When Penske Automotive Group Inc. agreed to buy used-only retailers CarSense in the U.S. and CarShop in the U.K. several months ago, Chairman Roger Penske said he was "cautiously optimistic" about the ventures.
Penske has dropped the "cautiously."
"We love it," Penske told Automotive News. "We're going to scale it. We have very good people, good processes, five good locations [in each country] and we'll be able to replicate those. All of that is very positive."
So even as Asbury Automotive Group Inc. shutters its Q auto used-only stores, Penske Automotive, of suburban Detroit, expects the used-only stores to bring in annual revenue of $350 million in the U.S. and $340 million in the U.K., and to bring a 4 to 5 percent return on sales.
Used-vehicle prices are under pressure because of a wave of off-lease vehicles that has caused supply to balloon, "but we're buying cars at market for these supercenters and then we're making our margin on them," Penske said. "We're actually $400 more per unit in the U.S., all in, meaning finance and insurance" included, compared with gross profits on used cars sold at Penske's U.S. franchised new-vehicle stores.
The higher margins stem from several distinctive sales strategies at the CarSense stores, including one-price selling, he said.
"The salesman is not there to haggle with you. The salesman is presenting a vehicle and so the penetration of products is higher than it is in the traditional way," Penske said. "It's also having a seven-day return policy."
For the first six months or 6,000 miles, CarSense will repair or replace any accessory or operating part for free, with no deductible. It offers a lifetime engine guarantee on many models.
The stores have no variable compensation costs, Penske said in a conference call with analysts and reporters. Salespeople are paid salaries, plus volume bonuses.
"That's made a big difference" in lower turnover and higher units per salesperson, he said. The average salesperson at CarSense "is selling about 23 cars. If you look at the traditional automotive business, it's approximately 10," Penske said. "We also have 50 percent repeat referral on this business in the U.S."
CarSense has five stores around Philadelphia and Pittsburgh. CarShop has five stores in the U.K. Penske Automotive intends to double the number of locations for both retailers within the next 24 months.
"These businesses provide an unlimited white space for scalable expansion," Penske said.
Penske owns land in the U.S. and U.K. earmarked for future stores, he said. Now it's a matter of securing permits to build them.
Penske sold 66,208 used cars in the second quarter, of which 11,125, or 17 percent, were retailed through the used-only stores.
As Penske basks in its used-only success, Asbury said last month that it will close its two remaining used-only Q auto stores in Florida. Asbury, of Duluth, Ga., launched Q auto in mid-2014, but the stores failed to generate profits. CEO Craig Monaghan said getting inventory was part of the problem.
"If you're going to an auction to buy a car, you're the last one with your hand up. That's not a situation we wanted to be in," Monaghan said.
Penske's sourcing has been strong because of a "seasoned" team that buys cars at auctions and "at the curb" using analytical tools to find the right cars that will sell, he said.
"They don't just buy cars because they're at the right price," Penske said. "They buy certain cars for certain markets, which makes a difference. They know what they've been able to sell in those markets."
In the U.K., Penske has contracts with certain leasing companies to provide it with a steady stream of off-lease vehicles.
Asbury's Monaghan said Q auto also struggled to arrange financing for many used-car buyers with subprime credit scores. Without a captive lender, Q auto was at a disadvantage, he said.
Penske does not feel that pressure. CarSense and CarShop use third- party financing, but he admires CarMax's success with captive financing and is open to it — later.
"I don't know that at the moment we have the capital available to start a finance company. It's something we can look at once we have a history and maybe we get a partner to do something like that," Penske said. "I wouldn't say that's top of the list right now."