Certified Pre-Owned Marketing Expands Scope

The certified pre-owned vehicle category, pioneered by Lexus in the '90s as a way to create an option between new and used, is no longer restricted to luxury brands.

"Everyone's doing it," said Alex Rosten, manager of pricing and market analysis at Edmunds.com. Most recently, Hyundai launched a CPO program, as has Toyota's Scion division.

While the number of CPO vehicles sold is up very slightly, the rate of increase is not what it was in the heyday of leasing. Analysts say the flood of returning off-lease vehicles that once filled dealer parking lots has turned to a trickle. That impetus had led luxury brands to so-called CPO programs in the first place.

Today, the programs are viewed as a way to grow dealer service business, build automotive brands through trial, and ultimately, create new-car buyers.

Rosten predicts that CPO sales will increase over the next few years, because of increased inventory, and because manufacturers like GM and Lexus are beginning to put incentive dollars and subsidized lease rates behind CPO. "In 2008, we will see a more substantial increase in CPO sales because of inventory," he said.



The leasing trend has been on a downswing since a raft of low-interest purchase incentive programs propelled more people to buy, not lease, their vehicles. It goes back to General Motors' post-9/11 "Keep America Rolling" campaign five years ago.

Leasing peaked in 1999, and vehicles coming off three-year leases flooded dealer lots in 2002 and 2003. But inventories of late-model vehicles began slowing in 2004, said Rosten.

As a result, automakers such as Toyota have loosened the criteria for what constitutes too old and too much mileage to be a CPO vehicle from five years and 65,000 miles to seven years and 85,000 miles.

Roughly 45 million used cars are now sold in the U.S. every year, of which 1.6 million were CPO vehicles in 2005, according to Edmunds.com. The auto commerce Web site and consultancy is predicting 2006 to hit 1.65 million in CPO sales. Rosten said there has been a 1.5 percent increase in CPO sales through September. Still, CPO is only about 3.5 percent of the overall used vehicle market.

What CPO "does for the volume brands--as with luxury--is to improve brand retention and dealer profit margins, if done right," Rosten said.

"It's a win-win-win. The manufacturer benefits from higher brand loyalty and incremental revenue selling warranties; dealers from higher profits and higher service business and customer retention; and consumers by getting a new-car experience with a second-hand car."

Some 85 percent of respondents to an Edmunds.com survey said they would consider a CPO vehicle. Consumers pay an average premium of $1,680 for CPO--ranging from $500 for sub-compacts to as much as $3,000 for premium cars. Thirty-one percent of respondents to the Edmunds.com survey said they would pay up to $500 extra for a certified pre-owned vehicle, and 12 percent said they would pay over $1,000 extra for a CPO. Almost one-fourth said they would not pay any additional amount for a CPO vehicle.

Tom Gauer, senior director of auto retail practice at J.D. Power and Associates, said such programs wield enormous power in building new business and loyal customers. "We have found that if [consumers] are satisfied with the vehicle and have a good experience, the likelihood is they will return to dealers for service, will purchase a new vehicle of the same make, and refer the brand to others," he said.

The consultancy's annual Used Vehicle Sales and Certification study, based on 13,000 questionnaire responses from consumers who bought 2001-to-2006 model-year vehicles in September and October of 2005, suggests that consumers who are happy with both the second-hand vehicle and the sales experience will return to the dealership for service, and are far more likely to return later on to buy a new car.

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