Everybody Loves Certified Used Cars
By Steve Finlay Ward's Dealer Business, Dec 1, 2007 12:00 PM

Everyone loves certified pre-owned vehicles. Well, almost everybody; there are detractors for one reason or another.

Dealers love them because they offer potentially higher profit margins, enhanced customer satisfaction and typically faster inventory turns than ordinary used cars.

Auto makers love them because they are a good way to remarket off-lease vehicles and boost residual values, which factor into new-vehicle demand and prices.

Consumers love them because they are reliable, come with warranties, undergo multiple-point inspections and offer more vehicle for the money than do new models.

The result is a recently created vehicle segment — dubbed “nearly new” — positioned between new and used, and with a distinctive demographic set to go with it.

Although some people still think “pre-owned” is a pretentious way to describe a used car, the remarketing industry has fused together “certified” to “preowned” and come up with a shorthand moniker, CPO.

“Certified” cars have been around for decades, with individual dealers often doing the requisite inspecting, reconditioning and certifying. But the movement really took off about 10 years ago after auto makers began introducing their own programs.

Since then, CPO sales have shot up. From 2003 to 2006, they doubled, going from 623,000 units to 1.27 million.

Auto makers' programs are orderly and disciplined efforts, with dealers paying extra wholesale for the vehicles because of the factory warranties, and customers paying extra retail, particularly because of the warranties.

CPO programs have developed considerable cache across the auto industry. Such programs were much discussed at this year's National Remarketing Conference and Used-Car Expo in Las Vegas.

Most attendees are CPO advocates who tout the benefits, although some detractors say there are downsides.

As sales climb, so does consumer awareness.

An Experian Automotive-Cars.com survey of car buyers indicates that 83% of Cars.com users have heard of CPO programs and 60% say they are familiar with elements of the programs. That's up from 53% last year.

“We've done a good job of conveying CPO attributes, such as late-model vehicles, inspections, reconditioning and warranties,” says Andy Jacobson, Cars.com's national sales director.

Still, a J.D. Power and Associates survey indicates 57% of CPO buyers learned about such vehicles from salespersons at the dealership, not beforehand.

Moreover, 38% cite the salesperson as having the greatest influence on the purchase decision, followed only by price.

A salesperson that conveys advantages of CPO vehicles and shows concern for shoppers' budgets “can be particularly effective in influencing buyers,” says Jane Crane, J.D. Power's director-automotive retail research.

To gauge customer loyalty to CPO products and brands, Experian crunched ownership data to look beyond the initial purchase.

“We found that CPO programs do drive loyalty,” says Dave Nemtuda, director of Experian's AutoCheck Solutions.

He says that customer loyalty extends to dealerships because CPO owners “are more likely to come back for service at the place they bought the vehicle.”

Owners of CPO vehicles show 28% brand loyalty compared with 22.3% for used-vehicle owners and 31.6% for new-vehicle owners, with non-luxury brands benefiting the most, he says.

Those percentage levels of loyalty are pretty much the same, regardless of income category. However loyalty varies by occupation. For instance, engineers showed more CPO loyalty than did doctors.

“It tells you that you should communicate differently to different customers, if you know their occupations,” Nemtuda says.

“The key is educating the customer to make sure they know what CPO is all about,” says Paul J. Pejza, manager of General Motors Corp.'s ambitious certified program, which generated 450,000 unit sales last year.

“There is a difference between manufacturers' certified programs and others — and customers should know that,” he says.

Hendrick Automotive Group is involved in CPO programs in a big way. All the used cars the dealership chain sells at its 60 stores are factory-certified, says Chris Little, Hendrick's director-variable operations and e-business.

“It helps that you don't have one Chevy Tahoe that's certified and one that's not,” he says. “It confuses the customer.”

In a large auto mall in Henderson, NV, Douglas Nissan has 60 to 75 CPO vehicles in stock at any given time, says John Kelly, general manager, who praises the auto maker's program.

He says it costs the dealership $300 per car for the factory warranty on CPO cars. But the dealership makes about $900-$1,100 more in gross profit compared with a non-certified vehicle.

“We're very happy with the enhanced gross profit and a CPO vehicle is a lot easier to sell,” Kelly says.

If used vehicles acquired during trade-ins require too much reconditioning, Douglas Nissan won't bother with the cost and effort of certifying them. “Those end up at auctions,” Kelly says.

David Begnaud, used-car manager for Billy Navarre Chevrolet of Lake Charles, LA, depends on auctions for a supply of certified stock, most of them off-lease vehicles.

“Just about every GM CPO vehicle I get comes from an auction in Houston,” he says. “CPO not only helps us sell more used cars, but also helps us deliver more new cars.”

It especially helps new-vehicle leasing, Begnaud says. “The CPO program boosts residuals and, if we can't get GM residuals up, we can't compete in leasing.”

It's the dealership's job to train personnel on CPO selling and the importance of the program, says Norm Olson, manager of Toyota Motor Sales U.S.A. Inc.'s certified program.

“Once you have sold the value, the warranty, the roadside assistance service, the reconditioning — all the elements of the program — you've just cut down negotiating by about 50%,” Olson says.

Little says most CPO buyers seek the assurance that comes when a car has been inspected, reconditioned as necessary and warranted.

Olson agrees.

“A factory-backed warranty on a used car buys peace of mind,” he says. “People don't want to buy someone else's problems.”

The factory warranty is the No.1 attraction among buyers of Chrysler-brand certified used cars, says Bud Place, Chrysler LLC's senior manager of used-vehicle sales and marketing.

“The vehicle reconditioning aspect of the program is high, too,” he says.

Olson says benefits to dealers include high gross profits and faster inventory turns. Toyota's CPO turn rate is 27 days compared with 55 days for ordinary used cars on the lot.

“We've seen a real shift by dealers to CPO because of the quicker turn rates,” says Olson, citing 94% CPO participation by Toyota's 1,250 U.S. dealers. “Now, it's a question of educating the public.”

Another dealer advantage is the prospective service work that comes from CPO warranty programs, Olson says. “The backend potential with certified is humongous.”

He says 50% of customers buying a Toyota certified used vehicle never owned a Toyota before. Of Toyota CPO buyers, 70% say they probably will buy a new Toyota next time. That shows “CPO moves them up,” Olson says.

Nemtuda cites similar findings by Experian.

“CPO buyers are more likely than (conventional) used-car buyers to buy new the next time,” he says. “The more CPO you sell, the more likely they are to buy a new car when they're in the market again.”

But one conference attendee, a former dealer, says that could present a Catch-22 dilemma for Chrysler brand dealers who are banned from company used-vehicle auctions — a prime source of CPO vehicles — if they don't sell enough new units.

“If I'm a Chrysler dealer and I sell more CPO vs. new, I risk being blocked from auctions at which I might get more CPO cars,” he says. “How does that help Chrysler's CPO program?”

CPO programs are not without downsides and shortcomings.

While many consumers are willing to pay a premium for CPO vehicles, they often feel the premiums are too high, according to the J.D. Power used-car survey.

And as the CPO programs become established, “certified is losing some of its buzzword,” Little says. “At Hendrick, we try to drill home that the manufacturer will take care of you with CPO vs. a generic certified program.”

But even though the warranty feature of the program helped fuel sales at first, that's tapered off, Pejza says.

Another CPO would-be pitfall is that many customers expect certified used cars to be as good as a new vehicle, says dealer Mike Cunningham, owner of Payless Cars and Trucks in Tuscon, AZ.

“If a customer feels he is buying something (tantamount to) a new car but really isn't, you can run into problems,” he says.

And CPO vehicles may hurt the auction prices of non-certified vehicles, says Neil Boardman, Regional Acceptance Corp.'s vice president-recovery and remarketing.

“We've found a negative trend at auctions in which cars behind a certified vehicle had a stigma because they didn't have certified stickers even though they may have been better cars that didn't need CPO reconditioning work,” Boardman says.

Despite the cons, there are more than enough offsetting pros, says Dan Crowe, American Honda's automobile remarketing manager.

“We think we are winning the battle with CPO,” he says.

The Internet has aided certified pre-owned vehicle sales, say industry leaders at the 2007 National Remarketing Conference and Expo in Las Vegas.

As Internet use goes up, so do CPO sales, says Howard Polirer, AutoTrader.com's director-industry relations.

Price and then the influence of the salesperson are the two main drivers of CPO sales, according to a J.D. Power and Associates CPO survey.

But Polirer anticipates a day “when a customer says, ‘Hey, I read about that CPO vehicle online and I'd like to see it’ vs. waiting for the salesperson to flip it.”

Still, it would be unwise to “devolve” the sales consultant's role, says Bud Place, Chrysler LLC's senior manager of used-vehicle sales and marketing.

“Our position is to support the role of the salesperson,” he says of Chrysler's CPO program. “At the end of the day, you can spend a lot of money on ads but if you haven't got through to the individual selling the car, the rest is for naught.”

Smart dealers use the Internet to their advantage, says Norm Olson, manager of Toyota Motor Sales U.S.A. Inc.'s CPO program.

“With 80%-85% of consumers on the Internet looking at cars, not to be there is a miss,” he says.

CPO Internet initiatives include the new GMCPO.com “that takes consumers to the car they want fast and then to dealer inventories,” says Paul Pejza, who manages General Motors Corp.'s certified program.

To sell more cars, CPOs or otherwise, dealerships must have a vibrant Internet operation, says Chris Little, director-variable operations and e-business for the 60-store Hendrick Automotive Group dealership chain.

“Vehicle shoppers using the Internet are not from Mars; they are regular people,” Little says. “Do you want to be where they are or do you want to use tradition as an excuse?”

Internet lead providers have done a great deal to create awareness of CPO programs, says Place.

“A couple of short years ago, awareness was one of our big obstacles,” he says. “The growth in online car shoppers has been amazing and it goes hand in hand with the increase in CPO sales. We're seeing very consistent growth.”

Chrysler was the last major auto maker to introduce a CPO program. It did so in 2002 exclusively for its certified Five-Star dealers, which make up 50% of its dealer body.

The program is being expanded to the entire dealer network. “To bring the others in is very exciting,” Place says.

The Internet is an important part of Honda CPO marketing, says Dan Crowe, American Honda's automobile remarketing manager.

“The Internet represents 40% of our budget to promote CPO,” he says. “We are focusing on putting inventory on Google and Yahoo sites.”

GM has doubled its Internet budget for CPO marketing, Pejza says. “Consumers are there and we are, too,” he says. “We're getting into videos.”

Polirer, a former general manager at a Volkswagen dealership, says that five years ago, “I had to drag a lot of dealers into realizing the importance of the Internet to car sales.”

He adds: “If I had the Internet as a tool when I started in the car business 30 years ago, wow, could I have sold a lot of cars!”
— By Steve Finlay

Editor's Note: A former dealer, who attended the 2007 National Remarketing Conference in Las Vegas, asked not to be identified but wrote to Ward's with these candid comments on certified pre-owned vehicle (CPO) programs:

I was amazed at the manufacturers' emphasis on CPO and their seeming misunderstanding of their own programs.

I understand their desire to collect CPO fees. First, it is a profit center.

Second, if they can successfully develop added interest in CPO vehicles, and if they are able to control themselves and not “over produce” their new products, they can increase the resale values of their brands and give their customers a better value proposition on their new products.

This is true at least of the domestics and I suppose the imports follow suit to maintain their resale value lead.

Perhaps everything will stay relatively the same in terms of resale leadership, but the overall price a consumer will pay for a late model used vehicle could go up.

As the wholesale market follows, or leads, the diminished depreciation hit consumers will feel will lessen. In particular, there might be some improvement in the epidemic of “upside down” disease that has been prevalent for years.

As for the manufacturers' misunderstanding of their own programs:

1. If they really want to sell more CPO vehicles, they just need to go back to over production and cycle their sales to daily rental companies like they did a few years ago. When they cycled their daily rental fleets every 5,000 miles or so there were plenty of CPO eligible vehicles. If it is true that increased CPO sales lead to increased new vehicle sales, this would serve that purpose. What they are accomplishing in reality is carving out an ever-larger niche of consumers who appreciate that someone else is taking the depreciation hit on the near-new vehicle they buy.
2. The domestic manufacturers either don't understand or don't choose to admit that they created the need for programs to artificially bolster their resale values and residuals themselves, through over production and “push marketing.”
3. The domestic manufacturers stated they don't have any lease programs to support their CPO initiatives because they have a residual-value problem. The fact is, their cars can be purchased at wholesale so inexpensively because of over supply. And because the American Lease Guide book likes their vehicles better than they think, there are many Chrysler vehicles that lease much better than they should. It's all about the difference between what a vehicle can be capitalized for and its residual. Even if the residual is relatively low, the price to buy many domestics at wholesale is even relatively lower. Dealers who choose to support CPO through leasing can lease a late-model Chrysler through numerous financial institutions on a short term. Buyers can achieve a similar payment for 36 months on a lease as a retail buyer would have on a 60-month conventional installment contract. Lease owners are three times more likely than car buyers to return to the dealership for their next vehicles.

It's a shame the domestics in particular haven't figured out these basic of the car business.

Toyota Motor Sales U.S.A. Inc. this year marked its two-millionth certified used- vehicle sale with a big celebration, at which the buyer received assorted gifts — including the vehicle itself.

But first Toyota had to convince him it was for real.

The milestone sale occurred at a dealership in Bellevue, WA. The vehicle was a loaded '04 Sienna minivan.

The plan was to fete the purchaser and pick up the price of the vehicle at the ceremony, which included a high school marching band.

“You just hope he's a good one,” Norm Olson, Toyota's CPO program manager, says of the honoree.

The buyer turned out to be an engineer, “with a pocket pen protector and everything,” Olson says.

He was also a disbeliever when Olson called to break the good news.

“He hung up on me three times before he finally realized I wasn't kidding.”
— By Steve Finlay

Volvo dealers deserve much of the credit for Volvo Cars North America LLC capturing a top honor for its certified pre-owned vehicle program.

So says Volvo's Johnny Lee in accepting IntelliChoice.com's first-place award for luxury-brand CPO programs.

“We'd like to thank our retailers, too, because they offer a lot of good feedback that we incorporate in our program,” Lee, the auto maker's pre-owned car line manager, says at the 2007 National Remarketing Conference in Las Vegas‥

Volvo beat out Cadillac a year after Cadillac ended Jaguar's long reign.

In the non-luxury category, Volkswagen of America Inc. was recognized for the fourth straight year for operating the best CPO program.

Hyundai Motor America Inc. made the most progress in the non-luxury category, moving from last place in 2006 to third place this year. It did so by enhancing its program with new financing offers and a better warranty.
— By Steve Finlay