After being rocked by the COVID-19 pandemic, sales of certified pre-owned vehicles are back on the rise.

During the past six months, most brands have seen growth in their CPO programs from both traditional and new sources as dealers decided to certify more of their used-vehicle inventory. In the current used-vehicle marketplace, that is a sensible decision because the data dealers provide directly to J.D. Power shows that when a vehicle is certified, it leaves the lot faster than if it wasn’t certified.

Quicker turns might be counterintuitive since reconditioning and the certification process take time to complete. Because of those factors, some dealers might reflexively believe the opposite. But when we look at days to turn, there’s a healthy buffer between the days to turn for a certified unit and a non-certified unit. (It should be noted in this comparison that a non-certified unit is defined as a unit that could have been certified but the dealership chose not to do so.)

While the used-vehicle market isn’t as strong as it was for most of the past year, prices are higher than before the pandemic—and they are expected to remain elevated this year. In a market that is weakening with used-vehicles prices trending downward, a stronger emphasis on CPO should enable dealers to compete better and retain margin even as demand falters.

At the same time, during the next several months, CPO programs will be negatively affected by the relative lack of fleet sales and retail leasing that occurred during the past couple of years. The market might take two or even three years to see a robust volume of used vehicles. If we look at things proportionally, there will still be a healthy number of CPO-eligible units.

Second-tier CPO spurs growth

The most important trend in the certified pre-owned business is second-tier CPO. These programs, which have been spreading across many brands in the past year or so, enable dealers to OEM-certify vehicles previously ineligible for an OEM program.

The vehicles are older and have higher mileage than those qualifying for a traditional first tier CPO program. Often the vehicles are as old as 10 years and can have 100,000 miles or more on their odometers. These certified vehicles are covered by a much shorter service contract than offered on conventional CPO vehicles.

Most often, that coverage is for 90 days instead of the multiple years typically provided by a traditional certified pre-owned program. At least six OEMs in the mainstream market now have programs like this, and two premium brands, Acura and Infiniti, are also offering this type of supplemental certification. It’s reasonable to expect other OEMs to follow suit, especially now that they’ve seen success from their competitors in the space.

Much of the recent growth in CPO is coming from these second-tier programs. They are attractive to dealers because they offer them the ability to add lower-priced vehicles to their CPO inventory, something that is especially advantageous in an era when overall used-vehicle inventory is constrained. They also enable franchise dealers to offer factory-backed warranty coverage on older, less expensive vehicles. This helps them compete with national used-vehicle retailers like CarMax and Carvana.

An associated trend is the decision by a few select OEMs, mostly notably Ford and Nissan, to allow their dealers to certify vehicles bearing other brands. So, a customer might walk into a Ford or Nissan dealer and drive out in a factory-certified Chevrolet or Toyota. This CPO development, too, broadens the reach of the franchise dealer.

While these CPO innovations offer benefits, the overall effects are still being determined. Perhaps the most important questions regarding the second tier CPO programs revolve around their potential effects on brand and dealer loyalty. Since developing and maintaining loyalty are considered two of CPO’s chief benefits, definitive answers to those questions will be critical in assessing the overall effectiveness of second tier CPO programs.

Reasons for concern

 The new programs have advantages for both dealers and OEMs. They offer the OEMs a level of control over older vehicles that they never had before. And they offer dealers the opportunity to certify older vehicles that were previously ineligible and profit from those sales. But the concern is the potentially negative effects the second-tier programs will have on loyalty.

Our data shows clearly that traditional CPO programs enhance loyalty. In the fourth quarter of 2022, when a certified unit was traded in, that customer was 16% more likely to stay with the brand in the mass market segment and 14% more likely to stay with the brand in the premium segment. In an era when the overall brand loyalty rate hovers around 50%, the added loyalty engendered by a CPO program is an important source of future sales.

These new programs have the potential to affect loyalty in a negative way. The threat is most pronounced from the programs that enable the certification of other-brand vehicles. This essentially facilitates brand defection. Of course, that is antithetical to one of the key OEM goals for their CPO programs — developing a source of new-vehicle buyers loyal to the brand. If you’re going to jeopardize that conversion, then where do your new vehicle buyers come from?

On the other hand, the second-tier programs are already demonstrating their ability to enhance dealer profitability. And though data doesn’t clearly demonstrate this yet, it is likely such programs also have a positive effect on dealer loyalty.

Since well-funded, profitable dealerships with strong customer loyalty are valuable to OEMs, those positive factors might outweigh the possible negatives of brand defection at the CPO level.

On another positive note, the new second-tier CPO programs are putting the CPO option in front of a set of buyers who previously never considered CPO. These are often younger, less affluent buyers for whom traditional 2- and 3-year-old CPO vehicles are out of reach financially.

But the new programs allow them to sample CPO benefits for the first time. Many of these first-time CPO buyers may start their individual brand and dealer loyalty journeys with their first-time CPO purchase.

While that remains to be seen, there is no doubt that certified pre-owned programs will continue to evolve as carmakers and dealers seek to optimize their benefits. At the same time, CPO programs give many car buyers the rationale to purchase used vehicles, which is positive for the entire industry.

Ben Bartosch is the manager of CPO solutions at J.D. Power