Low days’ supply of new inventory driving an increase in CPO sales across brands

Posted by George Augustaitis on July 17, 2020

Historically, consumers have turned to the used vehicle market during recessionary times as an alternative to a new vehicle purchase. That’s because used cars tend to be more affordable, allowing consumers to avoid the burden of a high monthly payment when money might be tight.

But there’s another factor driving the current shift to the used vehicle market—in particular, Certified Pre-Owned vehicles (CPOs)—and that’s low days’ supply of new inventory. The shortage of new vehicles is a result of plants remaining closed, and it’s making it difficult for consumers to find the specific new cars they want. While new and used vehicle sales posted double-digit losses in June, CPO sales posted an increase of 8.5% as compared to June 2019.

cpo-sales-numbers

Below, I’ll give examples of how days’ supply is impacting two brands and provide insight into what dealers can do to overcome this challenge.

Low days’ supply: Toyota and Nissan

Though new vehicle levels across the industry were low at the end of May, they did not reach an all-time low. The industry average for days’ supply at the end of May 2020 was 62 days—only one day less than last year’s average days’ supply. This makes it seem as if the industry is on trend with the seasonality of production.

However, the numbers vary greatly from brand to brand. For example, Toyota’s days’ supply at the end of May 2020 was only 43—a whole ten days less than it was in May 2019. On the other hand, Nissan, a brand that had been seeing a decline in overall sales since last year had a days’ supply of 83 at the end of May 2020, as compared to a days’ supply of 55 at the same time last year.

Looking at days’ supply at the vehicle level tells a similar story as brand-level numbers. Due to production shutdowns due to COVID-19, popular selling vehicles are at historic lows, while vehicles that have been in a selling slump have ample days’ supply. For instance, the Toyota RAV4, has a days’ supply of 32 at the end of May 2020 — not far off its May 2019 days’ supply of 39. On the other end of the spectrum is the Nissan Rogue. It has a days’ supply of 108 at the end of May 2020, up from 68 at the same time last year.

Days’ Supply
Jun 20 May 20 Jun 19
Small SUV 54 61 64
Small Standard SUV 54 59 64
      Toyota RAV4 31 32 46
      Honda CR-V 57 52 82
      Chevrolet Equinox 53 62 72
      Subaru Forester 19 36 18
      Nissan Rogue 94 108 66
      Ford Escape 67 75 75
      Mazda Mazda CX-5 36 50 61
      Jeep Cherokee 77 124 108
      Hyundai Tucson 81 57 65
      Volkswagen Tiguan 48 67 56
      Hyundai Santa Fe 51 47 38
      Kia Sorento 29 36 50
      Kia Sportage 42 49 43
      Jeep Compass 101 83 79
      GMC Terrain 81 62 75
      Mitsubishi Outlander 130 178 46
      Mitsubishi Eclipse Cross 191 257 85

Finding opportunity in low levels of new vehicle inventory

For some brands, a higher days’ supply when the overall industry has remarkably low numbers is a positive thing. Nissan could potentially capitalize on this by offering strong incentives and conquest money to pull consumers away from other brands. Their biggest hurdle is that its Rogue is long in the tooth and due for a refresh this year.

On the other hand, consumers set on a specific vehicle like the RAV4 may turn to the CPO market to find one. In fact, while new RAV4 inventory remains sparse, CPO RAV4 sales were up about 56% last month compared to the same time last year. However, the Nissan Rogue, which has ample new vehicle inventory, saw a 0.5% decline in CPO sales when comparing June 2020 to June 2019.

While this article compares only two vehicles, an overall lack of new-vehicle supply will likely push some consumers to 1- to 2-year-old, like-new CPO vehicles if they can’t find the new vehicles they’re searching for. Still, affordability will remain a key factor. Many will turn from new to CPO vehicles to avoid higher monthly payments while they’re uncertain about their personal finances, job security, and the economy.

What dealers can do in the meantime

The biggest issue the industry will face as production comes back online is the supply of vehicles. As COVID-19 cases continue to rise, and the possibility of a second wave of closures looms over many states, finding the right used and CPO vehicles in your area is crucial. For dealers that sell brands or models with low days’ supply, be on the lookout at auctions for vehicles that are popular among consumers and easy for you to CPO. For example, if you’re a Toyota dealer, look for RAV4 CPOs that are the properly equipped and popular colors. This will keep cars moving off your lot until new vehicle inventory levels return to normal.

Additionally, dealers should expect their performance ratios to change until new vehicle production returns to normal. Dealers that track the number of leads per new vehicle will likely see numbers increase, especially for the most popular vehicles with low days’ supply. Dealers that track their new to used ratio should expect a shift to selling more used compared to last year.

Until production levels ramp up again and there’s a cure or vaccine for COVID-19, the most predictable thing in the automotive market right now is change—a change in inventory, demand, metrics, and consumer behavior.

Topics: covid-19, CPO, days' supply, industry analysis, inventory