Retailers Want Piece of Huge Used-Car Market

 

Automotive News
May 26, 2014 - 12:01 am ET

 

As summer rolls out...the used car market is heating up and local-direct reps need to capitalize on helping dealers and automotive groups generate a larger chunk of consumer sales during this crucial time as more consumers are making purchases for summer vacations as well as replacement given that winter is more difficult for customers to get out. Philip Jay LeNoble, Ph.D.

 

Amy Wilson  , Arlena Sawyers  and 
Jamie LaReau   

The used-car business is hot, prompting franchised new-car dealers across the nation to pay more attention than ever to their used-vehicle operations, in some cases opening used-only stores.

Fueling the newfound focus on used:

• The market is huge and largely untapped by franchised new-car dealers.

• Used-vehicle sales are more profitable than new-vehicle sales on average, and the gap is widening.

• Dealers are tapping sophisticated digital tools to enhance their used-vehicle profits.

With new-car margins collapsing, in part because shoppers know more about prices because of the Internet, "we really need robust, high-performing used-car sales in our stores," says George Athan, vice president of sales at DCH Auto Group of South Amboy, N.J. "It generates service and parts business and repeat customers. It's a critical, critical part of our business strategy."

The Manheim 2014 Used Car Market Report, citing CNW Marketing Research, says U.S. franchised new-vehicle dealers sold 15.6 million used vehicles in 2013, about the same as their new-vehicle sales. But industrywide, used-vehicle sales totaled almost 42 million last year, including sales by independent used-car dealers and individuals.

Going big in used cars

Dealership groups, reliant on used-vehicle profits, are trying to boost that business.
Publics' push
Used vehicles make up a growing share of the public dealership groups' composite retail unit sales.
2007:	36%		2013:	43%

 

Sonic Automotive’s Scott Smith sees "enormous" opportunity.

"The largest player in this segment, CarMax, which we very much admire, has approximately a 1 percent share of the industry," says Sonic Automotive Inc. President Scott Smith. "That leaves an enormous amount of opportunity." This fall, Sonic plans to launch a string of stand-alone used-car stores, starting in Denver.

Many dealers want to grab that opportunity, especially because the volumes are accompanied by fat margins.

The average used-vehicle sale last year delivered a gross profit of $2,361, almost twice the average $1,200 on a new-vehicle sale, National Automobile Dealers Association data show. That gap is widening. For used vehicles, that average gross profit rose 13 percent in 2013, while the profit on the average new vehicle fell 7 percent.

No wonder dealership groups such as Germain Motor Co. of Columbus, Ohio, are doing all they can to maximize their used-vehicle business.

Germain COO John Malishenko realized the importance of strong used-car sales during the recession, when used-car profits helped Germain stay in the black after new-car sales tanked.

In 2009, the group installed software that helps it manage used-vehicle inventories, and it began pricing vehicles to sell quickly rather than for maximum profit. Since then, Germain's used-car sales have risen 53 percent, to 8,853, and its used-to-new unit sales ratio on a same-store basis went from 0.65-to-1 in 2009 to 1-to-1, and in some stores 2-to-1, says Malishenko.

Tom Webb, Manheim's chief economist, says many dealerships strive for a used-to-new sales ratio of 1-to-1 because it means they are maximizing used-vehicle profits. The ratio nearly reached that ideal during the recession for retailers that make up Automotive News' list of the 125 largest dealership groups in the United States, though it has slipped the last two years as new-car sales recovered.

Wholesale vs. retail

Germain Motor Co.'s John Malishenko: Used-car profits kept group in the black during the recession.

"If you have a real low ratio, it implies that you're taking trade-ins and you're wholesaling them," typically for less profit, "when you could have retailed them," Webb says.

Like many dealerships, Germain has realized that if it wants to sell more used vehicles, first it has to get them, and therefore it is focusing on procurement. "The best way to source a car is to take it in on trade," Malishenko says. "Our real focus is on 'look to book.'"

That means looking to find a way to get that potential trade-in on the dealership's books. If a used-car manager appraises 10 potential trades and buys just three of them, that's considered a poor 30 percent trade efficiency. One way to improve it: Offer consumers a higher trade-in price upfront.

Today, 40 to 45 percent of the 20,000-plus used cars Germain appraises each year are taken in on trade. Malishenko wants to boost that to 60 to 65 percent.

To reach that goal, Germain is modeling its strategy after CarMax's. "They will buy your car even if you don't buy theirs, and they give you their best offer upfront," Malishenko says. "They're very transparent."

He adds, "We had used-car managers who would hold back a little bit. That's old thinking."