Buoyed by a more aggressive marketing plan, Group 1 Automotive Inc. is gaining revenue from new and used vehicles even though the retailer is making slightly less money on each transaction.
The strategy helped Group 1 to a 17.2 percent revenue increase during the third quarter. Earlier today, Group 1 reported net income of $19.0 million during the period, up 3.5 percent. Used vehicles were particularly strong, with revenue up 29 percent on a same-store basis.
“Our used car business surprised me,” Group 1 CEO Earl Hesterberg said in an interview. “We did recognize at the beginning of the year that that market was there much more than the new car market. We put a lot more advertising money into that this year.”
Used-car advertising spending is up almost 20 percent this year, Hesterberg said.
At the same time, a tighter supply of used vehicles means Group 1 is spending more to acquire inventory. Though unit volume is up, those higher costs are lowering profits on the sale of each vehicle. Group 1 made $1,737 in gross profit on each used vehicle sold in the third quarter, down from $1,853 a year ago.
The story is similar in the new vehicle department.
Volume and revenue are up significantly, with lower margins. Gross profit per unit is down from $1,940 a year ago to $1,783 per unit for the third quarter. Group 1 is promoting more competitive prices, and its overall advertising budget is up 22 percent for the year, Hesterberg said. The company will spend about $32 million in advertising for the full year, he said.
Lower margins for higher volumes are the reality for right now, Hesterberg said. But he added that he's not comfortable with current new-vehicle margins over the long term.
In 2011, “the question we'll have to answer is one that was just asked: If we continue to trade off new vehicle margin for volume?” Hesterberg said. “We won't be able to answer that until we get a little farther down the road.”