Certified used-car sales could top 1 million this year

Certified used-vehicle programs are turning up everywhere, prompting some people to ask if it's just another marketing gimmick or is the industry on to something.

General Motors Corp.'s Jeff Heichel thinks the latter, as GM — after getting things right with dealers who disliked the automaker's original program, vintage 1996 — is getting in on the current action and setting aggressive sales goals.

“The concept of certified used vehicles has the potential to rival that of leasing, to become a concept known to every household in the country,” Heichel, director of GM used-vehicle activities, says at the Auto Remarketing Forum Series in Las Vegas.

Admittedly bullish, he sees industry-wide certified used-vehicle sales breaking a million this year. That would require a big increase — about 40%.

But Heichel notes that certified used-car sales leapt 45% last year, to 670,000 units from 460,000 in 2000.

Certified programs offer customers peace of mind with newer used vehicles that are inspected, often reconditioned and warranted. They're consequently priced more than non-certified inventory.

The programs offer dealers a chance to sell more used cars at higher margins — an average of $700 more in gross profits, according to some sources.

What do the programs offer manufacturers, to the point that they're now so keen on certified used-cars?

Simple, says William Lovejoy, GM's vice president of vehicle sales, service and marketing. New-car values improve if consumers know there's a demand for the vehicles they're currently driving.

Lovejoy is pushing Heichel and his team to double GM's certified used-vehicle sales to 200,000 units this year, and double them again in 2003.

GM stumbled out of the gate with its certified program six years ago. Dealers shunned it, saying the requirements were too cumbersome and the franchise fees too high.

Recalls Heichel, “Few dealers participated, and few customers even knew we existed. So we talked to dealers to find out what they liked and disliked about our original program, and made a number of changes as a result.”

That included reducing the enrollment fee to a one-time $500 charge, simplifying the warranties and expanding the maximum age of eligible vehicles from three-years-old to five.

Now 3,000 of 7,000 eligible GM dealers participate.

Consumers seem to like the idea of certification, and 46% of used-car buyers know of it. But most are currently unwilling to pay extra for it, says Chris Denove, an auto analyst of J.D. Power and Associates.

“Right now, 80% of domestic buyers say they are not willing to pay more for certification,” says Denove. “It's very bipolar. A large group says ‘certified’ means nothing to them. Another contingency really values certification.”

He suspects those that don't largely misunderstand it.

Denove explains, “‘Certification’ as a word is an overused concept that doesn't mean anything to consumers. It's like calling a car a ‘creampuff’ in a classified ad.

“The industry needs to market the value of certification more. Make the ads less cute and more educational. Give the word ‘certified’ meaning. There's definitely money to be made in it.”

That includes an estimated 15% higher gross, additional finance & insurance income and increased revenue from return service work.

Other touted dealer benefits include faster inventory turns, easier sales, higher customer satisfaction and more repeat and referral business.

Dealer Ann Hargrave of Hargrave-McEleney GM dealership in Iowa City, IA, says the certified program enhances business, boosts margins and “gets the used-car department more involved.”

But dealerships need to know what they're doing when selling certified used cars, says Ken Van Etten, assistant used-car manager at Jim Fresard Pontiac in Royal Oak, MI.

“It can be six of one, half dozen of the other,” he says. “You get the extra money on the higher price of the certified vehicle, but when a three-year warranty is slapped on a used car, it makes it harder to sell an extended warranty.”

He says GM's ambitious goals are noble, but it remains to be seen if they are reachable.

“GM is in it to remarket a lot of cars coming off lease,” says Van Etten. “We've got to ask ourselves, ‘What's in it for the dealer?’”

Certified sales are only 2% of the used-vehicle industry today, but there's an “untapped, latent consumer demand,” says Chip Perry, CEO of AutoTrader.com, the largest website for selling and buying used vehicles. “Right now, it's just scratching the surface.”

He says certified pre-owned vehicles are AutoTrader's fastest growing segment, with 276,000 searches a month. That's a 256% increase.

“Certified is growing 10 times faster than anything else on our site,” he says.

American Honda Motor Co. has seen its certified sales catch fire in the last two years of a six-year-old business initiative, says Dan Crowe, the importer's remarketing manager.

Since 1996, certified Honda sales have tallied 222,0000 units — half of those in the last year. Honda's Acura Div. sales total 71,000 — half in the last two years.

“We ask ourselves all the time how high we can grow,” says Crowe.

Modern certified programs represent a major shift on the part of the manufacturers, says Marv Ingram, who manages Lexus' national certified pre-owned fleet.

“Historically, manufacturers were only concerned with selling new cars, and they left it to the dealers to sell used cars,” says Ingram.

Despite all the manufacturer-inspired certified used-car programs that are now out there, Ingram says, “we cannot do this without dealers — they bring our ideas alive.”

Dealer Jim Moran pioneered certified used-car programs

Although many people see manufacturers' certified used-vehicle programs as a growing new force in automotive retailing, a legendary dealer pioneered the idea 50 years ago in Chicago.

He's Jim Moran, who at the time ran Courtesy Ford, and who now presides over JM Family Enterprises that includes dealerships, a big Toyota distributorship and JM&A Financial Services in Florida.

As a Chicago dealer in the 1950s, Moran began selling high-quality used vehicles that were inspected and reconditioned, and came with a “100% Courtesy guarantee.”

“He had a reconditioning facility the size of a city block,” says Andy Mahoney, JM Family Enterprises' vice president of vehicle remarketing. “They sold thousands of vehicles that way. Jim Moran was the pioneer of certified.”
— Steve Finlay

“What's it cost to recondition a certified car; and how much dealers should get back for it.

Estimates vary on what it costs to recondition used cars for certification — and what dealers should expect to get back from that investment.

Jeff Heichel, who's in charge of General Motors' used-car activities, says reconditioning costs average $300-$400, and consumers will pay up to $900 more for a GM certified car.

But Stuart Angert, a remarketing specialist, pegs the average reconditioning costs at a higher $700.

He warns about spending too much.

“You want to make sure you aren't putting more money in than you are getting back,” says Angert, president of Remarketing Services of America.

“The Volvo certification program, at best, breaks even. You don't want to put in $1,000 to get $500 back.”

Reconditioning costs should be enough to get a vehicle front-line ready, but not involve major work, says Chuck Nix, assistant vice president of AmeriCredit, specializing in auto sales, marketing and reconditioning.

“Expect a $2 return for every $1 of reconditioning,” he says. “You want to maximize the investment and the return.”

Tom Kontos, an auto analyst for ADESA Corp., sees dealers getting back $1.75 for every $1 spent on reconditioning. He says that ratio justifies the investment.

But dealers get skittish spending more than $750 to recondition a car for certification, according to Kontos.

“Beyond $750, it becomes iffy. The dealer questions whether the return will be enough,” he says.

Certified used-cars fetch on average $913 more, but that varies by model and class, says Kontos.

The certified markup ranges from $2,000 more for a luxury car to $500 more for a small car, according to his used-car tracking.

He says, “It's a pretty steady premium. I had thought ‘certified’ might be perceived as another hyped-up word. But it isn't. People see value.”
— Steve Finlay