Asbury Automotive Inc.'s experiment in selling used cars at Wal-Mart stores has stalled because the car lots are getting only half the traffic expected.
Asbury, the nation's fifth-largest dealership group, spent $7.5 million to open four Price 1 Auto Stores last year between May and October. The company leased space from Wal-Mart Stores Inc. alongside four Houston-area Wal-Mart stores, hoping to piggyback on the mass merchandiser's popular brand name and retail traffic.
Asbury saw Price 1 as a low-cost way to expand its new-car dealerships' profitable used-car business, but the lower than expected volume has the company grasping for answers.
Asbury must determine why traffic is low and if the problem can be fixed before it decides to expand or kill the project. But so far, the company only has theories:
"We need to double the traffic," says Kenneth Gilman, CEO of Asbury, a publicly held chain of 93 dealerships based in Stamford, Conn. Gilman says he would like to get sales to 50 per store per month.
Price 1 Auto Stores average 200 prospects per month and close deals with about 15 percent of them for an average of 30 sales. About 65 percent of the sales are to Wal-Mart customers.
Gilman says customers seem to like the concept of a stand-alone used-car lot with no-haggle pricing. Customer satisfaction is high and the closing ratio is about what Asbury expects for used-vehicle departments at new-car dealerships, he says.
The company has tinkered with different types of advertising. Asbury promotes Price 1 through radio, classified ads and newspaper pullouts in addition to fliers and signs inside the Wal-Mart stores.
Executives lowered the price of the average car in stock after finding that at least half the customers required higher risk subprime financing. The average vehicle price is now in the $10,000 to $12,000 range, instead of the $14,000 to $15,000 bracket.
Competing dealers offer other theories on Price 1's low volume. Some say that although Asbury did not overbuild its stand-alone used-car lots the way that AutoNation Inc. did with its $25 million used-car megatores, Price 1 could run into the same trouble that AutoNation had with inventory. Unlike new-car dealerships that can stock their used car lots with a steady stream of trade-ins, Price 1 relies on auctions, often buying rental returns. Trade-ins also better reflect the local market.
"All I saw were line after line of program cars," says Jim Brackenbury, general manager of Madisonville Auto Mall in Madisonville, Texas, which sells Chevrolet, Buick, Pontiac and GMC makes. "The biggest problem with program cars is that they are very bland and generic. There is not a lot of visual appeal, no upgrades. They don't tend to get customers excited."
Neil Stern, a Chicago retail consultant who has worked with several auto manufacturers visited a Price 1 store in Pasadena, Texas, a suburb of Houston. Stern, a senior partner at McMillan/Doolittle LLP, says the store lacked strong signage and visibility from the road. And the lot was at a traditional Wal-Mart store, rather than one of the higher traffic supercenters the corporation is building.
"Pricing appears strong," Stern says. But, he adds, "They do little to sell the benefits of a complete reconditioning. There are no car cutaways or literature on why their cars are special."
Price 1 is designed to be a low-pressure, no-haggle operation, but Stern says he felt pressured to buy even though he made it clear he was browsing.
Even if the Price 1 stores reach the 50 units-a-month sales target, some local dealers say the chain could struggle because of the high cost of advertising in the Houston area.
"Each lot would need to average 150 to survive," says Richard Armstrong, general sales manager for used cars at Lawrence Marshall Ford-Mercury in Hempstead, Texas. "This is a competitive market."