Mich. Honda dealer cashes in on clunkers
Store's Budget Row makes money and helps sell new cars
The managers at River Town Honda know there's cash in clunkers.
Eighteen months ago, the dealership in Grandville, Mich., embraced older, high-mileage trade-ins instead of automatically selling them at near-zero profit to wholesalers, said General Manager Rick Clift.
The decision has reshaped the way River Town Honda retails used vehicles and helped the store sell additional new vehicles, Clift said.
"It's been the biggest single piece to our growth," he said.
River Town Honda markets the older vehicles under the moniker "Budget Row collection" both in a special section of its lot and online.
The vehicles typically retail for less than $5,000 and are prominently sold "as is" to emphasize that they have high mileage and could need work.
River Town Honda has been fueled by the business and job growth in the nearest large city, Grand Rapids. The store is owned by Serra Automotive Inc. of Grand Blanc, Mich.
Serra Automotive ranks No. 20 on the Automotive News list of the top 125 dealership groups in the United States, with retail sales of 24,813 new vehicles in 2013.
When River Town Honda began its Budget Row experiment, managers were most concerned about the risk that retailing low-cost vehicles might tarnish the dealership's brand and image, said Cameron Korenstra, who handles used vehicles as one of the store's two sales managers.
"We're a reputable new-car franchise, and we couldn't be seen as some sort of shady mechanic operating a side lot," he said.
Several safeguards have made those concerns a nonissue, Korenstra said. First, River Town Honda takes those older vehicles only as trade-ins; it doesn't go out looking for them, he said.
As such, they represent about 15 percent of used-car inventory at any given time and are kept on a designated part of the lot with "Budget Row" signs. Late last month, out of 125 used vehicles offered online, 20 were Budget Row cars.
The least expensive vehicle in the collection was a 2003 Kia Optima LX with 165,470 miles priced at $1,250. The most expensive was a 2008 Honda Accord LX 2.4 with 177,787 miles for $6,750.
Korenstra said the store is selling 25 to 30 Budget Row vehicles a month at an average net profit of $700. That compares with near-zero profit when they were previously sold to wholesalers, he said. Of all the potential Budget Row vehicles taken in trade this year, Clift said he remembers wholesaling only seven or eight.
All Budget Row cars are sold "as is" with no express or implied warranty, Korenstra said.
Another safeguard is transparency in the transaction and marketing, Korenstra said. Each trade-in is inspected, and any safety problem is fixed before the vehicle is offered for sale, he said. That would include the check-airbag light or problems with the brakes.
Some things are too expensive to fix, though. They might include rust, scratches and even check-engine warnings that could cost a fortune to pinpoint, Korenstra said. The vehicles are clearly marked "as is," and the status of the engine-light warning, for example, is handwritten in marker for shoppers to see. That way, no customer can come back with a complaint that he or she was misled about the condition of the vehicle, Korenstra said.
The results have been impressive, Clift said. Whereas River Town Honda was selling 70 to 80 used cars a month 18 months ago, today it's about 125 used vehicles. The Budget Row collection is responsible for most of the difference, he said.
Moreover, keeping the trade-ins is helping sell new vehicles, Clift said. Because the store makes a $700 average net profit reselling the trades, it is able, when necessary, to offer a little more on trades to new-car buyers to get them to close, he said.
The majority of people who trade a vehicle destined for Budget Row buy a new vehicle, not another used one, Clift said.
Most of the cars have been owned by their first buyers. Those customers tend to keep their vehicles longer than the average buyer, piling up the miles before buying another new one.
The store sells between 100 and 115 new vehicles a month.
"The difference between winning and losing a deal," Clift said, "is often the trade."
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