Retailers want piece of huge used-car market

The used-car business is hot, prompting franchised new-car dealers across the nation to pay more attention than ever to their used-vehicle operations, in some cases opening used-only stores.

Fueling the newfound focus on used:

• The market is huge and largely untapped by franchised new-car dealers.
• Used-vehicle sales are more profitable than new-vehicle sales on average, and the gap is widening.
• Dealers are tapping sophisticated digital tools to enhance their used-vehicle profits.

With new-car margins collapsing, in part because shoppers know more about prices because of the Internet, "we really need robust, high-performing used-car sales in our stores," says George Athan, vice president of sales at DCH Auto Group of South Amboy, N.J. "It generates service and parts business and repeat customers. It's a critical, critical part of our business strategy."

The Manheim 2014 Used Car Market Report, citing CNW Marketing Research, says U.S. franchised new-vehicle dealers sold 15.6 million used vehicles in 2013, about the same as their new-vehicle sales. But industrywide, used-vehicle sales totaled almost 42 million last year, including sales by independent used-car dealers and individuals.

"The largest player in this segment, CarMax, which we very much admire, has approximately a 1 percent share of the industry," says Sonic Automotive Inc. President Scott Smith. "That leaves an enormous amount of opportunity." This fall, Sonic plans to launch a string of stand-alone used-car stores, starting in Denver.

Many dealers want to grab that opportunity, especially because the volumes are accompanied by fat margins.

The average used-vehicle sale last year delivered a gross profit of $2,361, almost twice the average $1,200 on a new-vehicle sale, National Automobile Dealers Association data show. That gap is widening. For used vehicles, that average gross profit rose 13 percent in 2013, while the profit on the average new vehicle fell 7 percent.

No wonder dealership groups such as Germain Motor Co. of Columbus, Ohio, are doing all they can to maximize their used-vehicle business.

Germain COO John Malishenko realized the importance of strong used-car sales during the recession, when used-car profits helped Germain stay in the black after new-car sales tanked.

In 2009, the group installed software that helps it manage used-vehicle inventories, and it began pricing vehicles to sell quickly rather than for maximum profit. Since then, Germain's used-car sales have risen 53 percent, to 8,853, and its used-to-new unit sales ratio on a same-store basis went from 0.65-to-1 in 2009 to 1-to-1, and in some stores 2-to-1, says Malishenko.

Tom Webb, Manheim's chief economist, says many dealerships strive for a used-to-new sales ratio of 1-to-1 because it means they are maximizing used-vehicle profits. The ratio nearly reached that ideal during the recession for retailers that make up Automotive News' list of the 125 largest dealership groups in the United States, though it has slipped the last two years as new-car sales recovered.

"If you have a real low ratio, it implies that you're taking trade-ins and you're wholesaling them," typically for less profit, "when you could have retailed them," Webb says.

Like many dealerships, Germain has realized that if it wants to sell more used vehicles, first it has to get them, and therefore it is focusing on procurement. "The best way to source a car is to take it in on trade," Malishenko says. "Our real focus is on 'look to book.'"

That means looking to find a way to get that potential trade-in on the dealership's books. If a used-car manager appraises 10 potential trades and buys just three of them, that's considered a poor 30 percent trade efficiency. One way to improve it: Offer consumers a higher trade-in price upfront.

Today, 40 to 45 percent of the 20,000-plus used cars Germain appraises each year are taken in on trade. Malishenko wants to boost that to 60 to 65 percent.

To reach that goal, Germain is modeling its strategy after CarMax's. "They will buy your car even if you don't buy theirs, and they give you their best offer upfront," Malishenko says. "They're very transparent."

He adds, "We had used-car managers who would hold back a little bit. That's old thinking."

RML Automotive, formerly RLJ McLarty Landers Automotive, is trimming the number of used vehicles it sells at auctions and saving money with an internal online auction system it put in place in April. The two-hour intragroup auction is held every two weeks, CEO Franklin McLarty says. Vehicles that aren't sold from one store to another within the 33-store group then are sent to a public auction.

McLarty says the Little Rock, Ark., group's auction, though still in its infancy, is reducing the time managers spend out of the dealership at auctions and cutting the cost of transporting vehicles to auctions and auction fees. He declined to specify the savings so far.

At DCH Auto Group, says Athan, virtual auctions have become paramount for used-car procurement in recent years. It's both more effective for finding specific vehicles and more efficient than live auctions.

"When we do it online, we don't have to waste our precious resource, which is our people, leaving the retail operations, driving to auctions and spending a day or two at auctions," Athan says. "We can research the vehicles much easier and quicker in an online environment. We can go from East Coast to the West Coast if we are looking for specific cars."

The publicly owned retailers have an array of strategies to grow used-car sales, in addition to the stand-alone used-car centers planned by Sonic and two planned by Asbury Automotive Group Inc. in Florida this year.

AutoNation Inc. executives say the nation's largest dealership group will concentrate on building its used-car business through its franchised dealerships. Some of its dealerships operate value outlets, which sell older, higher-mileage used vehicles than those found at the typical AutoNation store in the usual mix of new and used vehicles.

Still, AutoNation is trying to buy more used vehicles outside the trade-in channel, COO Mike Maroone says. A pilot marketing campaign this summer will tell vehicle owners that AutoNation dealerships will buy their vehicles, even if the consumer isn't buying a car or truck from AutoNation. AutoNation also continues to expand its centralized used-vehicle buying team.

Group 1 Automotive Inc. uses software to help it stock and price inventory and moves used vehicles within the group in search of the best market. By doing so, Group 1 has cut the share of used-vehicle revenue it generates by wholesaling to 13 percent from 23 percent in 2006, says Pete DeLongchamps, vice president.

After being skeptical of stand-alone used-car stores in the past, Jim Click Automotive Group in Tucson, Ariz., opened its first such store this year on a high-traffic street next to a Costco. It's doing well, and the group, which is part of Tuttle-Click Automotive Group, plans to open a second stand-alone used-car store with a quick-service lane next year on the southwest side of Tucson, said co-owner Jim Click.

If a dealer is not concentrating on the used-car business, "he's not making the kind of return he should be making on their investment," Click said. His stores are buying more vehicles outside trade-ins and limiting what goes to auction.

"If we get it to pass safety and smog and it's a car we'll sell to someone in our family," he says, "we're going to keep the car."