Consumers Gravitating to Certified Pre-Owned Vehicles

Sales of certified pre-owned vehicles, those so-called “cream-puff” used cars and trucks auto makers and dealers back with strong warranties and sometimes free maintenance schedules, are growing despite product availability restrictions and robust pricing.

Larry Pryg, national manager-CPO Vehicle Operations for General Motors, says the segment should grow 5% this year. GM expects CPO-backed sales at its dealers to be flat, at about 285,000 units, due mostly to fewer sales to rental fleets in recent years.

The auto maker fortified its CPO program last year to be more competitive, adding a 2-year/30,000-mile (48,280 km) maintenance program.

Toyota historically leads the segment, with Ford and Honda also posting strong results in a segment seeing more OEMs entering every year.

“Our business is growing, the industry is growing,” Pryg says in a conference call this week with journalists and analysts to discuss the sector. “It’s a great choice. You get treated like a new-car customer, yet you are buying a used vehicle.”

The growth in the industry comes against three headwinds.

For starters, used-car inventories are limited as the industry emerges from three years of record-low new-vehicle sales. Fewer new-vehicle sales mean fewer used vehicles at auction, where most CPO products are sourced.

In addition, auto makers only recently have begun cranking up leasing again, a key supply source of vehicles to the secondary market.

Used-vehicle prices remain historically strong, up 19% through the first eight months of 2012, compared with the same period in pre-recession 2007, according to the National Automobile Dealers Assn. NADA expects pricing stability to continue over the next few years.

“Demand is stout, we see no erosion ahead and supplies are limited,” says Larry Dixon, senior automotive analyst at NADA. “Those are fundamental economics supporting used-car prices.”

Auto makers and dealers want to grow their CPO business because a dependable used car, combined with a satisfactory service experience, leads to brand loyalty. CPO owners tend to return to the same dealer more often, too.

In addition, CPO cars carry a price premium over other used vehicles. That keeps residual values high and allows auto makers to offer competitive lease deals on their new models.

Dealer profitability on a CPO product is on par with a new car or truck, says Denny Dunfield, general manager-Al Serra Auto Plaza in Grand Blanc, MI.

“It’s been a successful program for us,” says Dunfield, who estimates CPO products comprise 38% of Serra’s used-vehicle business. Serra ranks as the No.2 CPO dealer nationally.

Consumers like CPO vehicles because the warranties offer peace of mind and those protection programs are better than what they typically find on a regular used car. Although priced higher, the resale outlook on their CPO vehicle is stronger.

Many also choose CPO because the cars simply are cheaper than new ones, says Howard Polirer, director-industry education at the consumer buying guide AutoTrader.com.

“The economy is certainly impacting the way consumers are shopping, there’s no doubt about that,” Polirer says. “Things are looking better, but the economy has changed consumer shopping behaviors for a long time.”

That means consumers are finding more value in CPO vehicles. For example, an AutoTrader survey reveals 60% of all new-vehicle shoppers would consider CPO as an alternative and 29% are considering it for the first time.

“We’re seeing a lot of activity in the segment,” Polirer says.

For a CPO-vehicle purchase to make sense for the average consumer, the price jump over a regular used car must be small enough to justify the premium price and substantially more cost-effective than a new car or truck, the AutoTrader executive says.

Currently, CPO luxury vehicles and fullsize trucks offer the best buy for the consumer’s buck, Polirer says.

[email protected]