Used isn't what it used to be

Attitudes are changing toward the used-car buyer. They're no longer treated as second-class citizens. Manufacturers aggressively are courting them, and many dealerships treat used-car customers the same as new-car buyers.

Buying a used car for years carried a negative connotation, notes Mike Davis, an auto historian and former Ford Motor Co. public relations executive.

During the Great Depression, used-car sales were perceived as hurting new-car sales. Then World War II came and no new cars were built as the automakers turned their attention to building weapons, notes Mr. Davis.

Used cars gained in importance during the war as a result, but fell back into negative perception in the 1950s, spawning the lingering mistrust of used-car salesmen. Another perception: people who couldn't afford new cars bought used.

So what's changed? For one, it's the evolution of the certified programs. Certified programs have been around, but the manufacturers have begun turning them into significant initiatives.

Today's programs include eligibility requirements for vehicles, strict inspection standards, improved and transferable warranties and a delivery process that mirrors that of a new car. Also, many of today's programs offer new-car financing rates for the customer.

Ideally, it benefits customers and dealers alike. Customers get greater peace-of-mind owning certified vehicles. Dealers, in turn, get premium prices for certified vehicles. And they don't get the hassle of dealing with angry customers whose cars may malfunction early into ownership.

The popularity of leasing in the 1990s fueled the enhanced certified programs of today. The automakers saw that the leasing boom meant higher volumes of two-, three- and four-year-old cars, and the creation of a new segment — “nearly new.”

To prop up demand for the increased supply of used vehicles, the manufacturers enhanced certified programs. The thinking is that buyers will be more attracted to and pay more for a used vehicle that has been inspected, reconditioned and carries a warranty.

The dealer pays more for reconditioning, and the customer is expected to pay more for the vehicle.

Dealers are concerned with how much they must pay for reconditioning. That number isn't being tracked at the manufacturer level. Dealers, however, are reporting that reconditioning costs for certified vehicles are $100-$200 more than for other used vehicles.

Pete Richards, used-car manager for Ed Voyles Dealerships in Marietta, GA, notes, “Look, we're giving the customer better value. People will pay for that peace of mind. We're just afraid to ask for it.”

“Chrysler research shows that 53% of car buyers would pay more for a certified vehicle,” says Bud Place, a marketing and distribution manager for DaimlerChrysler.

A 2001 Dohring Co. study says 50% of Americans surveyed would rather pay $20,000 for a higher-lined used car than spend the same amount on a new car. Some dealers are reporting getting almost $1,200 more in gross profits for certified vehicles.

Mercedes-Benz USA was the first with a serious modern certified program, launching its Starmark Certified Pre-owned program in 1989. Ford Motor Company's Quality Certified program has been around since 1994. Jaguar and Saturn introduced their programs in 1995 while Toyota and General Motors got involved in 1996.

John Beagan, president of Car Smart, a used-car sales training company, helped Toyota develop its certified program in the mid-'90s.

He says, “In the early '90s, we saw there would be an increase in leasing, and as a result, our dealers were going to have to sell used cars as they reached end of term.”

Most Toyota dealers at the time focused mainly on new-car sales. Toyota first trained its dealers in the early '90s how to correctly sell used vehicles, and then, in 1996, launched a major certified program. Now, 83% of all of the Toyota dealers are involved with the program.

For Saturn, the original request for a certified program came from dealers, says Scott Macgirr, Saturn's retail services manager. “Our dealers knew there would be a lot of trades coming back into the stores and wanted something to get them into the used car market.”

Saturn's program was unique in that all of its dealers participate because the program is incorporated into the dealer-franchise agreement. Like Toyota, Saturn embarked on an aggressive program training its dealers how better to sell used cars, incorporating its new-car sales no-haggle philosophy.

“We wanted to extend Saturn's unique new-car sales experience into the used-car side,” explains Terry Vaughn, Saturn's Used Car coordinator.

For the most part, however, the manufacturers at first paid only lip service to the used-car initiatives. Dealers weren't involved in the planning which turned them off early in the process, and most didn't participate. Training seemed inadequate. Advertising and marketing of the certified programs were minimal. Dealers also considered the investment in the programs to be high for what they saw as uncertain returns.

Most of the programs, therefore, languished on the back burner through the second half of the decade.

Fast forward to the late '90s and early 2000 when everybody in the industry was getting hammered as the leased cars starting coming off term with much lower residual values than had been originally estimated.

According to CNW Research, in 2000 alone, the industry lost $10 billion to those over inflated residuals. And with the specter of 3.3 million vehicles scheduled to come off lease this year, the losses were only going to be worse.

So the automakers went back to the drawing board to redesign and strengthen their certified used-car programs.

First, they had to get the dealers on board. In April of 2000, Ford went to its dealer council and set up a committee comprised of several dealers who then began to develop a stronger certified program. A pilot program was introduced to Texas and Florida dealers in October of that year. The final version rolled out from January to March of this year. The program was launched nationally April 16.

Says Mike Dennis, Ford's director of certified used vehicles, “We have a much stronger program today because of the dealer input. We wanted to put together a real customer-centric program.”

Consequently, Ford's certified customers are treated like new car customers — the delivery process is the same, including the full tank of gas. Ford also strengthened the warranty and offered one of the stronger roadside assistance packages in the industry. Vehicle history reports were also added to the mix.

For the dealer, Ford improved the back end administrative aspects of the program making it web based, reducing paperwork. Ford also launched aggressive advertising for the certified program. Two of the catch lines are “The difference between new and used? Pre-set radio stations” and “More like pre-worshipped.” As of August, 1,000 Ford dealers were certifying vehicles.

Still, Ford dealers' reaction to the program is mixed. Dealer mistrust is part of it. Dan Warwick, an Indiana dealer, argues, “When Ford came out with the program, they never did support the damn thing. And we have to pay $400 for every car we certify? It's just a profit center for Ford.”

Jim Bass of Mike Bass Ford in Ohio, and a dealer council member, says he just doesn't know enough about the program. “My rep has mentioned it a couple of times. I've sent my used-car managers to the training and told them to go for it if they felt it was worth it. I just haven't sensed any excitement from them.”

Jerry Reynolds, president of Prestige Ford in Texas and chairman of the Ford Dealer Council bristles when he hears dealers diss the program. He admits the original one was awful.

“But the new program has been fantastic for me,” he adds. “The ones talking negatively about it probably don't participate in it. If they knew what we went through putting the program together — the damn program was laid out by dealers and we crisscrossed the country getting feedback.”

He adds, “The $395 certification isn't burdensome — especially considering I'm making $800 more gross on my certified cars than I do on the others. Besides, I'm turning them at 15 days.”

Ed Van Boxtel, whose Ford Jeep dealership in Green Bay, Wisconsin is one of the leaders in used-car sales, says, “It's a good program, but a bit overstated. It's good for the customers and their peace of mind. But I'm not making any gross profit on the certified vehicles. When you factor in the cost of reconditioning and the training of my staff - it just isn't profitable.”

Ford's Quality Checked Certified program has placed second for two consecutive years in a ranking of the non-luxury programs conducted by Intellichoice. This year, Mercury tied with Ford as the division adopted Ford's certified program.

General Motors also revamped its program this year, says Dana Hammer, GM's manager, certified used vehicles. General Motors realized for the program to be successful it had to get the dealers on board. Only 1,350 of GM's dealers were participating in the program as of April. That number has since increased to 2,000.

To sweeten the program for its dealers, the automaker simplified the warranties and reduced the enrollment fees to $499 and removed the $1,000 renewal charge for the dealers.

To drive consumer interest, GM offered new car rates of 6.9% on its certified cars during the month of July. A survey of its dealers following the program indicated that 69% of the dealers had some increase in gross profits while 45% of the dealers who responded increased their gross profit by $500.

Jonathan Pittman, used car sales manager for Radley Chevrolet in Fredericksburg, VA, was one of the first GM dealers to sign up with the program in 1996.

Although he is a supporter of the program, he's not sure about changes in the warranty. The warranty had been a 12-month/12,000 mile warranty - now it's a three-month/3,000 mile comprehensive warranty.

“Dealers were complaining the longer warranty was too costly and that was the reason they weren't participating,” he says. “I bet if GM checks its records, it will find those same dealers still aren't participating.”

Mr. Pittman certifies about 35 vehicles a month. His reconditioning costs are $120 more than for regular used cars. His gross profits on the certified vehicles are about $200 higher than the others. It takes work and a lot of self-promotion — but in the long run, my CSI scores are very high, and I'm seeing a lot of repeat business.”

The benefit is three-fold, according to Mr. Pittman. “The customer gets a longer and better warranty; I'm able to build that relationship with the customer, and I'm able to liquidate GM's program and off-lease vehicles.”

Chrysler is the only major manufacturer without an official certification program, although sources say one is in the works can could be unveiled as early as this month.

Are the programs successful?

Toyota Motor Sales USA has set a new record for certified program sales almost every month this year. By the end of August, the import company had sold 126,135 certified vehicles this year and was on pace to sell about 170,000 by year's end. Since 1996, the company has sold over 500,000 certified vehicles.

Norm Olson, marketing operations manager for Toyota Certified Used Vehicles, says, “We don't have the advertising budget that Ford or GM has but we work hard at it. What sets us apart is that we're already starting with a great vehicle. Also, our dealers have done a great job making the program work.”

Honda, whose certified program has been ranked number one for three consecutive years by Intellichoice, also is reporting record sales. The manufacturer is on track to sell about 100,000 certified vehicles this year.

General Motors will sell close to 60,000 certified vehicles this year compared to 30,000 last year.

Although, it won't yet release its actual certified figures, Ford says its sales are increasing 50% each month since the program's April launch.

CNW Research is reporting used-car sales are up 387,000 through May. Most of that increase was occurring in private transactions, though. Franchised car dealers actually sold 6.2% fewer used cars compared to the same time last year.

Even though dealers are selling fewer used cars, NADA figures show used-vehicle sales revenues up 1.7% and gross profits up 3.1%. That indicates dealers are selling used cars at a higher price and profit — part of that propelled by certified programs.

Mr. Place, noting DaimlerChrysler's absence of a certified program heretofore, says, “Obviously, we're giving this thing a lot of study. I'm just not sure anyone has figured out the complete cradle-to-the-grave remarketing strategy. We have to make sure that, at the end of the day, it's more than just a marketing campaign. It has to be solid.”

Will certified used cars hurt new-vehicle sales?

Will the increased emphasis on the certified pre-owned programs begin to detract from new car sales? Right now, the automakers say no.

Most automakers consider the certified vehicles to be a separate brand and agree the certified sales are not going to detract from new car sales.

“There will always be a segment of consumers looking for the used vehicle,” says Mike Dennis, Ford's director of certified vehicles. “Right now, Ford is targeting the 18-49 year old buyer. But I think we'll be able to hone that down as we get into the process more. Outside research shows women with a college degree, under 40-years-old with a decent income level are the most typical certified pre-owned buyers.”

Norm Olson, marketing operations manager, Toyota Certified Used Vehicles, says, “It's like a franchise brand by itself. We're conquesting sales from other brands. It's almost an entry brand into new-car sales.”

Dana Hammer, General Motors manager, Certified Used Vehicles, says, “Our research shows the typical certified buyer is 46 years old, married with children. Possibly, they are buying the car for the child — the warranty and 24 hour roadside assistance provide great peace of mind for that parent.”

John Beagan, whose company, Street Smart Inc., helped develop Toyota's certified used car program and is now training Ford and Lincoln Mercury dealers on their respective programs, agrees that certified vehicles are becoming a separate brand. He has a different angle, though.

He believes the certified programs should be targeted toward those who buy through private transactions. “It's definitely a whole new brand,” he notes. “But we're going after that private business — we're not taking away from other business.”

His research indicates today's certified buyers historically have stayed away from dealerships, preferring private transactions instead.

He explains, “Those buyers typically can afford to pay cash or they don't need to seek special financing. These buyers have better credit ratings, higher salaries and put an average of $1,000 more on the down payment.”

There were almost 12 million private vehicle transactions last year.

Mr. Beagan refers to the book The Millionaire Next Door, which claims that 37% of the country's seven million millionaires have never bought a new car because they view them as unwise investments.

“These are the buyers we need to be targeting,” he says.

How the certified used-car programs stack up

Intellichoice, for three years now has ranked the certified used car programs. The company rates 23 manufacturers and divides the list into luxury and non-luxury.

Eric Anderson, database supervisor for Intellichoice, explains, “We evaluate four areas.”

“The two most important factors are the warranty and the inspection list,” says Mr. Anderson.

For the third consecutive year, Honda has taken first place in the non-luxury division. Meanwhile, Jaguar jumped to number one on the luxury side with a vastly improved point inspection list.

The 2002 Best Certified Used Car Programs, ranked by Intellichoice

Luxury

Inspection

Non-Luxury

Warranty

To view the Intellichoice's Best Certified Programs, and for a complete overview of each manufacturer's program, go to www.WardsDealer.com.