Cha-ching! Dealership profits soar
Used cars drive growth
Rising new-vehicle sales are boosting dealership profits. Most public retailers reported much higher first-quarter earnings last week, and other dealers tell similar stories.
All dealership profit centers are contributing. But it's in used-vehicle sales that many groups see big growth opportunities -- along with some challenges, the greatest of which is a lack of inventory.
"The biggest driver for used-car sales growth is the ability to procure used cars," says Bryan DeBoer, Lithia Motors Inc.'s COO. "We, at the top of the food chain, have a big advantage over the independent car dealer who doesn't take in the amount of trade-ins we do."
But for the Medford, Ore., dealership group to reach its goal of selling 60 used vehicles per store per month, it will have to do a better job at procurement, DeBoer says. In the first quarter, Lithia sold 45 used vehicles per store per month, he says.
"We have to open up our pipeline of used vehicles -- meaning get them from the street," DeBoer says.
Large retailers are using innovative tricks to get used vehicles.
Most say they are relying less on auctions. Instead, they look to increase trade-ins from new-car sales. They also are buying more used cars from Internet and newspaper ads. And they are using so-called equity software that combs their own databases to find existing customers with equity in their cars who might do a trade-in.
Big retailers say they are reconditioning more trade-ins for higher-profit retail sales instead of wholesales through auction.
At Penske Automotive Group Inc., retail sales of used vehicles jumped 27 percent in the first quarter. The spike helped boost Penske's first-quarter profits by 38 percent.
CEO Roger Penske attributes the increase in used-vehicle sales primarily to an internal program dubbed Retail First.
"Our initiative today is to recondition these used cars where they can be sold in retail rather than wholesale," Penske says. "It gives us a new customer."
And it results in bigger profits than wholesale yields. On average it costs Penske about $500 to $600 to make cosmetic and safety improvements to used vehicles, Penske says. But the average gross margin per used vehicle sold at retail is $2,043, Penske's earnings report says. Roger Penske says the company makes about $150 on a wholesale sale.
Vince Sheehy, president of Sheehy Auto Stores in Fairfax, Va., also wants to see more retail and less wholesale. He is relaxing his used-car standards to capture more lower-end retail buyers.
"Sometimes you put new tires on a car, and then certain people can't afford the car. So if you can bring the price down by $750, that can bring the sale into play," Sheehy says. "Wholesaling means someone else is going to retail it. We want more of those opportunities, but not anything that gets in the way of our reputation."
Sheehy's used-car sales were up about 5 percent in the first quarter compared with a year ago, and his used-car profitability was up about 10 percent, he says.
Sheehy Auto Stores is ranked No. 31 on the Automotive News list of the top 125 U.S. dealership groups, with total new-vehicle retail sales of 15,669 units in 2011.
Vince Sheehy also is looking to increase trade-ins. Starting earlier this month, he put so-called equity software in each of Sheehy's 15 dealerships.
Kuni Automotive also uses equity software and has spent the past two years using technology to improve vehicle acquisition, COO Joe Herman says. Used-car volume, revenue and gross profits are up significantly, and Kuni is up to 1.13 used vehicles sold for each new one.
In the last 90 days, Herman has added a new procurement specialist position to several stores. That person uses specialized software to seek inventory on online vehicle auctions.
"The dealers that can access inventories with some of those new Web tools can increase the size of their retail business because they can expand their reach beyond their physical location," Herman says.
Kuni Automotive of Vancouver, Wash., is No. 104 on the Automotive News list with retail sales of 6,683 new vehicles in 2011.
At Swope Automotive Group in Louisville, Ky., sales managers "source the service lane" for potential used-car inventory, says Cary Donovan, director of used-vehicle operations.
"You may source the appointments the evening before customers arrive," Donovan says. "You'll know from that particular group if you have a customer who's been in a car for two to three years."
Swope Automotive Group ranks No. 71 on the Automotive News list with 8,784 total new-vehicle retail sales in 2011.
"You've got to fish in some areas we didn't fish in before," Donovan says.
Used-vehicle sales continue to be a strength for Asbury Automotive Group.
"Our stores broke all-time first-quarter company records for used retail revenues and unit sales," says Asbury COO Michael Kearney.
Group 1 CEO Earl Hesterberg says he was surprised by the used-vehicle market's strength to start the year. Because December was a great month for new-vehicle sales, Group 1 started January with more good trade-ins on hand.
In the first quarter, Group 1's used-vehicle unit sales soared 24 percent and retail used revenues jumped 28 percent. Gross profit on used vehicles jumped by 26 percent.
And "there's still excellent growth room" going forward, Hesterberg says. "The more trade-ins we get, we can be more competitive and have more attractive merchandise."
Group 1 is retailing all but poor-quality trade-ins.
"Most of the things that go to auction now from our company are really junk," Hesterberg says.
AutoNation Inc. and Sonic Automotive Inc. are focusing on using the increase in new-car sales to boost their used-car inventories and sales with trades as well.
"We know that we do not want to be an auction buyer other than in very select situations," says AutoNation COO Michael Maroone. "We aggressively went after our appraisals and converted almost 50 percent, which is an all-time high for us."
In the past, AutoNation's typical close ratio on trade-ins was in the high 30s, low 40s.
AutoNation retailed 45,500 used vehicles on a same-store basis in the first quarter, up 8 percent. Same-store retail used-vehicle gross profit increased 5 percent.
AutoNation continues to shift used vehicles between stores to find the best market, moving around 13,000 vehicles in the quarter.
Asbury has changed its view of lower-priced used cars.
"We used to avoid anything sub-$10,000," Kearney says. But now Asbury does a significant amount of business in the $8,000 to $12,000 price band, he says. "It gives you opportunity to reach so many more buyers."
At Sonic, first-quarter used-car revenue rose by 9 percent and gross by 8 percent. Its closing ratio on appraisals was 48 percent. By selling 90 used vehicles per store in March, Sonic also hit a new milestone on its way to the goal of selling 100 used vehicles per store per month. Executives say they believe Sonic can achieve that goal by the end of 2012.
The long-term potential is even greater, Sonic President Scott Smith says. "That's a psychological number," he says. "There's a lot more upside to what we're doing."
Bryan DeBoer is confident Lithia will hit 60 used cars sold per store per month, but he says it won't happen by year end for his company.
"We believe the market is there right now; it's really a matter of our stores being able to find those vehicles and then attracting the customers to gain awareness that we are a broader used-car dealer," DeBoer says. "We'll get there, probably sooner than later."
You can reach Jamie LaReau at email@example.com. -- Follow Jamie on