Certified programs boost used-vehicle sales

The luxury brand of Toyota Motor Sales U.S.A. Inc. asked its dealers in Philadelphia, Atlanta and Phoenix to put used Lexus cars though rigorous reconditioning. The dealerships checked nearly 100 items - little things such as light bulbs and windshield wipers, bigger things such as wheel alignment and suspension systems.

At the same time, Lexus extended the warranties on the vehicles in the test program - from four years or 50,000 miles, from when they were new, to six years or 70,000 miles. It gave buyers of the used vehicles 24-hour roadside aid and special finance and lease packages. Dealerships that took part in the experiment got advertising and marketing support.

The Lexus pilot evolved into one of the industry's first certified used-vehicle programs. Among the other early adopters were Jaguar Cars North America, which created its Select Edition certified brand in 1986, and Mercedes-Benz USA, which followed in 1989.

Since then, virtually every major automaker has launched a certified pre-owned, or CPO, program. Subaru of America Inc. was the most recent, in 2005.

The programs make sense for dealerships and factories. They enable automakers to prop up residual values and used-vehicle prices by making their used cars and trucks more attractive to buyers. They also provide a profit center for dealers.

Higher sales

Sales of certified used cars and trucks continue to grow. The industry sold 685,410 certified vehicles in 2001, the first year in which many major automakers reported sales. The next year, it sold nearly twice as many.

The industry sold 1,615,392 certified vehicles last year and 1,116,781 in the first eight months of 2006.

Details of certified programs vary, but the concept is universal. Franchised new-vehicle dealers identify the best late-model, low-mileage used vehicles. Those cars and trucks get extensive mechanical and cosmetic reconditioning. They are covered by factory warranties.

A study this year by J.D. Power and Associates concluded that buyers who value certification will pay $1,115 more on average for a nonluxury used vehicle that is certified than for a comparable vehicle that is not. For buyers of used luxury vehicles, the premium for certification averages $1,736, the study found.

The rise of certified programs was initially a byproduct of leasing. Since expensive vehicles are more likely to be leased than more moderately priced ones, luxury brands were the first to offer certification.

Superstore threat

Another factor that drove certification, especially for domestic-brand automakers and dealers, was the creation of used-car superstores in the mid-1990s. Applying big-box retailing concepts to the auto industry, superstores provided consumers hundreds of late-model vehicles to choose from. They also offered no-haggle pricing, longer warranties and money-back guarantees.

To compete with the superstores and to foster brand loyalty, Toyota Division, General Motors and Ford Motor Co. all rolled out certified programs in 1996.

Toyota's program sprinted. Five years after it began, about 85 percent of Toyota Division's U.S. dealerships sold certified used Toyota vehicles.

By contrast, the certified programs from GM and Ford stumbled. Both companies' dealers complained that the programs were too complicated and expensive. In 2001, just 18 percent of eligible GM dealerships enrolled in the GM Certified program. Cadillac, Saturn and Saab operate separate certified programs.

In the same year, only 14 percent of Ford, Lincoln and Mercury stores took part in Ford Motor certified programs.

To boost participation, Bill Lovejoy, then GM's group vice president of vehicle sales, service and marketing, declared that his company would take sales of certified used vehicles as seriously as it did sales of new vehicles.

The company enhanced its marketing and advertising support of GM Certified. It cut the enrollment fee for dealers in half, to $499, and eliminated the $1,000 renewal fee. It expanded the program to make more cars and trucks eligible for certification.

At the same time, GM cut the number of warranty plans for certified vehicles from four to two and simplified their pricing.

Because of GM's increased attention to its program, the company's sales of certified used vehicles have climbed steadily.

GM Certified sold about 30,000 used vehicles in 2000. Last year, the program sold 455,498 vehicles. GM has led the industry in certified sales since 2002. Toyota Division is No. 2. It sold 283,574 units in 2005.

You may e-mail Arlena Sawyers at asawyers@crain.com