Dealers Spur Pre-Owned Sales with Certification Programs

The economy has forced many consumers to forego the purchase of a new vehicle due to their own budgetary concerns or due to the lack of available financing. These customers are now considering certified pre-owned (CPO) vehicles as a viable alternative to new. CPO units offer many of the same luxuries of purchasing a new car, but at a much lower cost.

Generally, CPO vehicles are late-model vehicles (usually seven model years old or newer), inspected for quality (most inspections cover over 100 points of the vehicle) and come with warranties. Many also have fewer than 100,000 miles and vehicle history reports. Some certification programs include roadside assistance and have no warranty deductibles.

Clearly, there are a host of reasons why customers are interested in certified units, which translates to several reasons why selling CPO units can be advantageous for dealers.

Certified Advantages

"The interest rates are 2.9 [percent for CPO units]. Sometimes you can take a customer and put them in a 2,000-mile, 2010 Corolla and the payments are $50 cheaper a month [compared to a brand new 2010 Corolla]."

- Lenny Cafarelli, GM
Huntington Toyota, Huntington, NY

Dealers stand to increase profits by selling CPO units. According to recent NADA data, dealers are profiting almost $800 more per used vehicle compared to new. When comparing non-CPO vehicles to CPO vehicles, Stuart Landsverk, managing partner of Payless Car Sales in Mesa, Ariz., said, “You can always get more money for a car that has a warranty on it versus one that does not. Always.” The Payless Car Sales store has been selling CPO units for two years now, and Landsverk said the average gross has increased by $400 to $500 per unit.

In addition to grossing more per vehicle, dealers with certified programs tend to sell more used vehicles. Plus, CPO units sell more quickly. Lenny Cafarelli, general manager at Huntington Toyota in Huntington, N.Y., has been ramping up the dealership’s CPO business for the past year-and-a-half. He said, “This store used to do 19 [used sales per month]. This month we’re going to hit 100. Right now we have 66 cars in stock. We turn our inventory probably twice a month.”

According to the National Independent Automobile Dealers Association (which now offers a CPO program for independent dealers), a non-CPO vehicle is on the lot twice as long as a CPO unit. CPO units average 27 days on the lot, while non-CPO vehicles average 55 days (based on data from 2009 Consumer Marketing Research).

Landsverk said the Payless Car Sales lot experienced a significant improvement on inventory turn since implementing their CPO program. “We [were] averaging a 90- to 100-day turn, whereas we’re closer to 60 now. Obviously, the quicker you turn your inventory, the more money you make and the fresher the inventory that’s out there for people,” he said. Additionally, the store has seen its monthly sales increase by 50 to 60 percent.

Jason Giordano, president of Certified Cars Inc. in Glen Burnie, Md., has also experienced a surge in pre-owned sales thanks to CPO. However, that was prior to opening an independent operation. Before venturing out on his own, he was a general sales manager at a CPO Honda store. It was there that he got the idea to boost sales by implementing a secondary certification program for the off-brand inventory and used Hondas that didn’t qualify for the manufacturer’s program.

He said, “When customers were coming in for an off-brand vehicle … comparing it to a certified Honda … you’d have to break the news to them that they were getting no warranty other than the 30-day, 1,000-mile warranty that’s provided to them by the state of Maryland … At that point, we were losing sales. So I sat down with my friend, whose family owned the dealership, and we created a warranty program – essentially it was a warranty program, but we called it a certification program – for all the vehicles we had in inventory [that weren’t Honda certified].”

This new CPO program resulted in an almost-immediate 10 to 12 percent increase in sales for that segment of vehicle. It’s also what gave Giordano the idea to open up his own independent dealership where every car is certified, which is a success so far. “We’ve been open officially since January 5th [2010], and we’ve shown … a 20-percent increase month-over-month since January.

"A common argument from most of the 20 groups I participate in is the cost of reconditioning is significantly higher with certified vehicles ... Really, the difference in cost of reconditioning is minor, and the fact is, our average front-end gross is $3,000 per copy."

- Jason Giordano, President
Certified Cars Inc., Glen Burnie, MD

Another fringe benefit of selling CPO vehicles is that it helps improve finance company relations. If a vehicle is certified, the finance company has some peace of mind financing it because the quality of the vehicle has been checked and the warranty increases the likelihood of the customer staying on track with payments. Landsverk said, “It certainly helps us with lenders … Lenders know customers are getting a 5-year, 100,000-mile warranty. [Customers] can’t play the, ‘I can’t make my car payment because my engine blew up’ card.”

Cafarelli has the luxury of low interest rates on CPO units thanks to access to the dealership’s captive finance company, Toyota Financial Services, which he said is “always enhancing the CPO interest rates.” He added, “The interest rates are 2.9 [percent for CPO units]. Sometimes you can take a customer and put them in a 2,000-mile, 2010 Corolla and the payments are $50 cheaper a month [compared to a brand new 2010 Corolla]. Why would you not do that?”

Yet another reason CPO programs are beneficial: the majority of used car shoppers want a CPO car.  J.D. Power and Associates’ 2009 Used Vehicle Market Report discovered over 60 percent of “used-vehicle buyers indicating they intend to purchase certified pre-owned vehicles at the start of their shopping process.” Additionally, 29 percent of buyers visited dealer Web sites specifically for CPO vehicle information. Over the past five-plus years, customers have become more educated on the benefits of buying CPO thanks to the availability of information online and because manufacturers have been actively marketing their CPO programs.

Bob Cockerham, dealer of Zia Kia in Santa Fe, N.M., said, “I think [today’s customers] are [more educated about CPO], and I think more and more customers are looking for value … and value isn’t necessarily the lowest price. That’s where we come in as salespeople to explain the differences [between CPO and non-CPO].”

Perceived Disadvantages
While there are several advantages to incorporating a CPO program, some dealers are still hesitant for a few reasons. The main concern is that a certification program increases the cost of reconditioning (because part of the certification includes a rigorous inspection) and adds in a warranty cost. With many CPO programs, the inspection alone costs over $500. However, dealers shouldn’t fear the increase in recon costs because CPO sales gross more than non-CPO—enough to cover the extra investment and net dealers hundreds more in profit per retailed unit.

Giordano agreed that most dealers hesitate on CPO because of the costs. “What I find is a common argument from most of the 20 groups I participate in is the cost of reconditioning is significantly higher with certified vehicles, but it’s really not that much more … Really, the difference in cost of reconditioning is minor, and the fact is, our average front-end gross is $3,000 per copy.”

At Certified Cars Inc., the average cost of recon is about $550, which is half of what Giordano’s recon cost once was. When he was a GSM at a CPO Honda franchise, the cost of recon there was a four-digit figure. Even so, the return was worth it.

Giordano said, thanks to having good processes and people, he’d still be running a successful independent store even if the inventory wasn’t certified, but he estimated his per-vehicle grosses could be $2,000 to $2,500 as opposed to the far-above-average $3,000 he’s earning. NADA data showed the average franchise dealer grossing $2,166 per used vehicle (Feb. 2010 year-to-date average).

Cockerham, who is on the brink of implementing Kia’s CPO program at his dealership, said, “The expenses that you incur on your certified program are … the inspections themselves. The inspection is a lot more thorough inspection … We’ve done a couple of [CPO inspections] just to see, and it is substantially more than what we’re currently spending … It’s almost going to double our used car recon expense.”

"You can always get more money for a car that has a warranty on it versus one that does not. Always."

- Stuart Landsverk
Managing Partner
Payless Car Sales
Mesa, AZ

Landsverk spends $700 to $800 per certified pre-owned vehicle for recon. “We spend probably a lot more than we should [reconditioning a car] … but on the other hand, the car is as nice a car as it can possibly be. The car looks like a nicer-than-average used car.” While that figure may scare some dealers, it’s been well worth it for the Payless store. “Our gross average has probably gone up $400 or $500 a car, and that’s after factoring reconditioning and the cost of the warranty,” said Landsverk.

At Huntington Toyota certifying a vehicle costs $550 at minimum, said Cafarelli. However, he has a $200 “slush fund” for each car because sometimes the dealership needs to do more than the bare minimum required to qualify a pre-owned Toyota as a CPO. “We go above and beyond the call of duty when it comes to reconditioning … Some cars need the extra money; some cars don’t.” Recently, Toyota recognized the dealership for its efforts. Huntington Toyota was awarded the 2009 Standard of Excellence Product Quality Award for its quality CPO units.

Another concern for dealers is that implementing a CPO program will take away the opportunity to profit from the sale of F&I products, particularly extended service contracts. Landsverk said, “[Some dealers] say there’s not F&I opportunity [with certified programs]. We have an upgrade available that will cover more items for an additional charge, so we do have some F&I opportunity to sell an upgrade and make some money on that, but for the most part, people are happy with the power train warranty that we give them.”

Payless Car Sales’ warranty on CPO cars is quite extensive, spanning five years or 100,000 miles after the purchase date. “You could buy a Payless Certified Car, it could have 100,000 miles on it, and you would be covered to 200,000 miles. No manufacturer can touch that. They have their 7-year, 100,000-mile warranty, but that always starts at the in-service date. That doesn’t start when you buy the car,” said Landsverk.

Management at Cars Certified Inc. constructed a certification program with AUL so that F&I profit was still an option. Giordano said, “The reason we didn’t provide any longer term than 6-month, 6,000-miles is we wanted to still be able to upgrade our customers to an aftermarket [extended service contract]. What we found is when you’re doing 12-month, 12,000-miles or anything longer than that, what you’re doing is you’re taking away any back-end opportunity.”

One issue Cockerham expects to run into with CPO is pricing because they typically cost more, considering they’re reconditioned better and come with a warranty. His fear, however, revolves around how competitive the used car market is. “The problem is there’s such price pressure on used cars right now with the use of tools like vAuto … We’re currently using vAuto, as well. There’s so much pressure to be the lowest-priced dealer that sometimes certification has to take a back seat.” His goal is to only certify used Kias, which will allow him to stay in the price game with the off-brand vehicles on his lot.

Some dealers would counter Cockerham’s price hesitations with the fact that customers are willing to pay more for certified vehicles. NIADA reported (via 2009 Consumer Marketing Research) that “shoppers are willing to pay $3,000 more (on average) for a CPO vehicle.” Plus, customers now have the luxury of searching specifically for certified cars on many third-party vehicle listing sites, including AutoTrader.com, cars.com and KelleyBlueBook.com.

Be Known for CPO
Even though shoppers may be willing to pay thousands more for CPO units, dealers need to properly market their certified programs if they really want to move certified metal, which is why Giordano focused as much on marketing his new business as he did defining the parameters of his certification program. He said, “I took everything the manufacturers have done in terms of marketing the certified pre-owned program and drilling it into these consumers’ minds that certified pre-owned is the way to go, and I did it on an independent scale … I needed to have a niche in order to outsell my competition.”

"I think more and more customers are looking for value ... and value isn't necessarily the lowest price. That's where we come in as salespeople to explain the differences [between CPO and non-CPO]."

- Bob Cockerham, Dealer
Zia KIA, Santa Fe, NM

In addition to having CPO as a niche, another way to gain ground on the competition was becoming competitive on the Internet “in terms of pricing [and] marketing.” So, he and his partner met with a Web designer and went to work, starting with the URL of the site. “When we developed the name for our company, we developed the name based on what URLs were available in terms of certified cars. We knew that we wanted ‘Certified Cars’ in the title of our company, and with us being incorporated, we tried Certified Cars Inc., and it was available as a URL.”

In addition to CertifiedCarsInc.com, the dealership owns the same URL with .biz, .org and .net domain names, all of which redirect customers to the .com site. “We bought every single [CertifiedCarsInc] URL that was available.” Another part of the dealership’s plan was to be competitive on AutoTrader.com, cars.com and craigslist. To maintain an in-demand inventory that is competitively priced, Giordano (like Cockerhan) uses vAuto.

Similarly, Landsverk said online marketing is a key part of his overall strategy. “We do YouTube; we’ve got videos on the certification process and how the warranty works. We’re aggressive online on … YouTube, Twitter, Facebook, cars.com, AutoTrader.com, eBay Motors, [our] own Web site … [The dealership’s CPO program [is] incorporated in all our advertising.”

While Huntington Toyota certainly promotes its CPO program online, the dealership has the luxury of manufacturer advertising and marketing to supplement its own marketing.  Cafarelli said, “Every other brand tries to follow the way Toyota does their CPO. Toyota has always done and will always do a very good job with it.”

Cockerham, who’s been considering implementing Kia’s CPO program for some time, has closely watched the Toyota CPO program and hopes to emulate it. He said, “I like the Toyota model a lot. I think they’ve done an excellent job of branding what a certified car is and showing value in a Toyota certified. We’re watching that very carefully, and we’re going to kind of inch down that road little by little.” So why is he watching Toyota’s program? “From what I can see, Toyota’s program is a lot more evolved and a lot more fine-tuned—from what the standards are to the execution as well.”

While almost all customers do some sort of research online before buying a car, marketing a CPO program offline is also very important because, according to J.D. Power and Associates’ 2009 Used Vehicle Market Report, 45 percent of CPO vehicle buyers’ primary method of locating CPO vehicles was “by driving to dealer lots.” To catch the drive-by customers’ attention, at Huntington Toyota the sunvisor of each CPO vehicle is pulled down and has a certified label on it. At Certified Cars Inc., Giordano has a custom certified window sticker that’s about 2-feet by 2-feet, which is catching more than his customers’ attention.

He’s opened his franchise counterparts’ eyes to how lucrative CPO can be. He said, “Since we’ve opened, we have increased awareness to the franchise dealers; there’s no question … You can definitely tell … we’ve been a thorn in the franchise dealer’s side. We have definitely taken sales from them, which I love, and they have definitely wised up.” He added, “Pretty much every franchise dealer in the area has now established some level of certification for their pre-owned vehicles.” One franchise dealer “right up the street from us” even made a sign that’s almost identical to the Certified Cars Inc. logo.

Obviously, entering the CPO vehicle market is worthwhile, but it’s more than having service technicians complete inspections on vehicles and slapping certified tags on them. However, for dealers willing to go the extra mile to properly implement a program, CPO is the way to go. Just ask dealers like Giordano, Landsverk and Cafarelli, who have been reaping some serious CPO benefits for years. Like any other profit center, CPO takes time, money and manpower, but it pays off, which Cockerham will probably soon find out. 

Vol. 7, Issue 7