales of certified vehicles fell 7.2 percent to 2,611,634, according to figures from the Automotive News Research & Data Center. It was the first drop since 2009 and the lowest annual volume since 2015. This year, CPO sales are up 12 percent through August compared with the first eight months of 2020.

According to J.D. Power data, the rate of certification this year is only a few percentage points lower than before the pandemic and the subsequent microchip shortage.

For mainstream brands, roughly 72 percent of same-brand used vehicles on dealership lots are eligible to be certified. Of eligible inventory, dealerships certified 38 percent of the vehicles in the second quarter this year, said Ben Bartosch, manager of CPO solutions at J.D. Power. That certification rate has hovered between 36 percent and 39 percent for the last five quarters.

The rate was 41 percent for the first quarter of 2019 and stayed above 40 percent until the fourth quarter that year. While dealerships are certifying at a lower rate, CPO sales are rising because the volume of certifiable inventory has grown, Bartosch said.

"When you look at things from a percentage standpoint, it shows that [dealers have] always had that inventory to certify, [but] they just weren't certifying it at really high rates," Bartosch said. "And now's the tricky time with that because consumers may see these newer vehicles coming into the used market and they think, 'Well, the vehicle's brand new. It maybe doesn't need to be certified.' "

Still, many car buyers see value in certification, as evidenced in vehicle turn rates, he said. Mainstream-brand CPO vehicles turn in 35 days vs. 55 days for non-certified, according to J.D. Power. For premium vehicles, it's 41 days for CPO vs. 66 days for non-certified.

In this tight market, the decision for dealers to certify sometimes comes down to whether the vehicle can be brought up to snuff in a timely manner.

Feinstein said he has foregone certification when needed parts were on back order and unlikely to arrive for days or even weeks.

"Do I hold the car up for a week to certify it until the back-ordered part releases, if I'm lucky? Or do I just go ahead and not certify the car?" he said.

The industry's leading automakers for CPO sales were off to a solid year through August. Toyota Motor North America's certified sales jumped 21 percent to 343,470 vehicles in the first eight months of 2021. General Motors' CPO sales increased 11 percent to 248,301. American Honda was up 15 percent to 222,598. Stellantis rose 4.5 percent to 208,435. Ford Motor Co. also increased 5.1 percent, to 151,193.

For Toyota, certified vehicles have turned at a faster rate this year than before the pandemic, said Ron Cooney, Toyota's CPO sales operations manager.

Toyota's certified inventory is turning at a rate of 15.5 times a year, for about a 20-day supply, Cooney said. A typical turn rate before the pandemic and chip shortage, when sales were robust, was a 60-day supply.

"At any given moment today, my ground stock inventory is actually down slightly from last year, the end of last year, but my turn rate is up really, really high," he said.

This has led to a "huge spike" in sales of both certified and non-certified used Toyotas, Cooney said. Toyota has had several record months for CPO sales this year.

Kayla Reynolds, manager of economic and industry insights at Cox Automotive, said Cox data shows the new-vehicle shortage — and particularly the resulting high price tags for those cars and trucks — is boosting CPO sales performance.

In July, the average new-vehicle transaction price was $42,736, up 8 percent from July 2020, according to Cox's Kelley Blue Book.

"That's definitely going to shift those buyers who are kind of on the edge into the CPO market," Reynolds said. "So we do think that as long as new-vehicle prices, and also new-vehicle inventory, continues to be impacted, there will still be some demand for the CPO market."