Luxury dealers reversing course on used

Anorexic new-car margins, shrinking profitability and a surge in off-lease vehicles have luxury-brand dealers — and automakers — punching the gas on the used-car business.

It's a notable U-turn from the days when luxe dealerships had little time or interest in peddling used cars. But with mass-market and luxury-brand vehicles alike, new-car profits have dwindled in recent years because of heightened price competition and shifts by automakers to reduce gross vehicle margins in favor of profits tied to special bonus targets.

The changes mean luxury-brand retailers are embracing used vehicles because there's financial opportunity. The used-to-new vehicle sales ratio at the average luxury-brand dealership spiked from 0.68-to-1 in 2015 to 0.90-to-1 last year, according to data from the National Automobile Dealers Association.

BMW of San Antonio revved up its used-car business in late 2014 when Mark Smith, co-founder of newly formed Principle Auto Group, launched a certified pre-owned program. Under previous ownership, the dealership wholesaled most of its used cars. Within 90 days, BMW of San Antonio was selling 180 used cars a month, up from 40.

"It exploded our service department business, because we were now putting more cars that were certified on the ground," Smith told Automotive News. "Eighteen months later, all of a sudden you got a 15 or 20 percent bump in service [revenue] month in and month out."

In 2018, Principle sold nearly two used vehicles for every new vehicle it retailed.

Other luxury-brand retailers have had similar awakenings on the CPO front.

In 2018, more than 21 percent of luxury dealerships in the U.S. increased CPO sales by more than 25 percent over the previous year, according to J.D. Power.

"The numbers that we see on a transaction basis show that you can make more money with a certified car, typically more than 1 percent more on the front end, versus one that is not certified but is eligible to be," said Andrew Stowe, senior director of vehicle valuation at J.D. Power.

The CPO business generates income streams beyond just the sale of the car. The dealer gets paid for parts and labor to prepare the vehicle for the CPO program, makes a profit from selling the vehicle and receives income from financing, maintenance and other ancillary products. Finance and insurance gross income as a percent of used-vehicle sales, for instance, grew to 2.7 percent in 2018 for the average luxury dealership, up from 2.3 percent in 2015, according to NADA.

"With certified cars, dealers are playing the short game by making money on the vehicle sale, while also playing a long game by bringing customers back to the store for service," Stowe said.

The used-car business also helps luxury-brand retailers bring in new — and younger — buyers, developing future business.

"You can reach a consumer that otherwise might not have considered you with a new-vehicle purchase, or new-vehicle lease," Stowe said. "Used cars can attract buyers who don't feel like a new car is right for them, or they understand the depreciation curve and don't want to participate in the initial depreciation movement."

Used vehicles are a profit generator at Mercedes-Benz of Buffalo in New York and represented nearly 60 percent of vehicles sold by the store last year, said Robert LaMastra, president of the dealership. The global reach of the Internet is driving LaMastra's used-car business.

"In a market like ours, you were limited when you didn't have the Internet," LaMastra said. "Now, you're a virtual used-car lot all over the world. I have sold used Mercedes vehicles to customers in Germany."

LaMastra's store earns seven times the profit on each used Mercedes it sells vs. a new car when considering both upfront gross and F&I income, he said. Ten years ago, his new-vehicle margins were nearly double those for used vehicles.

Unlike a customer who leases a new vehicle for three years, a used-car buyer is more likely to see value in buying a service contract, wheel and tire insurance, even paint protection, because they plan to keep the vehicle for a while.

"You're going to see these cars back in your service bays much more frequently than cars that are leased," LaMastra said.

"Those [lease] customers know they are going to turn in the vehicle at the end of the three years and are going to do bare-bones maintenance."

CPO customers also are loyal, returning to the dealership for service and their future vehicles.

More than 70 percent of Mercedes CPO buyers return to the brand for their next vehicle purchase, according to the automaker. And CPO sales now account for about 65 percent of total used-vehicle sales across Mercedes-Benz franchised dealerships.

Mercedes-Benz USA amped up support of its three-decade-old CPO program starting in 2014. Since then, the number of CPO vehicles sold by Mercedes dealerships in the U.S. grew from 119,000 vehicles to 129,000 last year.

The CPO emphasis is about maximizing profitability for retail ers, said Adam Chamberlain, Mercedes-Benz USA vice president of sales.

"Having a strong healthy used- car business becomes a real pillar of overall dealer profitability," Chamberlain said. "It drives profit in the shop, it drives profit from the sale of the vehicle, it brings in [new] customers to the brand."

For Mercedes, the renewed focus on used-vehicle sales is both strategic and opportunistic. Franchised dealerships face increased competition in the used-car business from independent retailers, such as Carvana and CarMax.

"The quality of independents' used-car offerings has increased over the last five years. ... They are capturing the imagination of certain consumer groups," Chamberlain said.

"That keeps us on our toes. We want Mercedes-Benz franchised dealers to be the destination of choice for a used Mercedes-Benz purchase in the U.S."

The wave of vehicles coming off lease is also driving luxury automakers' interest in growing the CPO channel. New-vehicle sales in the U.S. surged in the aftermath of the Great Recession.

"If 50 percent of your business is leasing it, you know you've got cars coming back as well," Chamberlain said.

CPO programs are a profitable way to get off-lease vehicles back into the market while supporting vehicles' residual values.

"The more participation you have on buying and selling your used vehicles, the more upward support you get on" residual values, J.D. Power's Stowe said. And higher residual values "help to sell new vehicles, especially when leasing is a critical part of what you do."

It all helps explain why automakers are pushing their retailers to expand their used business with marketing support, sales incentives and in-store training.

Mercedes uses a combination of "push and pull" levers to drive used-car sales. The brand is priming the demand pump for used Benzes with TV and digital advertising campaigns and customer-focused carrots, such as low-rate financing and prepaid maintenance plans.

And "we incentivize [dealers] to buy cars from us off-lease, and we incentivize them to sell an increased number of used cars each year," Chamberlain said. "If a dealer hits their target, they'll earn some money from us."