PHOENIX — Shrinking profit margins and rising prices for new vehicles highlight the growing opportunity for dealerships in the used-vehicle space.
And that side of the business is also where much of the disrupter-caused experimentation is taking place in auto retailing. Dealers, auction companies and analysts echoed that message at the 2018 Used Car Week in suburban Phoenix last week.
Dealers who aren't treating used cars like their own franchise are doing a major disservice to themselves, said Rick Ricart, president of Ricart Automotive Group in Columbus, Ohio. Used vehicles are ripe for entrepreneurship, Ricart told a receptive crowd at the annual event.
"If you're not sourcing cars yourself, if you're not scaling and growing your used-car operation, I feel like you're going to be left in the dust," Ricart said.
Affordability challenges on the new-vehicle side of the business also make the used-vehicle side an increasingly necessary focal point.
"One of the things that's driving the used-car industry right now, obviously, is the price of new cars," Don Luke, owner of Bill Luke Chrysler-Jeep-Dodge-Ram in Phoenix, said during a session about certified pre-owned vehicles.
Noting the rise, he added, "People who are going to get a car for their kids, you know, $30,000 is nuts." They would rather buy a 1- or 2-year-old car for around $20,000.
One advantage dealers have on the used side is greater control over their inventory and marketing.
"We're going to see the revolution in the way people buy cars at retail first in the used market," said Jonathan Banks, vice president of vehicle valuations at J.D. Power. But it's a double-edged sword; the space is also fit for greater retail disruption.
Banks noted recent developments that underscore how traditional dealers will increasingly have nontraditional competition.
This month, Carvana, the online-focused retailer that is growing at a fantastic clip, announced it had been given an additional $2.3 billion in financing commitments from Ally to support its inventory needs. The company also reported triple-digit increases in revenue and vehicle sales volume for the third quarter, though it is still losing money overall. Carvana's rise has come without traditional brick-and-mortar stores and salespeople, and traditional dealers have enviably noticed the company's lower overhead costs because of that.
In September, San Francisco-based startup Shift Technologies Inc. announced a $54 million investment from Lithia Motors Inc. Lithia CEO Bryan DeBoer said the investment in the online used-car retailer will allow Lithia to offer more shopping options to consumers. Shift, meanwhile, is keen on leveraging Lithia's physical properties to supplement its storage facilities.
As retailing continues to move more online and as transportation service fleets increase, traditional dealers could find themselves well-positioned with the physical space to help new players manage and service large fleets.
To that end, Ricart recently bought a 130,000-square-foot warehouse across the street from the group's Ford dealership to support an apparently growing fleet management business. It will allow Ricart Automotive Group to service more fleet customers. But also, Ricart said, it will accommodate cars and trucks that need servicing if mobility and autonomous driving technology puts vehicles otherwise sitting in owners' driveways into heavy, shared use.
"Things are going to have to go down the road," Ricart said. "We have a massive infrastructure of roads around this country, so as long as there's going to be tires on them, they're going to wear out and we're going to replace them."
Becca Polak, chief legal officer for KAR Auction Services Inc. who also heads its TradeRev unit, noted that rising mobility options, digital retailing and margin compression are among the micro and macro issues causing traditional dealers to get more creative and look beyond the new-vehicle franchise.
"It can't just be about the new cars anymore," Polak said.
Dealers have to find new ways to be profitable, and it has to involve used vehicles and service.
"That's just a new way of thinking, and things are happening so quickly in all those areas — mobility, data and digital — [dealers] really need to be proactive," she said, noting Ricart's fleet-servicing warehouse as an example. "If you're being proactive about it, you're going to be in a better place in five years than other dealers."