Used car salesmen may have a bad reputation, but that sure doesn't seem to keep U.S. consumers from buying used cars. In 2004, we bought 13.6 million new cars and light trucks and leased 3.3 million new cars and light trucks — but went home with 42.5 million used cars and light trucks, an increase of just under 12 percent from 1990, according to the Bureau of Transportation Statistics.
But these days, used cars are better than ever, thanks to certified preowned, or CPO, programs, which were created by auto makers to resell cars coming off lease. The manufacturer cleans and inspects each car, slaps on a warranty comparable to one found on a new car, and sells it at a premium — although still for much less than the cost of a new car.
Best of all, for the manufacturer and dealer at least, these CPO cars can only be sold, not leased, so they put no drag on inventory.
Introduced in the 1980s, CPO programs have proved so popular that a study by J.D. Power & Associates stated that, by 2005, they accounted for 41 percent of all used-car dealership sales, an increase of 4 percent over the previous year.
Weak economy helps
To get an idea of the numbers: As of last month, year-to-date CPO sales were up 2 percent at General Motors, where slowdowns at Saturn and Saab were offset by growth at Cadillac and Hummer. Sales also rose 7.8 percent at Mercedes-Benz, 14 percent at Chrysler Group, 23 percent at BMW, and 105.6 percent at Toyota, exclusive of Lexus.
Because they're getting a late-model car with a manufacturer’s warranty, consumers are willing to pay a higher price for certified cars than for non-CPO ones. J.D. Power, which has been tracking the CPO market for the last five years, released results of a nationwide survey last month showing that the average premium paid over other used cars amounted to $1,680 in 2005, up more than 12 percent from the previous year. (J.D. Power is a division of The McGraw-Hill Companies, MHP , which also owns BusinessWeek.com.)
J.D. Power's senior director of automotive retail research, Tom Gauer, points out that, "with the weaker economy, people are definitely more cost-conscious, and even at a premium these pre-owned cars are more affordable."
Driving up price
Industry observers say this premium represents the important influence of certification on potential customers, allaying fears of potential mechanical problems. "Retail buyers are willing to pay a premium," says Tom Webb, chief economist for Atlanta-based Manheim Auctions, "but, at the same time, you're getting a much better car. It's a higher quality vehicle, not just additional peace of mind."
Even with the premium, CPO cars are still more affordable. For example, a 2006 Jaguar S-Type sedan retails for $45,995, whereas a certified 2003 model with similar equipment and 29,152 miles on the odometer costs $28,995, nearly 40 percent less.
Fostering young consumers
Because leasing first came into vogue at the luxury end of the auto market, that segment has always led CPO growth. And, in J.D. Power's satisfaction surveys, luxury CPO programs continue to outpace similar offerings from nonluxury brands. J.D. Power's senior director of automotive retail research, Tom Gauer, says, "Predominantly, the luxury nameplates do the best. When we ask, 'Who's doing a good job?' it's Mercedes-Benz, Jaguar, Lexus, and so on."
Those luxury nameplates also tend to have the best residual values as well, which is another reason CPO cars are attractive. When a new car is driven off the lot it automatically depreciates. CPO cars don't have that problem.
Manufacturers have found advantages to CPOs in addition to just managing fluctuating off-lease inventories. BMW corporate, for one, advises franchise dealers they can increase their customer base by about 25 percent through CPOs. Bill Bates, BMW USA's manager of CPO vehicles sales, admits that "CPO is a great way for people to get into ownership if they're at a stage in their life when they can't buy a new car. We think these customers are high potential, [and we want] to keep them in the brand because they're young and they're upwardly mobile."
Auto companies expect CPO customers to come back, either to buy another pre-owned car or a new model. Webb says, "The manufacturers see it as enhancing the brand—the value of pre-owned programs spilling over to new units." And, because warranty claims are funneled through franchise dealerships, manufacturers also gain by increasing their exposure to CPO buyers.
Clearing up confusion
The uptick in CPO sales and corollary benefits may have a built-in brake, though. The National Automobile Dealers Assn.'s chief economist, Paul Taylor, predicts a slowdown in the market as CPO programs continue to grow along with a dip in the overall price of used models. "The key in maintaining value is very carefully selecting the cars. In that sense, the programs are somewhat self-limiting," he says.
What's more, despite the popularity of the programs, confusion still abounds both with consumers and within the industry. "Certified" is "largely unregulated" says BMW's Bates, and warranties and coverage differ greatly from manufacturer to manufacturer (see BusinessWeek.com's accompanying tip sheet "How to Buy Certified Pre-Owned").
Another point of confusion for consumers: where certification is actually coming from, whether an independent local dealer or a corporate-backed franchise dealership is guaranteeing presale checks and eventual repairs. "It's a big concern because the customer isn't going to necessarily distinguish," says Gauer, "blaming, for example, BMW if something goes wrong, not the independent."
Trade-ins key
But, the biggest outstanding question remains—how will another incentives frenzy affect CPO sales across the country? Summer sales tactics, like those announced this month by Ford, General Motors, and Chrysler, and those still expected to be unveiled, tend to tempt buyers toward price-reduced new models with attractive incentives. Gauer notes that the percentage of CPO vehicles dealerships sell, which usually hovers around 20 percent drops by as much as 5 percent during heavy promotional periods.
But Taylor says the incentives, though temporarily damaging to CPO sales, can actually help dealers. "The impact of incentives is also a surge in trade-ins," he says. Because 60 percent of new sales involve a trade-in, "It's also a buy opportunity for dealers to source their used car operations," he adds.
The drawback to incentives is that they usually pertain only to selected models—often the ones that are proving most difficult to sell—or don't apply at all to certain luxury names. So, if you're in the market for a good, reliable, affordable car or light truck, you may want to consider skipping the new car showrooms and heading right down to your nearest CPO dealer. After all, the only person who will know it's a used car is you.