Has the used car business discovered the fountain of youth?
Not exactly. But used cars sold by Toyota and Lexus dealers are definitely getting younger. And more plentiful. As a result, both brands’ certified pre-owned vehicle programs have never been more important.
Here’s what’s going on:
- After the financial crisis of 2008-2010, new-car sales rose to record levels. Though the pace has cooled somewhat this year, industry sales have been humming along in excess of 17 million units since 2015.
- Meanwhile, more and more customers are choosing to lease those vehicles rather than buy. One big reason: It allows them to drive a more fully-featured car at a lower monthly payment than if they were to go down the traditional financing path. This is especially true for luxury brands like Lexus. But it’s becoming increasingly common for Toyotas to be leased, too.
- The term for most leases is three years. That makes it easy to predict when these customers will return in need of a new vehicle to start the process all over again.
- Of course, if the supply of three-year-old used vehicles goes up and demand stays the same, prices will go down. That’s a problem, for Toyota, Lexus and its dealers.
This is where manufacturer-backed certified used vehicle programs come in. While they’ve been around for many years, their impact on dealer profitability, owner retention and vehicle residual values has perhaps never been greater. That’s because, if done right, certified can boost demand for exactly the kind of vehicles that have become more plentiful. And when demand keeps up with supply, prices are more likely to hold steady.
Both Toyota and Lexus have been stepping up their certified efforts to ensure that’s exactly what happens.
“We’ll have more than 325,000 leased vehicles returning next year, which is just staggering,” says Ron Cooney, the Toyota Certified Used Vehicle (TCUV) operations manager. “That number has been growing steadily over the past few years. It’s down a bit this year. But in 2018, it goes right back up again.”
“We sold a record 101,000 units in 2016,” says Eric Schuttee, operations manager of L Certified. “Off-lease returns are down 13 percent this year. But next year, they’ll increase to over 170,000. That’s a 33 percent jump. Almost all of them are 3-4 years old.”
Combined, that’s nearly 500,000 units that will need to be accounted for. It’s a challenge. But it’s also an opportunity.
The Benefits of Certification
What does “certified” mean and how will it help address this influx of late-model used vehicles? In simple terms, it amounts to a manufacturer’s promise that when a customer buys one of these cars, they can trust that the dealer has thoroughly inspected it and restored it to like-new status. That promise is sealed with factory-backed warranties that kick in should problems arise.
So, for example, a customer who buys a three-year-old certified Camry gains the peace of mind of a 12-month/12,000-mile limited comprehensive warranty, a 7-year/100,000-mile warranty and a year of roadside assistance. A customer who opts for, say, a certified ES gets not only a low-mile luxury sedan but also two years of free maintenance and an extension on the original limited comprehensive factory warranty by two years and an unlimited number of miles, plus roadside assistance and all the other perks of Lexus ownership.
These benefits do come with a higher price tag. But many customers calculate that the total package is a better value than buying a non-certified Toyota or Lexus that doesn’t offer a comparable safety net. It’s one of the reasons certified used vehicles tend to sell faster than non-certified, even though they cost more. That’s crucial, given the surge in supply.
“It’s about making a compelling value proposition,” says Schuttee. “A lot of younger people aspire to own a Lexus. Certified gives them a price point that makes the possible for them. And it also appeals to older buyers who are OK with driving a Lexus that has some miles on it. Both of those customer groups are important for the long-term health of our brand.”
Good for Customers and Dealers
So certified used vehicles are popular with customers. Cooney and Schuttee’s task is to convince their respective dealer networks that investing in a strong certified program will pay dividends for them, too.
“Certified is a building block in a dealers’ foundation,” says Cooney. “It’s part of the lifecycle that starts when a customer leases a new vehicle. They come back for maintenance and service and then, at the end of their lease, return the vehicle and get a new one. The old vehicle goes into service, where it gets reconditioned — at full retail rates — so it can be certified. Then the dealer sells it to another customer as a certified vehicle, who also comes back for maintenance and service. If this customer has a good experience, they’ll come back to buy another certified vehicle. So it’s a win-win for everyone involved.”
The alternative is to sell all of these lease-return vehicles without the benefits of certification. Cooney and Schuttee say those units tend to languish longer on a dealer’s lot and are more likely to wind up being wholesaled at an auction – at a lower price, if not a loss, due to the oversupply. The dealer also misses out on those additional customers and the service business they might bring their way.
Simply put, the lifecycle is cut short.
“TMNA is a new-car company, so you might wonder: ‘Why should we be concerned about used cars?’” says Cooney. “It’s because a healthy used-car department is the key to a dealership’s new-car sales department. The two go hand in hand. You can’t sustain success with one without the other. That’s never been more true than it is today.”
By Dan Miller