Dazzled by the profits CarMax earns from its lending unit, other big automotive retailers have explored starting their own captive finance companies. But the undertaking is challenging and expensive, and that has caused some prominent dealership groups such as AutoNation to pull back on the prospect.
Others continue to look into captives but with more caution than expressed previously. Executives for Sonic Automotive, for instance, said this year the dealership group is slowing its plans to establish a captive finance arm. That was a change from October 2014, when company leaders said they would build a captive, with a start date four years away.
Bottom line, establishing a captive is expensive and can be a big risk for a dealership group, said Mike Buckingham, senior director of the auto finance practice at J.D. Power. Although it may make sense for some retailers, they have to have considerable size and scale to pull it off.
"Where people have had fits and starts, it's probably putting pencil and paper to it and realizing what it's going to cost and balancing that with what's the potential risk," Buckingham said. "The other thing is there's a very heightened regulatory environment there, so that's a new layer that anyone, whether auto dealers or just a startup, is going to have to contend with."
Indeed, Jeff Dyke, Sonic's executive vice president of operations, cites regulatory concerns as a reason for the retailer's slowdown.
"There are so many government regulations and rules, it makes it almost impossible to do it," Dyke said. Sonic is considering a captive down the road as a way to support EchoPark, its stand-alone used-vehicle unit, he said, but "we're not ready yet."
Sonic sold its previous finance arm, Cornerstone Acceptance Corp., in 2007. In past interviews, Scott Smith, Sonic's co-founder, indicated the business model of any future captive would differ from that of Cornerstone Acceptance, which he described as offering "sub-subprime" credit.