• by Karl Greenberg , November 1, 2007

Somewhere between the world of showrooms packed with sparkling new cars and trucks and the used-car netherworld of pinwheels, one-day blowouts and haggling, resides the market for certified pre-owned (CPO) vehicles.

The CPO market, which started with Lexus in the 1990s and now includes at least 31 brands and more than one million CPO vehicles sold so far this year, has ridden the wave of off-lease vehicles in recent years, with automakers touting the programs as a way to get the new-car experience--including warranties and multi-point inspections--at something less than new-car prices.

Auto consultancy IntelliChoice this week served up its ninth annual ranking of such programs. In luxury, Volvo's CPO program came in first, beating out Cadillac. Volkswagen won for the fourth straight year as best non-luxury CPO program.

Hyundai moved from last place to third place by introducing car financing offers, and expansion of CPO warranty to ten years.

After Volvo and Cadillac, IntelliChoice said the other three of the top five luxury CPO programs belonged to Jaguar (which tied with Cadillac), Saab and Lexus, respectively. The top five non-luxury brands were Volkswagen, Mini, Hyundai, Honda and Scion.

Arguably, the CPO boom was in 2003 through 2005, when the market was deluged with off-lease vehicles. That process has slowed, says James Bell, editor of IntelliChoice, but higher interest rates--assuming they remain high--may change things this year, causing more people to opt for leasing. If so, the CPO market won't feel it until 2010.

Bell, who points out that Hyundai, Suzuki and BMW's Mini division all launched programs this year, says the market is driven by availability of products. "The market is driven by off-lease vehicles, but some of the brands haven't had, until now, the volume of sales to justify CPO, from off lease and trade-ins," he says.

"What CPO does for automakers and dealers is become a real third channel. It helps dealers because when things get quiet on the new-car front, they have something else to fall back on--used cars with a special shine to them."

He says the program also boosts the parent brands because it gets consumers into one of their vehicles without sacrificing control over the consumer experience. "It gives customers peace of mind and lets manufacturers get people into their vehicles."

Bell says consumers rate warranty and inspection as the two most important factors in their opinion of a CPO program. "Those two factors equal better than 70% of weighting. Those two are always the big front-of-mind issues; the thing with CPO is that the factor that always rises to the top is that peace of mind: that new-car experience that if something goes wrong I can go back to the salesperson, instead of the used-car lot." He adds that while consumers are willing to pay the premium for that benefit, many are still unaware that such programs exist.

"From my discussions with management of CPO programs, demand is growing, but there is a learning curve. Within the industry, CPO is a well-known acronym. Not among the general buying public."