Search high and low through statistics about U.S. auto sales and you'll find practically nothing to brag about these days. But one silver lining does emerge: sales of "certified pre-owned" vehicles.
Even through the industry's darkest days, sales of certified pre-owned units for most automakers selling in the American market have been ahead of a year ago while, of course, new- car and general used-car sales have been declining at ferocious double-digit rates.
Not even a negative fourth quarter of 2008 could prevent a robust performance by CPO sales for the entire year: Sales for the segment actually rose by 1 percent last year over 2007, according to Edmunds.com.
Joe Spina, Edmunds.com's senior manager of remarketing, believes the appeal of CPO programs is as simple as it is strong. "During these uncertain economic times," he said, "CPO sales are a good option. "People still need to buy cars, and a safe bet is to get a CPO vehicle."
In fact, the biggest drag on CPO sales may not be consumers' general reluctance to buy vehicles but, actually, a restricted supply of top-shelf used automobiles that are eligible for automaker certification.
"There is an incredible shortage of one-to five-year-old used cars because so many have been purchased under long-term contracts that people don't want to get rid of them," said Art Spinella, president of CNW Marketing Research, in Bandon, Ore. "So people can't find good certifiable used cars. You have to rely on daily rentals and corporate fleets now to find them, and most of them are pretty beat up."
Some Black Numbers
Even through the teeth of the automotive recession, American consumers have been demonstrating strong demand for CPOs.
Mercedes-Benz CPO sales rose by 27 percent last year, to nearly 65,000 vehicles, with the strength of comparisons actually accelerating as 2008 closed: November sales rose 47 percent over November, 2007, and December CPO sales for Mercedes-Benz surged by a whopping 61 percent compared with a year earlier.
"They're popular from a budget standpoint," said Mark Webster, manager of pre-owned operations for Mercedes-Benz USA. "But this trend also involves the idea of reusing things and being green and being less ostentatious in these difficult times."
Other import-luxury brands also performed especially well in CPO sales. Audi's pre-owned sales were nearly 19 percent higher last year than in 2007. BMW's CPO sales in the United States rose by 17 percent.
Infiniti's CPO sales for the year surged by more than 150 percent, to more than 7,200 units; that performance included a 560-percent blowout increase in August over the year-earlier month in the wake of an enhancement last summer of the Nissan luxury brand's CPO program. And Lexus CPO sales were up about 4 percent.
General Motors' overall Certified Used Vehicles sales were off only by 5 percent for 2008. Cadillac Certified Used sales rose by 7 percent. And this arena remained practically the only solace for GM's troubled brands: Hummer's Certified Used sales last year rose by 71 percent, while Saab's Certified Used sales were up nearly 6 percent.
Ford's CPO sales were up by 36 percent over last year, through October, in its Southwest Region and down by only 4 percent in California - the two parts of the country where the company first launched a round of program improvements earlier this year. And for 2008 nationwide, Ford's CPO sales were only down by 7 percent compared with the year earlier.
And in a rare win for Chrysler in any sales category for 2008, its CPO sales rose by 2 percent over 2007 - and they absolutely shone during certain periods of the year. "We were the only domestic manufacturer to show improvement in CPO sales in August," noted Lisa Way, Chrysler's CPO vehicle manager.
A Real Silver Lining
Indeed, amid today's sobering dynamics of the U.S. auto industry, Certified Pre-Owned vehicles are perhaps the only bright spot. At about 1.7 million vehicles, they comprised more than one-tenth the size of the new-vehicle market in 2007 and a considerably bigger comparison last year.
As a result, most automakers are backing CPO programs more heavily than ever now - boosting vehicle eligibility for the programs, adding advertising muscle, and harnessing their efforts to effective internet-sales platforms.
Chrysler, for example, bolstered its CPO program last year -- among other things, expanding the availability of these most desirable used vehicles beyond just its top-performing Five Star outlets to all 3,400 dealers of the three Chrysler brands.
Automakers are even beginning to treat the CPO-eligibility thresholds for their vehicles with some of the same enthusiasm that traditionally has been reserved for new-vehicle launches.
"We're excited about the fact that the current-generation IS - which was launched in October, 2005 - is just starting to come off of leases and into our dealerships now," said Matt Kaleba, national CPO manager for Lexus, the Toyota luxury brand, late last year.
"There's been a lot of pent-up demand by consumers looking for those vehicles, and it will be a great volume addition to our [CPO] lineup. It's the kind of vehicle that brings new people to the brand."
Good for Consumers
CPO vehicles comprise multiple advantages for automakers and dealers who are scrambling for ways to respond effectively to the increasingly bleak dynamics of the U.S. car market.
The fundamental value of CPO vehicles, of course, is they're late models that dealership technicians inspect, recondition, repair, and "certify" as sound; then the factory backs them by re-applying the vehicle's original warranty and usually offers expanded and extended warranties. Ticking through hundreds of inspection points and refurbishing what's necessary typically costs $1,000 to $1,200 a vehicle, at least for Audi dealers, said Mark Ilijanic, CPO manager for Audi of America.
The value proposition purported for CPO vehicles now is far more credible to American consumers than it was, say, five years ago in large part because of huge advances in manufacturing quality by every major automaker - and the elevated perceptions of quality levels.
CPO vehicles are priced somewhere above conventional used vehicles - but usually many thousands of dollars below the price of the new versions of the same models. Prices for Lexus CPOs, for example, average about $31,000 compared with the brand's new-vehicle average transaction price of more than $40,000.
So, CPO programs encourage consumers to continue to consider aspirational models that many of them no longer can afford to "stretch" to purchase new, especially luxury brands.
And some CPO buyers still play things right on the edge. "It's a different segment of the market, which we call 'strugglers and jugglers' - people who may be able to afford a new vehicle, but an incorrect decision could be fatal for them financially," said Mark Mathews, General Motors' director of used-vehicle activities. "So they can look at that almost-new vehicle."
Salve for Lease Customers
Now that many OEMs have pared back leasing activity because of constricted availability of credit, CPO vehicles also give them an increasingly acceptable substitute for satisfying the desires of consumers in all segments for the vehicles they think they deserve - but can't afford or access as easily as before.
And factory CPO vehicles provide a new reason for consumers to explore the used market that, in general, they may have spurned before. "In our segment, a majority of customers come in looking for CPO because it's now a known entity - instead of being introduced to it for the first time," said Audi's Ilijanic.
Yet, strong OEM-sponsored CPO programs also are helpful to used-car novices who may be confused by certified-used plans that also are being proliferated by many individual dealers and even by some industry trade associations.
"They may be good for local markets, but if you're traveling to Colorado and your car breaks down, it may become a challenge to get that vehicle fixed locally under warranty," Mathews of GM explained. "Some state legislatures are actually considering requiring vehicles that are called 'certified' to be OEM-certified, because of all the games being played. We would support that."
Great for Dealers
For dealers, they tend to be more profitable than regular used vehicles. Dealers can cherry-pick units from their regular flow of off-lease units, rental repurchases and company demos, send them through the CPO ringer, and maximize returns.
Also, CPO programs allow dealers more financial flexibility to pursue new-car sales. "With 85 percent or more of new vehicles today having trades attached to them, a strong CPO program allows dealers to be more aggressive with trades and put more money into trades," said Glenn Burke, Ford's certified pre-owned manager. "They know that they're going to make a decent gross profit on the back end of unloading a used vehicle."
CPO vehicles also give more opportunities to retailers to establish service relationships with customers that simply aren't provided by conventional used vehicles, which lack certification and significant warranties.
Moreover, CPOs increase residual values of vehicles coming off leases and of other used vehicles at a time when this is an increasing priority for most OEMs. This advantage complements other important tactics aimed at the same strategic objective, including recent fleet-sales maneuvers by the domestic Big Three.
CPO vehicles ingratiate automakers with a group of consumers who rank just below new-car buyers in terms of their desirability - but far above typical used-car buyers. "They tend to be more on an upward trend in terms of their income than even new-car purchasers," Mathews said. "We've identified them as their own class."
Already, in fact, there's a significant cohort of consumers who always buy CPO. "There are loyal customers who would never consider buying a new car," said Tom Webb, chief economist for Manheim Consulting, the Atlanta-based national leader in used-car auctions. "That's the biggest segment for CPO sales."
And, said Katherine Zachary, a spokesman for Infiniti, the Nissan-owned luxury brand, "Most customers in this segment [pay] cash or financing for their purchases. That makes CPO sales especially easier on dealers these days, given how the automotive leasing market has tightened up overall.
Auto company executives said that CPO programs also help them achieve longer-term goals. "It helps our circle-of life strategy," explained Burke. About 55 percent of Ford's CPO sales since 2001 are "conquest" customers, he said. "So it gives us the ability to bring in a new customer. And once they experience our quality products and best-in-class dealer-retailers, we keep them.
And finally, successful CPO programs buttress automakers' brands across the board. "If people buy Certified Used, they have a greater propensity to come back and buy another Certified Used or a new GM vehicle on their next purchase," Mathews said. "That's a major motivation for us because it adds a healthy chunk of new-car business for the dealer body."
Given the glowing performance of CPO sales last year, at least in relative terms, and the substantial long-term advantages of strong programs, every major automaker has been enhancing its CPO efforts lately.
Last summer, for example, Nissan North America established a standalone CPO department within its sales divisions that currently focuses on the Infiniti channel. And it launched an enhanced Infiniti CPO program in July.
In April, Ford extended vehicle eligibility to include those up to six years old or with up to 80,000 miles, compared with the previous standard of five years / 50,000-miles; added a short comprehensive warranty that applies to all vehicles from the time of the CPO sale; and improved its warranties overall, including patching a hole in the previous plans that now covers super-duty vehicles.
Lexus initiated "event" advertising for its CPO program last spring, for the first time. Its "Sixty-to-Zero" APR-financing theme helped Lexus dealers post their two best months ever for CPO sales. And last fall, Lexus ran a "Season to Change" campaign for CPO vehicles.
"Competitors are offering CPO incentives, but one of our competitive advantages is that when we have special APR support as now, we offer it on all [CPO] models for all model years," Kaleba explained. "Mercedes-Benz and BMW select only certain models and model years, which can get confusing for consumers."
Nonetheless, Mercedes-Benz also has been boosting CPO marketing. Last year it ran a second annual CPO sales event that combined national and regional automaker-sponsored ads along with dealer advertising under tag lines including, "Certified Affordable Luxury" and "Certified Affordable." An ad in USA Today in October for Mercedes-Benz CPO vehicles, for example, said, "Proven Leadership and Sound Economics. Too Bad It's Not Running for Office."
The bulk of new marketing initiatives behind CPO programs, however, are being conducted online, where the expenditures actually may deliver bigger return on investment than advertising new vehicles on the internet.
GM, for example, has been moving nearly its entire CPO-marketing budget to Internet sites including Cars.com, AutoTrader.com, Edmunds.com, Yahoo.com and eBay.com, where it lists its inventory of the vehicles.
"The CPO buyer spends an awful lot of time on the internet, researching and making sure they don't make a mistake," said GM's Mathews. "So we digitally plant where we see a history of traffic for people who are interested in certified used cars."
GM's Certified Used effort has been suffering lately in contrast with those even of other Detroit Three automakers in large part, Mathews explained, because of the perception that GM dealers are having difficulty financing all consumer purchases.
But GM also has been going aggressively after more CPO business. Last spring, for example, it began listing its Certified Used inventories on eBay Motors, free for dealers. Vehicles are listed as online classifieds rather than for sale in an eBay online auction.
"It's meeting all of our expectations so far," Mathews said in November. "Leads are coming off of it. But we're still trying to make it as vibrant as possible," he said, including feeding eBay Motors GM's ideas about how to improve navigation and graphics.
Meanwhile, GM also approved Sister Technologies, Dallas, as a vendor to create used-vehicle walk-around videos for its U.S. dealers to use on their sites as well as on auto portals and YouTube. About 25 percent of all U.S. dealers now use online video, said Howard Polirer, director of industry relations for AutoTrader.com, the Atlanta-based online service3.
"It's far more engaging for customers to look at video instead of still pictures," Mathews said. About 85 percent to 90 percent more leads come from videos than from photos, "and we get about 70 percent more calls directly to a dealer in terms of inventory searches," he said. "We're encouraging our Certified Used dealers to use this."
In its test upgrade of CPO marketing in the Southwest and California, each evening Ford taps into the CPO inventory listed electronically in each retailer's dealership-management system and posts it online at many of the same sites.
"In the new-car arena, you can get a blue Taurus anywhere with the same equipment," said Burke. "But used cars are different. And because every CPO vehicle is truly unique, typically what happens is once consumers click on the particular listing with the age and inventory and price and equipment they want, they pick up the phone and call the dealer."
And in these two regions, Ford also is experimenting with "behavioral targeting" of potential CPO customers. If a consumer goes to Edmunds.com, for instance, and examines CPO inventories and leaves - then doesn't return to the listings for a couple of weeks - Ford will send that person an e-mail message. Ford also is buying up online-search terms in those two markets "and we've seen a tremendous increase in customers going from Google to our web site to dealers' inventories," Burke said.
Yet, said Audi's Ilijanic, dealers retain a key role in the growing success of CPO programs. "According to our surveys," he said, "the single largest source of information on our CPO program still seems to be at the dealership. That's where consumers are heading about the program and what it adds to the car, and that helps them make up their minds right on the showroom floor."
By Dale Buss
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