May Certified Pre-Owned Vehicles: Accelerating Forward

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1 May 2014 Certified Pre-Owned Vehicles: Accelerating Forward

2 Certified Pre-Owned Sales (millions) TABLE OF CONTENTS The Genesis of Certified Pre-Owned... 2 Consumer & Dealer Sentiment Aligned... 3 Late Model Supply Helping to Drive CPO Sales... 4 CPO Premiums: Consumer Expectations vs. Actual... 6 Conclusion... 7 At NADA Used Car Guide... 9 Certified Pre-Owned Vehicles: Accelerating Forward The Genesis of Certified Pre-Owned It might come as a surprise to many consumers that manufacturer-sponsored certified pre-owned (CPO) used vehicle programs have been around for the better part of 20 years now. Conceived as a means to protect residual values and address the large number of off-lease vehicles hitting the used market, manufacturers promoted CPO vehicles as a cost-effective alternative to purchasing new. Manufacturers encouraged consumer demand for certified vehicles by reconditioning them to like-new standards and extending bumper-to -bumper and powertrain warranties to reduce repair cost fears. In short, CPO gave consumers a third option for auto purchases in addition to new and used: superior used. After growing rapidly through its infancy stage at the beginning of the 2000s, CPO sales experienced just incremental gains in the years that followed. Hindered by higher costs and limited awareness, CPO sales increased by only 200,000 units from 2003 to 2011 and deliveries consistently fell between million units over the period. Manufacturer Certified Pre-Owned Vehicle Sales Calendar Year Source: Autodata NADA Used Car Guide 8400 Westpark Drive McLean, VA nada.com/b2b 2

3 Number of Pages CPO sales began to take off in 2012, however, due in part to recovering auto demand in general as well as increased awareness of, and consideration for, CPO units among the more value-conscious post-recession consumer. Google Search Results for "Certified Pre-Owned Car" The number of pages returned for the phrase "certified pre-owned car" by calendar year. 2,500,000 2,000, % since 2011 CPO sales reached an all-time high of 2.1 million units in 2013, up 15% from 2012 s figure of 1.8 million. With both late model supply and consumer awareness growing, sales are on pace to hit another record this year. In fact, CPO sales through April stood at nearly 750,000 units, up 11% on a prior-year basis and well ahead of the 3% rise in both new and used vehicle sales. 1,500,000 1,000, ,000 0 Source: Google Calendar Year To get a better understanding of certified pre-owned sales trends and what s fueling growth, May s edition of NADA Perspective reviews consumer and dealer sentiment toward CPO vehicles, how manufacturer sales have unfolded, and CPO pricing trends. Consumer & Dealer Sentiment Aligned Certified pre-owned vehicles benefit consumers and dealers in a variety of ways. Consumers are able to purchase a fully reconditioned used vehicle with warranty coverage similar to a new one, but at a much lower price. These attributes form the basis of CPO s value proposition for consumers. AutoTrader.com s 2013 study, Certified Pre-Owned: Understanding the Customer, revealed that the number one reason why perspective CPO buyers consider buying certified is because of peace of mind. This point goes hand-in-hand with the second most cited reason, CPO s attractive extended warranty coverage. AutoTrader.com also points out that new vehicle affordability and economic concerns are major reasons driving buyers to CPO units. Another benefit is access to low rate financing as most manufacturers offer reduced interest rates as an incentive to buy CPO vehicles. This increases affordability and offsets a portion of their higher upfront costs. As for dealers, CPO sales support current and future profitability and strengthen customer loyalty. Since a CPO vehicle is under warranty, consumers are more apt to return to their original dealer for maintenance and repairs than go to an independent repair shop. NADA Used Car Guide 8400 Westpark Drive McLean, VA nada.com/b2b 3

4 Annual Change Annual Change This increases service and parts business and presents the dealer with an extended audition to leave a favorable impression so the customer keeps coming back whether for service or another vehicle purchase after the warranty has expired. Further, data shows that certified vehicles remain on dealer lots for far less time than non-certified ones. Dealers have consistently reported in NADA surveys that CPO vehicles sell 1 2 weeks faster than otherwise; this not only increases throughput, but also reduces the amount of money dealers have to allocate to floor plan expenses. Late Model Supply Helping to Drive CPO Sales The sharp increase in CPO demand that has occurred over the past two years has come at an opportune time for manufacturers. After years of declines stemming from the falloff in new vehicle sales during the recession, late-model supply or the primary pool from which CPO vehicles are derived finally started growing again in Per NADA Used Car Guide s used vehicle supply forecast, late-model supply is expected to grow by 8% in 2014 and another 9% in 2015; combined, the 17% increase in used supply through 2015 will act as an additional catalyst supporting a continued increase in CPO sales. Brands experiencing the largest increases in latemodel supply have also realized some of the biggest gains in CPO sales. For example, NADA estimates that late-model supply for Kia and Subaru grew by 17% and 13% in 2013, respectively, figures exceeded only by VW s 20% rise. Kia and Subaru were also at the top of the non-luxury CPO sales growth leaderboard last year, as deliveries for the two increased by 72% and 45%, respectively. As for VW, CPO sales rose by a more modest 9% in So far in 2014, 12 of the 15 mainstream brands reviewed have reported gains in CPO sales on a prioryear basis. Sales for the top three performers Kia, Subaru and Hyundai are up by 44%, 37%, and 26%, respectively. Not coincidentally, NADA estimates that late-model supply will grow the most for Kia and Hyundai this year, while supply growth for Subaru is expected to be among the industry leaders. Annual Change in Mainstream Brand Used Vehicle Supply Vehicles to 5 years in age 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% CY 2013 CY 2014 CY 2015 Annual Change in Luxury Brand Used Vehicle Supply Vehicles to 5 years in age 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% CY 2013 CY 2014 CY 2015 NADA Used Car Guide 8400 Westpark Drive McLean, VA nada.com/b2b 4

5 Units Sold (Thousands) Units Sold (Thousands) Late-model supply for luxury brand Land Rover is expected to grow more than any other premium nameplate this year and so far the brand s year-todate CPO sales improvement of 66% is ahead of other luxury makes. Following closely behind, CPO deliveries for Jaguar and Infiniti are up by a combined average of 61%, while Lincoln has increased CPO sales by 20% year-to-date. It will be interesting to see if Lincoln can maintain its solid CPO performance as NADA expects that late-model supply for the brand will rise by a relatively mild 5% this year. Mainstream Brand CPO Sales Calendar Years Source: Autodata BMW, Mercedes-Benz and Audi have grown CPO sales by 14% apiece and NADA estimates that supply for the group will increase by respective figures of 8%, 11% and 15% over the course of the year. Certified growth for Lexus and Acura has lagged other luxury brands, with sales for the two up by 3% and 2%, respectively. Luxury Brand CPO Sales Calendar Years NADA expects used supply to be flat in 2014 for Lexus, which is likely playing a role in holding back CPO sales growth. It should be noted that while growth has been mild, more than 24,000 Lexus CPO 20 0 Source: Autodata vehicles have been sold so far this year, third most among luxury brands. Things should improve for Lexus in 2015, as NADA estimates that late-model supply will be 8.4% higher than this year s expected level. Mainstream Brand CPO Retail Sales 2013 v. 2014, YTD Make 2013 YTD 2014 YTD % Change Buick 9,055 11,175 23% Chevrolet 83,582 93,017 11% Chrysler 8,285 9,036 9% Dodge 18,311 21,531 18% Ford 62,390 77,672 24% GMC 16,258 20,471 26% Honda 78,567 77,980-1% Hyundai 23,953 30,278 26% Jeep 12,433 15,658 26% Kia 9,625 13,830 44% Mazda 11,518 13,533 17% Nissan 36,858 43,783 19% Subaru 10,320 14,150 37% Toyota 120, ,598-4% Volkswagen 31,988 29,393-8% Source: Autodata Luxury Brand CPO Retail Sales 2013 v. 2014, YTD Make 2013 YTD 2014 YTD % Change Acura 13,116 13,439 2% Audi 12,311 14,016 14% BMW 26,314 30,011 14% Cadillac 6,316 6,705 6% Infiniti 3,629 5,802 60% Jaguar 1,172 1,894 62% Land Rover 2,258 3,750 66% Lexus 23,388 24,186 3% Lincoln 6,741 8,099 20% Mercedes-Benz 33,091 37,716 14% Porsche 3,260 3,672 13% Volvo 3,786 4,037 7% Source: Autodata NADA Used Car Guide 8400 Westpark Drive McLean, VA nada.com/b2b 5

6 Volume CPO Premiums: Consumer Expectations vs. Actual Certified pre-owned vehicles cost more than their non-certified counterparts because of the expenses associated with a comprehensive inspection, repairs required to meet manufacturer certification standards (e.g., worn tires replaced, cracked windshield repaired, worn brake pads replaced, etc.) and the bumper-to-bumper extended warranty. Most CPO programs also include roadside assistance and a free vehicle history report, and some include free scheduled maintenance (e.g., oil changes, tire rotations, etc.). Results from AutoTrader.com s 2013 CPO study showed that many consumers are still unfamiliar with all that goes into certifying a used vehicle. More than a third of new car shoppers were unaware that a certified vehicle was fully inspected and 45% didn t realize that a CPO vehicle came with an extended warranty. Used car shopper inspection and warranty awareness wasn t any better, as 32% and 46%, respectively, were unfamiliar with these program aspects. Consumer unfamiliarity with CPO benefits can largely explain why sizable percentages of shoppers are unwilling to pay a premium for a CPO vehicle. AutoTrader.com data shows that while 62% of new car buyers are willing to pay a CPO premium, just 34% of used car shoppers are. But while premium willingness is non-existent for some, the amount that agreeable shoppers are prepared to pay has doubled. In AutoTrader.com s 2011 CPO survey, the average acceptable CPO premium for new and used car shoppers was $1,245 and $1,292, respectively, but these amounts jumped to $2,940 and $2,163 in the 2013 survey. A review of CPO sales data indicates that premiums are predominantly well below the consumer thresholds derived from AutoTrader.com s latest report. Records collected by NADA from mainstream and luxury manufacturers show that 75% of CPO transactions carried premiums ranging from $500- $2,000; this disparity implies that CPO s value proposition actually exceeds consumer expectations. As far as the differences in CPO prices are concerned, NADA concludes that prices are dictated by four primary factors vehicle brand, age, price and the competitiveness of a given manufacturer s CPO NADA Analysis: Distribution of CPO Premiums The CPO premium relative to a non-certified retail transation price % of transactions have a CPO premium ranging between $500 - $2,000. CPO Premium NADA Used Car Guide 8400 Westpark Drive McLean, VA nada.com/b2b 6

7 CPO Value program (i.e., length of warranty, mileage allowance, etc.). Correspondingly, these factors and CPO sales data form the basis of NADA s certified pre-owned value methodology and dictate the CPO values found in NADA s Official Used Car Guide. Generally speaking, CPO values are greatest for newer and more expensive models backed by programs that extend bumper-to-bumper and powertrain warranties out the furthest, while values are lower for older, less expensive and less competitive programs. NADA Official Used Car Guide Certified Pre-Owned Values Average CPO value by model year and vehicle type $2,750 $2,500 $2,250 $2,000 $1,750 $1,500 $1,250 $1,000 $750 $500 $250 $ *Note: 2008 MY averages are higher due to changes in Brand mix. Model Year Luxury Mainstream Total Currently, NADA s used vehicle certified pre-owned premiums range from an average of $1,532 for 2008 model year vehicles to $1,737 for 2014 vehicles*; mainstream brand CPO values range from an average of $1,166 to $1,371, while luxury values range from $1,992 to $2,381. At the brand level and specific to three-year old 2011 model year vehicles, Ford s CPO value average of $1,486 topped other mainstream CPO values, but was followed closely by GMC s average of $1,424. With respective figures of $1,284 and $1,222, Toyota and Chevrolet CPO premiums are a bit further down the line, while Scion, Suzuki and SMART each carry CPO premiums below $900. As for luxury brands, Mercedes average premium of $2,909 is currently $300 higher than second-place Porsche s $2,605 average, while Acura s $1,525 figure is the lowest of the group. Conclusion With demand and supply now moving solidly in the right direction, CPO vehicle sales should achieve meaningful growth over the next few years. NADA CPO Values: Mainstream Brands 2011 model year vehicles FORD GMC LIGHT DUTY TOYOTA CHEVROLET NISSAN DODGE SUBARU BUICK HYUNDAI JEEP CHRYSLER VOLKSWAGEN HONDA MINI KIA MAZDA MITSUBISHI SCION SUZUKI SMART $750 $949 $883 $844 $1,083 $1,067 $1,064 $1,050 $993 $987 $1,284 $1,222 $1,190 $1,182 $1,175 $1,148 $1,134 $1,132 $1,486 $1,424 $0 $500 $1,000 $1,500 $2,000 NADA CPO Values: Luxury Brands 2011 model year vehicles MERCEDES-BENZ PORSCHE LEXUS JAGUAR LAND ROVER BMW AUDI CADILLAC LINCOLN VOLVO INFINITI ACURA $1,709 $1,650 $1,525 $2,068 $2,018 $1,878 $1,870 $1,855 $2,175 $2,161 $2,909 $2,605 $0 $1,000 $2,000 $3,000 $4,000 *Note that of the 37 brands with CPO programs, 13 cover vehicles from the 2008 model year or newer and 21 from the 2009 model year and up; as a result, differences in brand mix (i.e., fewer CPO-eligible mainstream vehicles for the 08 model year) will influence model year averages. NADA Used Car Guide 8400 Westpark Drive McLean, VA nada.com/b2b 7

8 To ensure this opportunity is maximized, manufacturers will need to enhance marketing efforts to clearly outline to consumers all that certification entails. The substantial benefits associated with buying CPO the rigorous reconditioning, extended warranty coverage and peace of mind that the vehicle is backed by the factory and its dealer partners should make the task less challenging. Having a better understanding of CPO premiums should help support certified consideration as well, especially since CPO premiums deemed tolerable by consumers are above current sales levels. In addition, consumers who currently believe they can t afford a CPO vehicle might reconsider if they had a realistic idea as to what the additional cost would be and the relative value of benefits for which they would be paying. Given that certified pre-owned sales account for roughly 13% of all used vehicle sales at franchised dealerships, there is huge potential for CPO growth moving forward. In the end, cultivating consumer familiarity and understanding will play a lead role in dictating how quickly and how high CPO sales grow. NADA Used Car Guide 8400 Westpark Drive McLean, VA nada.com/b2b 8

9 AT NADA USED CAR GUIDE What s New Available on iphone, ipad and Android devices, the recently enhanced NADA MarketValues is the fastest, easiest and most cost-efficient way to make smart vehicle decisions on the go. This native app allows you to get your NADA values anywhere, anytime without an Internet connection. Subscriptions start at $50 per month and when you download NADA MarketValues from Google Play or the Apple Store for $1.99, you ll receive a FREE 30-day trial! On the Road Dan Ruddy and Larry Dixon are attending the 18th Annual Non-Prime Auto Financing Conference on May in Fort Worth, Texas. Larry is speaking on a panel titled Optimizing Collateral Values in Auto Financing on Thursday, May 29 at 4:00 p.m. Mike Stanton and Jim Dodd are attending the NIADA Convention and Expo from June in Las Vegas, where NADA Used Car Guide is co-sponsoring the National Quality Dealer Awards. Stop by booth 414 to see Jim. About NADA Used Car Guide Since 1933, NADA Used Car Guide has earned its reputation as the leading provider of vehicle valuation products, services and information to businesses throughout the United States and worldwide. NADA s editorial team collects and analyzes over one million combined automotive and truck wholesale and retail transactions per month. Its guidebooks, auction data, analysis, and data solutions offer automotive/truck, finance, insurance and government professionals the timely information and reliable solutions they need to make better business decisions. Visit nada.com/b2b to learn more. Financial Industry, Accounting, Legal, OEM Captive Steve Stafford x7275 sstafford@nada.org Director, Sales and Customer Service Dan Ruddy x4707 druddy@nada.org Credit Unions, Fleet, Lease, Rental Industry, Government Doug Ott x4710 dott@nada.org Automotive OEMs Stu Zalud x4636 szalud@nada.org Automotive Dealers, Auctions, Insurance Jim Dodd x7115 jdodd@nada.org PR Manager Allyson Toolan x7165 atoolan@nada.org Business Development Manager James Gibson x7136 jgibson@nada.org NADA Used Car Guide 8400 Westpark Drive McLean, VA nada.com/b2b 9

10 NADA CONSULTING SERVICES NADA s market intelligence team leverages a database of nearly 200 million automotive transactions and more than 100 economic and automotive market-related series to describe the factors driving current trends to help industry stakeholders make more informed decisions. Analyzing data at both wholesale and retail levels, the team continuously provides content that is both useful and usable to the automotive industry, financial institutions, businesses and consumers. Complemented by NADA s analytics team, which maintains and advances NADA s internal forecasting models and develops customized forecasting solutions for automotive clients, the market intelligence team is responsible for publishing white papers, special reports and the Used Car & Truck Blog. Throughout every piece of content, the team strives to go beyond what is happening in the automotive industry to confidently answer why it is happening and how it will impact the market in the future. Senior Director, Vehicle Analysis & Analytics Jonathan Banks x4709 jbanks@nada.org Senior Manager, Market Intelligence Larry Dixon x4713 ldixon@nada.org ADDITIONAL RESOURCES Automotive Analyst David Paris x7044 dparis@nada.org Automotive Analyst Joseph Choi x4706 jchoi@nada.org Guidelines Updated monthly with a robust data set from various industry sources and NADA s own proprietary analytical tool, Guidelines provides the insight needed to make decisions in today s market. White Papers NADA s white papers and special reports aim to inform industry stakeholders on current and expected used vehicle price movement to better maximize today s opportunities and manage tomorrow s risk. NADA Perspective Leveraging data from various industry sources and NADA s analysts, NADA Perspective takes a deep dive into a range of industry trends to determine why they are happening and what to expect in the future. Used Car & Truck Blog Written and managed by the Market Intelligence team, the Used Car & Truck Blog analyzes market data, lends insight into industry trends and highlights relevant events. Connect with NADA Read our Blog Follow Us on Twitter Find Us on Facebook Watch Us on YouTube Facebook.com/NADAUsedCarGuide Youtube.com/NADAUsedCarGuide Disclaimer: NADA Used Car Guide makes no representations about future performance or results based on the data and the contents available in this report ( Guidelines ). Guidelines is provided for informational purposes only and is provided AS IS without warranty or guarantee of any kind. By accessing Guidelines via or the NADA website, you agree not to reprint, reproduce, or distribute Guidelines without the express written permission of NADA Used Car Guide. NADA Used Car Guide 8400 Westpark Drive McLean, VA nada.com/b2b 10