Certified Pre-Owned Cars are Less Conspicuous; Cheaper, Too

A number of converging factors are making certified pre-owned cars and trucks more popular, especially for luxury brands like BMW and Mercedes-Benz.

First and foremost, many consumers who could afford a new car before the present downturn can’t afford it any more.

Second, some consumers who mathematically can still afford a new car won’t buy one because they’re spending more conservatively until the economy and the job market start to improve. Besides the numbers, there’s also a social-acceptance angle. Fewer people are willing to be seen as conspicuous consumers, when everyone else is tightening their belts.

An article in The Wall Street Journal today noted that certified pre-owned luxury cars can be a compromise between luxury and performance on one hand, and keeping a lower profile on the other. Separately, edmunds.com estimated that in the last three months, more than 500,000 new-car shoppers switched to used cars.

Thirdly and importantly, car companies and their dealers are highly motivated to move the metal in certified pre-owned, or CPO. The car companies need to sell big volumes of cars and trucks coming back from leases.

That’s especially true for luxury brands. BMW, for instance, historically has relied heavily on lease discounts to grow or sustain sales volume. The downside is, off-lease vehicles can generate a loss for the car companies and their finance companies, if they are worth less at the end of the lease than projected, at the time the lease was written.

Since the second half of 2008, the finance companies for Ford, GM and Chrysler have all written off billions of dollars on the value of off-lease vehicles. On a smaller but still significant scale, luxury brands including Mercedes-Benz and BMW have also experienced losses on off-lease vehicles.

Selling reconditioned cars and trucks in a CPO program is a way to mitigate those losses. It costs money to recondition off-lease vehicles, but that can be offset by the fact that CPO vehicles command a higher retail price than non-certified used cars.

CPO programs are also aimed at keeping off-lease vehicles in the hand of dealers, instead of having cars returned to the car companies and their lenders, and auctioned off. That saves costs for transportation and storage, and keeps the vehicles out of the hands of auctions, where wholesale prices are lowest.

BMW, which was a pioneer in CPO sales in the late 1980s and early 1990s, is a case in point. In January, BMW’s CPO sales were 36.8 percent higher than the year-ago month, while new-vehicle sales were down 15.5 percent. For all of 2008, BMW’s CPO sales were up 16.4 percent from 2007, to 104,500.

“It is safe to assume that many shoppers who normally would be tempted by ‘new car smell’ and the latest automotive technology made a more cost-conscious decision because of economic pressures,” said David Tompkins, edmunds.com senior analyst.

Photo: bmwusa.com