Cool cars, hot prices
In the past, buying a new vehicle was a much thought over, long-time investment. Today’s multitude of options makes getting a new ride easier than ever. Automotive shoppers have three ways to put a shiny new vehicle in their garages:
- New cars bought through full service dealerships,
- Pre-owned certified vehicles bought through the same dealerships or mega automotive retail centres
- Used cars bought privately or through corner lots all over North America.
In the past, buying a car or truck meant choosing between a new vehicle with a one year warranty at a high price or finding a used vehicle with no warranty and the possibility of hidden problems. The choice was solely driven by the consumer’s budget, limited financing options and the price of new cars in comparison to the single household incomes at the time.
Consumers would hold on to vehicles for 10 or more years, while saving up the money to buy their next new car. Dealers had fewer opportunities to see their customers and the used car inventory that was coming back on a trade-in would be high mileage, worn out products that made little sense on an ROI basis for a dealer to keep. Customers would be encouraged to sell the vehicle themselves or accept a low ball offer from the dealer as a trade-in. These vehicles spawned an industry of “curb siders” who would buy worn out cars or insurance write-offs and rebuild or dress them up and then sell these vehicles at a huge profit. The used car lots would also visit the auctions and buy fleets of high mileage cars and trucks, cleaning them up to look good and selling them with little or no warranties.
Between the curb siders and the shady corner car lots, it’s no surprise that buying a used vehicle scared the majority of consumers until the auto industry and governments introduced new legislation and self-regulation policies that policed and prosecuted illegal business operators and gave the consumer legal muscle to protect themselves from getting ripped off. Manufacturers introduced extended warranties, flexible low rate financing options and competitive leasing programs that gave consumers more incentives to trade in their vehicles sooner and own a new car every 3 or 4 years (the duration of the factory warranty).
As a result of these changes, the dealers now had a better selection of lease returns and trade-ins that they were willing to keep and sell as “pre-owned” cars and trucks with lower mileage and warranty service histories. It became profitable for dealers to keep these vehicles themselves and expand their pre-owned business because the ROI on pre-owned was up to 100% directly to the dealer and they could turn over the pre-owned inventory faster than new cars. Large dealerships now have up to 50% of their property devoted to pre-owned vehicles with separate sales departments and extended warranties offering even more profitable upsell opportunities.
Even manufacturers have embraced the concept of the “pre-owned” market as a lucrative extension of new car sales and a powerful relationship-building tool to make new customers for their brands. Almost every manufacturer has a certified vehicle program where the dealers must follow a checklist to prepare a vehicle before it can be considered “brand certified” vehicle such as General Motors Optimum or BMW’s wildly popular Certified Series program. Now, new car shoppers have a real alternative to the high price of new cars and trucks. Certified programs offer low mileage, fully warrantied and brand certified pre-owned vehicles. What’s more, the dealer can ask a premium price for certified vehicles and the manufacturer gets an opportunity to build a new customer relationship with a buyer who is more likely to buy a new vehicle from the same brand next time.
The loss of 0% financing and leasing, combined with the recession of 2010 and 2011 solidified “pre-owned” as an alternative to a new car purchase. Tighter household budgets and the fear of job losses cut into the discretionary spending of North Americans. Not willing to trade down in either vehicle size or options, North Americans began looking at the pre-owned market (especially the “brand certified” vehicles) as an alternative to committing to a new car purchase.
Today, manufacturers and dealers must be more creative because the new car shopper and the pre-owned shopper are the same customer who can be swayed either way depending on the product, price or warranty. Any OEM that overlooks pre-owned does so at its own peril because they could be alienating an entire market of potential new customers.