Certified Cars to the Rescue

LAS VEGAS — When new-car sales plunged last year, grateful dealers found a safety net in certified pre-owned vehicles, automotive remarketing executives say.

“In a way, we've been a savior for dealers,” Bill Bates, pre-owned manager for BMW of North America, says at the National Remarketing Conference here.

“I had dealers calling me up in December and thanking me, saying, ‘Without certified vehicles, we'd be in trouble,’” he recalls.

U.S. auto dealers last year sold 1.7 million units through auto makers' certified used-car programs, in which vehicles are inspected and reconditioned as necessary and sold at a premium with factory warranties.

Originating as a way to remarket off-lease vehicles, certified programs have proven popular with consumers seeking the peace of mind that comes with a warranty on a used car.

Dealers are attracted to CPO programs because the vehicles fetch higher prices and sell faster, allowing for quick inventory turns. “Profits on CPOs are strong and the grosses good,” Bates says.

But total CPO sales this year may not be as high as in 2008. One reason is the U.S. government's recent “Cash for Clunkers” program, which offered incentives of up to $4,000 to consumers who exchanged their old vehicles for new ones that were more fuel efficient.

“Cash for Clunkers screwed us up a bit,” says Norm Olson, CPO sales operations manager for Toyota Motor Sales U.S.A.

Still, BMW's certified sales are up 11% this year, Bates says, marveling at such a year-over-year gain considering the tough times. “Who has double digits in this economy? Bankruptcy lawyers maybe.”

CPO sales in 2010 are expected to be flat, in large part due to tight inventories, says Chuck Yaeger, national CPO fleet manager for Toyota's Lexus luxury brand.

“But dealers are excited, and we're doing well,” he says, adding luxury brands such as BMW, Lexus and Mercedes-Benz typically register strong certified sales.

Certified-car buyers don't necessarily start out as such, says Bates.

“We learned most customers are not shopping certified. They are shopping for a particular used car. When they find it as a certified vehicle, it helps seal the deal. But certified itself is not driving customers to the dealership.”

Toyota's CPO program builds brand loyalty, says Olson, noting “43% percent of our customers never owned a Toyota before. Many of them indicate they will buy a new Toyota next time.”

Some dealerships have established separate facilities for their CPO operations. That includes 220 of the 1,100 Toyota dealers participating in the program, Olson says.

Separate facilities are seen as an effective way to set the certified vehicles apart, especially from conventional used cars.

“Our cars average a 27-day turn vs. 63 days for non-certified,” Olson says. “We train the dealership staff to sell the value story. It cuts negotiations in half.”

In 1996, the first year of Toyota's CPO program, 42,000 vehicles were sold. Through September of this year, Toyota and Lexus dealers sold more than 250,000, Olson says. “Dealers love selling these because it's so easy.”

Dealers ultimately make more money by pricing their vehicles competitively and selling them faster, rather than pricing them high and gradually knocking money off as the car ages on the lot.

“If your $16,500 car is way over the market price, it slows the inventory turn and hurts profits,” Olson says.

Computerized inventory-management systems give dealers detailed information on what particular vehicles are going for in any given region. But not all dealers use that software.

“Our guys have a long way to go with inventory-management systems,” Bates acknowledges. “But they're becoming almost obligatory.”

Although certified cars come with a premium price, there is a limit as to how high that can go, says Yaeger. “If a customer says, ‘For another $50 a month, I can buy a new car,’ they just might do that.”