Public groups hit the gas on used-only

Three of the largest sellers of new vehicles in the U.S. plan to focus much of their capital spending in the next few years on expanding their used-vehicle store counts.

Leaders from publicly traded dealership groups AutoNation Inc., Penske Automotive Group Inc. and Sonic Automotive Inc. say growing their own used-only platforms is cheaper and easier than adding new-vehicle stores, which require automaker approvals. And those executives expect that used-vehicle expansion will help them boost profits and grab more market share.

"As we looked at the opportunity and the return on capital investment, there's no question this is the leader in the clubhouse," Penske CEO Roger Penske told Automotive News.

Penske Automotive, the latest of the three to accelerate used-only store expansion, last month said it would spend about $200 million to grow its network of used-vehicle supercenters from 17 locations in the U.S. and United Kingdom to 40 by the end of 2023. Last year, Penske's used supercenters sold just over 53,000 vehicles, generating revenue of $1 billion. By the end of 2023, the supercenters should be selling at least 150,000 used vehicles annually and generating revenue of $2.5 billion to $3 billion, said Penske, the nation's second-largest new-vehicle retailer.

This month, the retailer rebranded its six CarSense supercenters in the U.S. as CarShop so that all of Penske's standalone used-vehicle stores will operate under one global brand.

"Our goal for supercenters is to earn between 3.5 percent and 4 percent on sales while generating earnings before taxes [by the end of 2023] of approximately $100 million," Roger Penske told analysts last month.

Those growth and income targets caught the eye of analyst Michael Ward of Benchmark Co. In a note to investors last month, Ward wrote that Penske's standalone used business is about the same size as online used-vehicle seller Vroom Inc.'s but with more profitability and higher growth aspirations. Down the road, Penske's board could "consider a strategy to unlock value for shareholders," he said.

That could include the possibility of spinning off the used-vehicle business, Ward told Automotive News. And AutoNation's and Sonic's boards also may want to discuss such an option, he said. After all, upstart online used-vehicle sellers have been rewarded by the stock market, despite being unprofitable thus far.

"The dealer stocks are undervalued," Ward said.

Roger Penske said the CarShop expansion may go faster in the U.K. than in the U.S. because of land the company already has available. But a CarShop location is slated to open May 1 in Monmouth Junction, N.J.; a Scottsdale, Ariz., location also is expected to open this year.

One advantage of used-only supercenters is having more freedom to expand, Penske told Automotive News.

"We don't have all the limitations on location, on density within a particular marketplace, due to certain requirements by the OEMs," he said.

That sentiment is shared by AutoNation CEO Mike Jackson.

AutoNation last year announced a major expansion of its AutoNation USA standalone used-vehicle store network, which had long held steady at five locations. Last month, the nation's largest new-vehicle retailer said it would open five AutoNation USA stores this year: two in the Denver market and one each in Phoenix and in the Texas markets of Austin and San Antonio. Another 10 stores are slated to open in 2022, and the company wants more than 100 AutoNation USA outlets by 2030.

"We are in charge of our own destiny," Jackson told analysts last month. "We're able to build these stores for $9 million, $10 million each. We do not need manufacturer approval. All we need is a brand, a great customer experience and a digital ability to penetrate the market, and the size of the market is much larger."

AutoNation doesn't break out financials for its AutoNation USA unit, but CFO Joseph Lower told analysts last month that the existing five stores "continue to operate successfully."

In October, AutoNation said a typical AutoNation USA store would sell about 200 vehicles a month and generate pretax profit of about $200,000 monthly, or $2.4 million a year, by the time it had been operating for 18 months.

Sonic continues to expand its EchoPark used-only unit, which launched in 2014, by opening stores from scratch, but it's also acquiring existing used-only operations. Sonic, the nation's sixth-largest new-vehicle retailer, opened seven EchoPark stores last year and has added five this year, including four through acquisitions. It now has 21 locations.

In July, Sonic said it was pressing the accelerator on its EchoPark expansion, targeting 140 locations by the end of 2025. It also expected EchoPark to be selling 575,000 used vehicles annually and generating $14 billion in revenue by then.

Late in the fourth quarter, Sonic spent $19.7 million to buy two Used Car King stores near Syracuse, N.Y., from Todd Caputo.

Sonic President Jeff Dyke told Automotive News last month that those dealerships have become EchoPark stores. And in February, Sonic purchased Carbiz, Dyke said, with two locations: one in Baltimore and one in Laurel, Md., which have been rebranded as EchoPark stores.

The Laurel store is just down the street from a large CarMax store, Dyke said. CarMax is the top used-vehicle retailer in the country.

The Used Car King and Carbiz acquisitions are expected to generate annual revenue of more than $350 million, Dyke said.

"It just became the perfect opportunity to take EchoPark and to speed it up, to make it grow faster," Dyke said. "And when you already have the people hired, you already have the facility, and they believe in your culture, it makes it a whole lot easier to do."

Sonic also opened a new EchoPark store outside Phoenix this month, in Avondale, Ariz. It's one of 25 locations Sonic plans to open this year; five will be full stores, and 20 will be smaller delivery and buying centers, Dyke said.

Sonic also plans to open EchoPark stores this year in the Atlanta, Las Vegas and Birmingham, Ala., markets, Dyke said. And another store will open in either the Kansas City, Kan., or St. Louis markets.

Last year, EchoPark revenue rose 22 percent to a record $1.4 billion as sales jumped 15 percent to a record 57,161 vehicles. Dyke told analysts last month that he expects EchoPark to sell at least 100,000 vehicles this year.

"EchoPark is just going to have a smashingly good year," he said.