GIADA Member Update

16
Jan

Tighter New Car Margins, Increase Volumes Push Public Dealer Groups in to Used Vehicle Space

By Cliff Banks, The Banks Report

When the Penske Automotive Group announced the acquisition of CarSense in December, it became the fourth publicly traded franchise dealer group to move into the independent used car market.

It’s becoming an industry trend as large dealer groups seek to expand their used vehicle operations. Click Here for full story. (full story below in blue)

When the Penske Automotive Group announced the acquisition of CarSense in December, it became the fourth publicly traded franchise dealer group to move into the independent used car market.

It’s becoming an industry trend as large dealer groups seek to expand their used vehicle operations.

In addition to CarMax, which is expanding its footprint into several new markets, other moves by AutoNation, Sonic Automotive and Asbury Automotive to build independent used car operations signal a shift in philosophy for companies once focused on new vehicles.

Combined, Carmax, AutoNation, Penske, Sonic and Asbury sold 1.2 million used vehicles in 2015. (Author’s note: Lithia Motors and Group 1 Automotive were excluded because they have not yet announced independent used vehicle initiatives).

Penske’s acquisition of CarSense is intriguing because it is the first time one of the public dealer groups has bought an independent used vehicle dealership.

CarSense has five used vehicle stores located in the Philadelphia and Pittsburgh markets and generates approximately $350 million a year in revenue. Penske said in a statement announcing the deal that the group is looking to expand the CarSense model nationally.

The model is based on a no-haggle/one price strategy, which seems to be the trend across the board for each of the groups.

Other groups are building their own operations from the ground up.

  • Sonic is expanding its Echo Park operations into several new markets buying real estate and building facilities over the next several years.
  • Asbury, meanwhile, appears to still be working out its strategy with its Q brand, which is in a couple of markets in Florida.
  • Meanwhile, AutoNation has announced a move into the used vehicle space, but hasn’t said how it plans to move forward – either through acquisition or following Sonic’s model.

Several factors are driving the public dealer groups’ move into the independent used vehicle sector.

  1. First is the continued squeezing of new car margins. There appears to be no let up from the manufacturers as their policies and initiatives have all but eliminated whatever profit dealerships can make on new car sales today.

    The public companies need to find new ways to generate profit and a return for their shareholders. An increased focus on used vehicles promises to be the quickest and most profitable way to do so.

  1. A second factor is that the industry will see a record return of off-lease vehicles over the next few years. And that represents significant opportunity for dealers.

    That also means a period of time in which used vehicle prices will trend downward – especially during periods of increased returns, such as the first quarter 2017.

    But public groups have the capital to withstand those periods along with the technology to help predict and manage downturns in pricing.

    With sophisticated F&I operations along with the runway to grow their service work, public dealer groups see additional revenue and profit opportunities beyond just the sale of the vehicle.

  1. A third reason driving this focus on used vehicles is that it provides a buffer or protection for times when new car sales drop. New car sales growth isn’t declining yet, but it is plateauing and a significant downturn likely will happen in the next two to three years.

    The memories from 2008 and 2009 when new car sales plummeted from about 16 million to approximately 10 million are still fresh and painful.

The question is, how does this new strategy impact independent used car dealers?

It remains to be seen. But it likely will be tougher to operate in the markets where public dealer groups have a presence.

They’ll come armed with resources and technology that will make it easier for them dominate the markets they’re in – at least in theory. And they’ll likely try to capture as much of the attractive inventory as possible.

But they haven’t exactly dominated new car sales in the markets they’re in, as many experts once predicted.

The public’s focus on building a one-price mindset might provide an opportunity for smaller independent dealers to price more competitively.

This was already happening in the Philadelphia market as customers recently had started using CarSense’s one-price system to shop other dealers for better pricing – even on new cars.

Cliff Banks is a noted analyst in the automotive industry. He is the president and founder of Banks Media Enterprises, which publishes The Banks Report. It can be found at www.thebanksreport.com

 

 

 

 

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