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 ofCorp.’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, Douglashas 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, Douglaswon’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 ofMotor 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.
“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-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.’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 forbrand 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’s automobile remarketing manager.
“We think we are winning the battle with CPO,” he says.
The Internet has aided certified sales.
As Internet use goes up, so do CPO sales, says Howard Polirer, AutoTrader.com’s director-industry relations.
While the J.D. Power survey indicates salespersons influence many CPO sales, Polirer anticipates a day “when a customer says, ‘Hey, I read about that CPO vehicle on line 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 Place.
“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 Olson. “With 80%-85% of consumers on the Internet looking at cars, not to be there is a miss.”
CPO Internet initiatives include the new GMCPO.com “that takes consumers to the car they want fast and then to dealer inventories,” Pejza says.
To sell more cars, CPOs or otherwise, dealerships must have a vibrant Internet operation, says Little.
“Vehicle shoppers using the Internet are not from Mars; they are regular people,” he 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 ofCPO marketing, says Crowe. “The Internet represents 40% of our budget to promote CPO.”
GM has doubled its Internet budget for CPO marketing, Pejza says. “Consumers are there and we are, too. We’re getting into videos.”