SHARE:
The Used Car Game Gets A Makeover
"It's the first time major national entities with deep resources have entered this business, and it's stirring things up,'' says Don Mealey, a competitor of the new superstores who sells about 1,600 new and used cars each month at the 12 traditional dealerships he owns in Orlando and Tallahassee. "The game is on."
The game, at least initially, is the growing market in late-model, low-mileage used cars. It's a market that looks somewhat like the hardware business before Home Depot blew in - ripe for a consolidation:
The retail network for used cars is fragmented, ranging from high-end, niche players to those specializing in cars for people with bad credit. Florida, which has 935 new-car dealers, has nearly 8,100 licensed independent used-car dealers.
There's strong consumer demand, fueled by the perceived value in low-mileage used cars, which are more durable than in the past and which sell for an average of $11,000 compared to almost $22,000 for a new car. In 1995, for the third year in a row, new-car dealers actually sold more used cars - 18.5 million - than new - 14.5 million.
The margins in used cars are higher - for a franchise dealer, $339 on a used car vs. $107 on a new auto, according to the National Automobile Dealers Association. New-car dealers get about 44% of their profits from used-car sales, while actually losing about 2% on new cars, according to the trade group.
Nowhere is the battle for the car buyer more heated than in Florida, where dense population, low wages and spotty public transportation spur a strong demand for used autos. Florida is also the epicenter of auto wholesaling, with millions of rental cars and privately owned vehicles flowing through the state's auto auctions each year.
At the head of the used-car race - in publicity if not sales - is Florida's H. Wayne Huizenga, whose AutoNation USA chain wants to do for car sales what his Blockbuster chain did for video rentals: simplify the process and replicate it quickly in as many locations as profitable.
Great expectations
Huizenga boldly predicts sales of $100 million per year from each AutoNation, but refuses to disclose sales in 1996. The chain, acquired by Huizenga's Republic Industries in January, began the year with seven stores, one of which opened in Coconut Creek, north of Fort Lauderdale, in October. Other Florida markets targeted by the chain are Tampa-St. Petersburg and Orlando, with Jacksonville and West Palm Beach to come. AutoNation aims to have 80 locations by 2000.
Racing along in Huizenga's shadow is Circuit City's CarMax division, which has been experimenting with a used-car superstore format since 1993. CarMax reported sales of $304.5 million from five locations in fiscal 1996, but the chain still lost seven cents per share.
CarMax's sixth store opened in Orlando in November; the seventh opened in March in Tampa. A Miami area CarMax is on tap for later this year, and the chain promises up to 90 superstores in 45 metro markets by 2001.
Trailing the two leaders is Michigan-based Driver's Mart, a private company organized by 22 new car dealers who plan 100 used car superstores nationwide. Two other entrants, both public companies, plan to consolidate "buy here/pay here" used-car lots that sell higher-mileage, lower-cost cars to customers with bruised credit. Smart Choice, a newly formed public entity based in Titusville, is acquiring 11 used-car businesses in Tampa Bay, West Palm Beach, Stuart, Orlando and Daytona Beach (as well as two new-car dealerships in Stuart and three finance companies). Ugly Duckling, which owns eight lots in Arizona, planned to acquire five used-car dealerships in St. Petersburg earlier this year.
Virtually all the chains base their appeal on making the car purchase a less unpleasant experience. CarMax and AutoNation are nearly identical in their selling strategies, for example: Customers are greeted as they enter by a salesperson who steers them to a computer kiosk where they peruse an inventory list before venturing out on the store's lot. Each store offers a selection of up to 1,000 vehicles, most less than five years old with fewer than 70,000 miles. Price, which averages $14,000, is posted on the windshield and is non-negotiable. Each car comes with a bumper-to-bumper, limited warranty (30 days for CarMax, 99 for AutoNation), plus a money-back guarantee (five days at CarMax, seven at AutoNation). Each chain offers on-the-spot financing and insurance quotes, plus amenities like a kids' play center. Trade-ins are handled separately: Customers get a no-haggle offer for their vehicles that's valid regardless whether they buy a car there.
Driver's Mart, which plans to mimic its competitors' formula in medium-sized markets, will have an on-site cafe and coffee bar at its stores. Smart Choice, which is calling its used-car lots First Choice, will negotiate the prices of its generally older, higher-mileage vehicles, but hopes to offer a warranty for the life of the loan.
Survival
Mealey and others say the new chains will change the business but won't wipe out traditional dealers. "Some people may have underestimated the resolve of dealers and manufacturers to maintain market share," Mealey says.
The biggest problem the used-car chains may have is inventory. With every chain chasing the cream-puff, nearly-new auto, maintaining a supply of cars at a competitive price is an issue. New-car dealers could actually benefit if the competition for used vehicles shrinks profit margins and reduces the price differential between new and used.
Not surprisingly, each superstore company has, or plans to purchase, new car franchises. Republic Industries' torrid buying spree totals 17 dealerships in New York, Florida, Phoenix and Los Angeles as of late January.
Not only are new-car dealerships a direct pipeline to late-model trade-ins, they also have first right to the estimated 3.5-million cars coming off lease each year. Today more than one-third of all new cars are leased. The dealer who issued the lease is first in line for the return. Same-brand dealers have next pick and what's left is sold at auto auction houses.
"It's going to be difficult for these new chains to be price-competitive if every one of their cars is bought at high bid," says Mealey.
Another source of nearly new cars is rental fleets, which makes AutoNation's recent purchases of Alamo Rent-A-Car and National Car Rental System Inc. look like a smart move. But Art Spinella, who's been following the used-car business since 1984, disagrees.
"We've found that most used car shoppers do not want a daily rental car. It's at the absolute bottom of the list, next to cars that have been flooded," says Spinella, VP and general manager of CNW Marketing Research in Bandon, Oregon. "AutoNation's biggest problem will be making sure shoppers don't see it as an outlet for Alamo rental cars."
Spinella also questions whether the supply of off-lease cars is as large as projected, noting that about 1 million of these vehicles are kept by their owners. "If every franchise dealer increased their inventory of off-lease cars by just a small percentage, there would be no cars left for the superstores," Spinella contends. "The whole premise of these new chains is based on a strong leasing industry, and in fact, leasing has topped out."
Finally, Spinella wonders whether consumers will like no-haggle pricing once the novelty wears off. He says CNW's surveys show customers can get a lower price - as much as $500 less - by taking a CarMax bid to a traditional dealer.
"People say they don't like to negotiate, but if you can give them something to negotiate with, they love it," says Spinella, who estimates one-third of CarMax's shoppers are using the chain's fixed price as a negotiating tool elsewhere.
The long-term impact of the chains on the car business is unquestionable. Bradford Wernle, used-car editor at Automotive News, says, "No matter what kind of success these guys have individually, they're going to change the retail landscape permanently. Buying a used car will never be the same."
Used Cars: The Players
AutoNation
Headquarters: Fort Lauderdale, Fla.
Corporate structure: Owned by Republic Industries Inc.
Number of units end of 1996: 7
Sales: n/a
Expansion plans: 80 units by 2000
CarMax
Headquarters: Richmond, Va.
Corporate structure: Division of Circuit City Stores Inc. (CC)
Number of units end of 1996: 6
Sales: $304.5 million in fiscal 1996
Expansion plans: Up to 90 stores in 45 metro areas by end of 2001
Driver's Mart
Headquarters: Grand Rapids, Mich.
Corporate structure: Driver's Mart is a privately owned company organized by 22 new car dealers in response to competition by used carsuperstores. Each of the company's founders will be a franchisee, developing Driver's Marts superstores in medium-size markets.
Number of units end of 1996: 1 in Neenah, Wis.
Sales: n/a
Expansion plans: Plans a 100-unit expansion nationwide.
Smart Choice Holdings Inc.
Headquarters: Titusville, Fla.
Corporate structure: Formed early this year through a merger with publicly held Eckler Industries.
Number of units end of 1996: 2 new-car lots and 11 used-car lots (doing business as First Choice), all in Florida.
Sales: $100 million in 1996
Expansion plans: 10 new-car lots and 25 used-car lots with $250 million in sales by the end of 1998. Company is also buying finance companies that target customers with credit problems. Two other Smart Choice divisions offer insurance and dealer training.
Ugly Duckling
Headquarters: Phoenix, Ariz.
Corporate structure: Publicly owned (UGLY)
Number of units end of 1996: 8 used car lots in Arizona
Sales: $70 million (estimated 1996)
Expansion plans: Ugly Duckling plans to acquirefive used-car lots in Tampa Bay in early 1997; with other acquisitions in New Mexico and Nevada, the chain will number 17 early this year.
Business Beat - Week of May 10th
