By David Paris, Senior Analyst, J.D. Power Valuation Services
In preparing for 2020, the automotive industry has been making a list and checking it twice to determine which vehicles will continue their model cadence into the immediate future, and which… will not.
Over the past few years, we have seen scores of announcements for the planned discontinuation of vehicles — especially sedans — as the industry calibrates its portfolio to meet new vehicle purchase preferences. On the mainstream side of the market, recently sedans like the Taurus, Focus, Fiesta, Cruze, and Impala have either joined or are expected to join the list of discontinued models. This trend will continue in 2020 as automakers are concentrating their efforts on expanding SUV production.
This opens an important question about what happens to the valuation of vehicles that are — effectively — orphaned.
Shrinking Supply and Surging Demand Support Discontinued Sedan Vehicle Valuation
The good news, according to J.D. Power analysis, is that discontinued passenger sedans are tracking to be on par with vehicles that will continue to be available in the new-car market. In general, used sedan models have become more important than ever for dealers and consumers alike.
Dealers, for example, are enjoying a plethora of late-model used units, packed with great technology and safety features that are generating solid profit margins. Consumers are happily purchasing these used units at discounts that range anywhere from 30 to 50 percent from new model.
As automakers continue to announce plans to stop production of traditional passenger cars, supply constriction in the used markets is buttressing passenger vehicle valuation performance in the aftermarket. It is a trend that appears to be getting demand support as well. Used passenger cars are more popular than ever, which is why aftermarket prices for small, compact and midsize passenger vehicles are rising by six percent and nine percent in 2019 compared to the same period in 2018.
The fact that these dynamics are holding true for both non-discontinued and discontinued models is remarkable. It bucks the history of valuation performance of orphaned vehicles, which have tended to experience value retention challenges.
Discontinued Vehicles as CPO Candidates
As dealers explore their options for maximizing returns on used vehicles, discontinued vehicles may emerge as attractive and profitable candidates for Certified Pre-Owned (CPO) programs. Generally speaking, dealers generate higher profits on CPO sales compared to conventional used sales and tend to move off the lot more quickly. For discontinued vehicles, CPO programs — and the value-added service and maintenance support that is included — may present the pincer effect of offsetting consumer concerns about model discontinuation, while elevating margins.
