BMW's Used Cars Help to Sell New Cars

The BMW brand is a pioneer in emphasizing sales of "certified pre-owned" cars through its dealerships. Until the late 1980s, many luxury-car dealers didn't sell used cars at their new-car dealerships. Instead, they sent trade-ins to wholesale auctions and made all their money from new car sales, parts and service.

With the rise of leasing in the 1980s and 1990s, it became more important to luxury brands to keep the resale value of those off-lease cars high, and to sell as many as possible at retail new-car dealerships, instead of wholesale used-car auctions. That's because at the end of the lease, the car company and its lending arm end up owning the car. The company loses money if the resale value is too low.

In the meantime, dealer margins on new-car sales are thinner than they used to be because of tougher competition and better-informed customers. Therefore, used cars have become a more important profit center for luxury-car dealers.

From a consumer's point of view, high resale values also help keep monthly payments low on leases. How leasing works in effect is that the customer only borrows the difference between the upfront cost of a car and its predicted value at the end of the lease, usually called the "residual value." The smaller that difference is, the less the customer has to borrow. A high residual value is one way to shrink that depreciation.

BMW is also a leader among luxury brands in offering free scheduled maintenance for four years or 50,000 miles. Besides the obvious benefit to new-car buyers, free maintenance also makes used cars more valuable because new-car buyers take better care of their cars.

I spoke with BMW's U.S. chief Tom Purves on June 16 at BMW's North American headquarters. Purves, a 59-year-old Scot, is responsible for sales, marketing and distribution of the BMW and Mini brands in North, Central and South America. He leaves that job to become CEO of Rolls-Royce, based in the United Kingdom, starting July 1. The following are edited excerpts:

BNET: BMW was way ahead of the curve on CPO. Tom Purves: We did about 20,000 certified pre-owned when I came (in 1999). Last year, it was 90,000. It's increased more than new-car sales.

BNET: Is that a priority, mostly because of residual values? TP: Certified pre-owned has been an extremely important part of the process. Historically, BMW did not have the best residual values in the business. We do now, for some models, but we are still working to attain them for others. That's a field where you have to ensure that you stay on top of it, because it underpins dealer profitability, and it underpins your brand value. I was used to that being a priority in Britain, where dealers commonly sell two or three times as many what they call "authorized used cars" as new. That's the equivalent of our "certified pre-owned."

BNET: Do you still do as much leasing as you used to? A few years ago, it was a big majority of your sales some months. TP: Leasing is lower today that it was a year ago, or two years ago.

BNET: Free maintenance has got to be expensive. TP: Free maintenance covers virtually everything except tires. It reassures people who bought the car, it's going to cost "this much" per month plus gasoline. BMW historically needed to improve its image with regard to cost of ownership.

BNET: Research shows people still worry about high maintenance cost for BMW, like they do for Mercedes-Benz, yet Mercedes-Benz doesn't offer anything free. Neither does Lexus. Their out-of-pocket costs are comparable to Mercedes-Benz, yet Lexus has this reputation for "bulletproof" quality and low maintenance. TP: Images are built up over a long period of time, and once they're built up and strong enough, they're hard to change. How much money has Volvo spent in the last 20 years trying to be "sporty?" How much money has Mercedes spent on Formula 1 racing to be seen as high-performance? A lot of money. But if you ask people what a Mercedes is, they won't say "high-performance," they'll say it's a prestigious car. That applies also to negatives. BMW is a very polarizing brand. People either like it or they have certain issues with it, and the cost of ownership is one of those. Free maintenance is a way to explain to owners that it's not something they need to worry about. It's answering an objection in a meaningful way, as opposed to (merely) promising it, in a way that people will believe.