Dealer Groups

Sonic pushing EchoPark since OEM demands are ‘out of control’


A pair of top Sonic Automotive executives reiterated the potential of its chain of dedicated pre-owned stores — EchoPark — not just because of the project’s capability of retailing used vehicles for a strong margin and building long-standing customer bonds.

Furthermore, the top Sonic brass is pushing resources into EchoPark because requirements from automakers about how franchised dealerships need to look and operate are “out of control.”

Sonic chief executive officer and president Scott Smith and executive vice president of operations Jeff Dyke discussed the topic during Sonic’s latest quarterly conference call when they also highlighted the records the dealer group posted during the first quarter. Investment analysts wondered if Sonic would be making franchised store acquisitions at a pace some of the other publicly traded groups have.

“I would say that 90 percent of our focus is on EchoPark,” Smith said. “I don’t want to say that we’re completely out of the market because I think, if there were opportunities in markets where we currently exist, that we would be interested in looking at those opportunities.

“But our primary focus right now is growing EchoPark as quickly as possible,” he continued. “(Executive vice president and chief financial officer Heath Byrd) and I got out on the road several years ago and said that we thought that there would be an inflection point. We feel like we’re entering that phase.”

Sonic already operates EchoPark rooftops in Colorado and Texas with plans to move into places such as the Carolinas.

“We’re seeing a lot of good positive traction in our EchoPark model and the pricing models that we’ve got installed now. And we think that at some point in time, in the not-too-distant future, that EchoPark will be substantially larger than our franchise business,” Smith said.

“There’s no barriers to entry for us. We’ve got the technology, the people, the processes, and we feel that we’ve cracked the code in how to make it predictable, repeatable and sustainable. Now it’s just a matter of building them in the markets and getting them up and running,” he went on to say.

Then Dyke quickly chimed in with his assessment of having additional franchised operations versus growing the EchoPark footprint.

“The only other thing I would add is from a franchise perspective, what dictates buying new-car dealerships, is the amount of money that you have to invest in facilities per our manufacturers’ requirements. And that has gotten, from our perspective, out of control,” Dyke said.

“And so while we want to bring our technologies and processes and the great things from the different brands that are out there, we’re just not going to make absurd and obscene investments in facilities,” Dyke continued.

“And so that will slow us down in terms of exactly what franchises we might buy and when we may buy them. It’s just got to be a reasonable return, and we’re managing that to a T,” he went on to say.

Smith cheered the points Dyke made to Wall Street observers with regard to what the OEM expectations are with regard to franchised dealerships.

“When we evaluate and weigh our investment opportunities, the new-car model, in my mind, as the CEO of this company, the new car model is completely broken right now because of the expectations of what these manufacturers have out there in the cost of this facilities. It doesn’t pencil. The model doesn’t work and something’s got to budge,” Smith said.

“And right now that’s, in my opinion, devaluing some of these franchises. And certainly, until the manufacturers lower their expectations, I think M&A’s going to slow down,” he added.

Used-car stores give Penske Automotive 'momentum'


Roger Penske was answering a question specific to the retailer’s operations in the U.K., but the sentiment, perhaps, is universal when it comes to the standalone used-car stores at Penske Automotive Group.

Responding to that inquiry during the Q&A portion of the company’s quarterly conference call, Penske said that used-car standalone stores “really give us some real momentum as we go through the balance of the year, not only from a unit perspective but a profitability and margin (perspective).”

Counting the stores that came into the fold after its January acquisition of The Car People in the U.K., Penske Automotive currently has 14 used-car stores throughout the U.S. and U.K.

Penske, the group’s chairman, said he believes these stores can sell more than 65,000 units annually and pull in $1 billion in revenue.  

“When you look at the first quarter, this business generated a 4-percent return on sale and a pre-tax return on invested capital averaging over 15 percent,” Penske said during opening remarks on last week’s call. “We believe these used-vehicle supercenters further diversify PAG’s business and provide an opportunity to capitalize on the highly fragmented used-vehicle marketplace.”

During the first quarter, Penske’s used-car stores moved 18,673 used vehicles, according to a presentation accompanying quarterly results. They generated $331.1 million in revenue.  

The average transaction price on these cars is a shade under $15,000, with a total variable gross profit $2,233 per unit and a margin of 15 percent, Penske said.

The revenue mix for these stores is 84 percent used vehicles, 9 percent wholesale, 6 percent F&I and 1 percent service and parts. Gross profit contribution is 43 percent used, 4 percent wholesale, 41 percent F&I and 12 percent service and parts.

Penske said he would like to further drive the parts and service business within its U.K. standalone stores, much like it has in the U.S.  

6 new stores to open by 2020

In early January, the retailer closed its purchase of U.K.-based used-car retailer The Car People, an acquisition first announced on Dec. 12.

This followed a similar move Penske made in January 2017, when it announced an agreement to buy CarShop, a U.K. chain of five standalone used-car retail stores. That acquisition was completed in February 2017

Stateside, Penske announced a deal in December 2016 to buy U.S.-based used-car retailer CarSense, closing that acquisition in January 2017.

And now the retailer has its sights on six new greenfield locations that it plans to have open by 2020. In the U.K., Penske has a commitment on a property that is close to ready, with the company aiming to have that converted in 2020.

In the U.S., Penske does have a potential spot in Phoenix along with eyeing the Mid-Atlantic. But they’re not just trying to dot the map with start-from-scratch facilities.

“What we’re trying to do is not just go all over the country for white spots,” Penske said. “We’re trying to grow where we have the impact of our digital and also our advertising, so we get that coverage.”

A $2-3 billion business?

Speaking of growth, Penske was asked during the Q&A if it would be reasonable to believe the standalone could grow to $2 billion to $3 billion per year.

“Well, I would say that there’s no reason we can’t double it, maybe not by 2020,” he said. “But I didn’t realize we’d make these acquisitions as fast as we did, and we’re going to continue to look and see what’s out there. But this is a very good business and I’d have to take my hat off to CarMax.”

The business CarMax has built leans on “a single brand, large stores, good discipline,” Penske said. “I think that’s the same formula that we’re trying to adopt ourselves.

“And we have some great people. When you think about the team at CarSense here in the U.S., they’ve been together for a long time; they’re all still running the business. We’re learning from them every day,” he said, echoing a similar sentiment about the folks in the U.K.


Lithia maintains close watch of human element of dealership operations

MEDFORD, Ore. - 

Lithia Motors leadership discussed people in significant detail during its first-quarter conference call with the investment community.

Lithia is keeping close tabs both on individuals who employed by the dealer group as well as its customer base that is exhibiting changing behavior.

Lithia president and chief executive officer Bryan DeBoer intrigued Wall Street watchers during his opening comments when he mentioned how the company is making strides in bringing retail and repair services to the customer and not always waiting for them to walk through a dealership door.

“Expanding our service and delivery sites builds the scale and national footprint that can accelerate our success in the evolving ecosystem of personal transportation,” DeBoer said. “Future expansion into the Southeast and pockets in the Midwest remain an objective in the coming years.

“A larger organization with coast-to-coast coverage provides scale and inventory, cost management, financing and technology,” he continued. “The web rewards size, while owning and controlling the inventory is paramount. We have one of the largest new- and used-vehicle inventories online with over 75,000 units available for sale.”

Later during the call when DeBoer also revisited how weather impacted Lithia’s Q1 retail performance, the company’s top executive described how consumer behavior is so much different nowadays with commerce perhaps starting on a couch and transmitting online.

“I think when we look at who we are today, much of our business has transitioned away from traditional, what we would call, old retail automotive business, where a customer drives by the dealership and they see a car and they decide to stop and come in, or we advertise in the newspaper or on TV and they decide to come in, and their car breaks and they decide to bring it into their closest service facility. Today, most of our interactions with our consumers begin on a web-based interaction,” DeBoer said.

“We mentioned the fact that over 81 percent of our business is done and initiated online, which means the interaction was found online on that vehicle unlike driving by that vehicle,” he continued. “It typically starts with chat or it starts with email discussions or possibly a phone call, where we’re looking at how do we meet our customers’ needs and then how do we fulfill that engagement with that customer, whether it’s delivering at his home or whether it’s them coming to one of the dealerships to be able to take delivery of that car.

“The same happenings are happening in service and parts, whereas many of our stores today, it’s a different experience,” DeBoer went on to say. “People aren’t hanging around the dealership as much as they used to. They may come in and drop their cars off or we may go pick it up in their living room and bring it back to our store, then redeliver it back to their home. If they’re bringing their cars in, many times the customers will just get an Uber and go home or we’ll shuttle them or we have loaner vehicles that are there. But the interactions are mostly more in passing rather than long interactions, which is making technology a lot easier to interact with our customer.

“And I think I could get into a lot of different examples of how technology helps those interactions by online appointment making, by online payments and so on and so on to be able to talk about those,” DeBoer added. “But the business that we’re in today is about fulfillment and fulfilling those needs of the consumers the way they choose within the comfort of their own homes rather than trying to draw them into the dealerships, where they're sitting around and hopefully they'll have a reciprocal effect and buy a car or do something else to be able to spend their time and money.”

Rewarding company employees

With devices like smartphones changing how Lithia interacts with its customers, the dealer group recognizes that it still needs a strong human component to be successful. Executive vice president and chief human resources officer Chris Holzshu described how Lithia is nurturing its 15,000 employees to be able to respond to customer demands either via the retail channel or service drive.

Holzshu pointed out that Lithia internally promoted 80 percent more managers within its system last year than in 2016, rewarding employees to are leveraging the company’s personnel development endeavors.

“Our entrepreneurial culture rewards innovation and technology and is helping us to attract seasoned leaders from across our industry,” he said.

And Lithia’s workforce is relatively young, too, as Holzshu mentioned that more than 50 percent of the dealer group’s employees are millennials, “boosting our familiarity with technology that enhances online buying, financing and servicing experiences for our customers.

“By allowing our teams to utilize a variety of technology and tool sets as they see fit, we can evaluate and experiment with the best technology solutions,” Holzshu continue. “Similar to an app environment, Lithia relies on competition between our internal developers and technology vendors to remain nimble and to avoid mandating a single solution across the entire organization.”

Diving deeper into metro areas

Continuing on the human resources and customer behavior discussions, DeBoer was asked about Lithia has responded when taking a deeper dive into metropolitan markets, especially with all of its acquisitions during the past couple of years. Previously, Lithia concentrated in cities that served as outposts for rural areas.

“I think if we’re comparing and contrasting our exclusive market strategy versus our metro market strategy, specifically looking at what we’re learning in metro markets, the upside is huge,” DeBoer said. “I think from a technology standpoint, you have to be much more savvy in metropolitan areas, which is helping bring a lot of value into our exclusive markets as well. I think if we look at the competition or even the consumers, they’re less tolerant, which means you have to be even better at what you do, which leads to the third item, which is are you able to keep the people.

“When we first combined with DCH, we weren’t sure that people were going to be as stable and would be more transient,” he continued. “We’re really pleased to find out that there are similarities between stability of people in metros versus exclusive markets. Our turnover rates are very similar to our exclusive markets. And if you run a good business and provide opportunity and ownership for those people to be able to make their own decisions, we’re finding that the stability of people is very similar, which means you're able to continue to grow and season the stores.

“If we look at where we're at in terms of margin today, our margins in the metropolitan areas are slightly worse than our exclusive areas. However, we have multiple stores that are showing us that the margins in metropolitan areas have the potential to be even higher than what exclusive markets are,” DeBoer went on to say. “And I think some early examples of that are maybe a Paramus Honda in Bergen County or the new Toyota store in downtown (Los Angeles) that are starting to reach volume levels where you’re levering your fixed cost at such a high amount that everything is dropping to the bottom line. And I think we're very pleased with our entry into metropolitan areas because of that.”

Asbury to focus on what it can control, investing in web, mobile tech

DULUTH, Ga. - 

Asbury Automotive Group will spend the rest of the year focusing on parts of its business it can control and expects to invest in excess of $10 million on its omni-channel strategy, company executives said.

“Our plan for the remainder of 2018 is to focus on the aspects of the business that we can control, specifically, parts and service, used cars, (finance and insurance), and overall expense management, while continuing to intelligently deploy capital towards the highest return,” said Asbury Automotive chief executive David Hult, during the company’s quarterly conference call last week.

“Be that strategic investments in our existing business, notably our omni-channel capabilities, acquisitions or returning capital to shareholders.”

Though it has been widely predicted that new-vehicle sales will flatten in 2018 Hult “doesn’t see a significant downturn coming” but expects the seasonally adjusted annualized selling rate to be “choppy or bumpy” throughout the year.

He also noted that the company’s average gross profit per import new unit was negatively impacted by declines in sales at its Nissan dealerships resulting in lower incentive money. The Nissan brand started 2018 “with a lot of ’17 product on the ground,” he added.

Same-store average gross profit per new vehicle for Asbury’s import brands plunged 24 percent to $799. The average gross profit per new unit for its luxury brands rose 5 percent to $3,713; its domestic brands were up 5 percent to $1,801.

Nissan represents 11 percent of the dealership group’s brand mix, according to documents released in conjunction with the conference call.

Omni-channel strategy

Asbury is using its omni-channel strategy to position itself for the future by investing in its web and mobile technology and assembling a special team to manage all digital traffic, said John Hartman, the company’s senior vice president, operations, who was also on the call.

The team supports 25 percent of the group’s stores and is expected to support the entire company within 18 months, Hartman said.

“Stores participating in the program are experiencing a 20 percent increase in conversion rates coupled with enhanced sales efficiency,” he added.

Asbury is also applying its omni-channel capabilities to other aspects of its business.

For example, up to 7 percent of its vehicles sales starts through PUSHSTART, it’s online sales tool that enables customers to purchase vehicles online, get financing approvals and have their vehicle delivered to their driveway.

“We are extremely excited about these initiatives and proud that we’ve been able to maintain our industry-leading SG&A management while investing in the future,” Hartman said.

New accounting standard

On Jan. 1, Asbury adopted a new revenue recognition accounting standard which reduced its net income by $900,000  and earnings per share by 4 cents the company said in an April 24 document detailing the company’s first quarter earnings.

The company’s net income in the quarter increased 18 percent to $40.1 million on revenue that rose 4 percent to $1.61 billion. Net income in the first quarter of 2017 was adjusted for a $900,000 pre-tax gain on legal settlements.

Asbury’s overall sales of new cars and trucks in the quarter were up 1 percent to 23,659 units and overall used-unit sales increased 3 percent to 20,570.

Same-store sales of new vehicles slid 2 percent to 22,965; same-store used-unit sales were up 1 percent to 20,000 units.

Hartman said used-vehicle enterprise software the company implemented in all dealerships in the fourth quarter of 2017 was bearing fruit: the first quarter of 2018 marked the first time the company experienced an uptick in used-unit sales since the second quarter of 2017.

Same-store parts & service

On a same-store basis, warranty work in parts and service declined 8 percent but the company’s parts and service revenue and its gross profit each grew 3 percent.

That’s thanks to a 5-percent increase in customer pay work and improved used-vehicle sales helped Asbury increase its reconditioning segment within parts and service by 4 percent.

To accommodate that uptick in customer pay work, the dealership group is trying to increase its technician head count, which is not easy, Hult said. He said the company has had empty service bays at its dealerships for “years.”

“If we filled every bay we had and didn’t invest $1 in brick and mortar, (service and parts business) would be up in excess of 30 percent,” he added.

Asbury acquired a Honda store in Indiana in the quarter and will close on the acquisition Chevrolet and Toyota stores the Atlanta market in the second quarter, Hult said.

The Indiana store is Asbury’s second dealership in that market and is expected to generate $120 million in annual revenue, Hult said. He called Indiana an “attractive market opportunity.”

Conversely, he described the stores in Atlanta as “under-performing,” but notes they have potential and are predicted to generate a combined $120 million in annual revenue.

Sonic establishes 6 new records during Q1


Sonic Automotive sure enjoyed a record-setting first quarter as the dealer group reported six different new milestones as a part of its latest financial statement released earlier this week.

Sonic said it posted new highs within six different metrics, including a trio related to its used-vehicle and F&I departments.

Starting from the top, the dealer group reported record first quarter revenue and gross profit of $2.4 billion and $352.5 million, respectively.

Next, Sonic set an all-time record quarterly pre-owned retail unit sales high, turning 33,739 units.

Then, the company highlighted an all-time record for quarterly F&I gross profit per retail unit of $1,490. That pace led to a record first quarter F&I gross of $93.7 million.

Furthermore, Sonic said it generated record first-quarter fixed operations gross profit of $169.6 million.

While all the high marks made for a great headline, Sonic did experience some challenges during Q1.

The dealer group watched gross profit per used vehicle retailed softened by $254 year-over-year to settle at $1,090.

On the new-model side, retail sales dipped by 3.3 percent to 29,500 vehicles. Sonic managed to keep its gross on those new-car turns nearly steady year-over-year as that figure softened by just $14 to $1,925.

When Sonic had to wholesale a vehicle during the first quarter, the company sustained some significant year-over-year setback.

Sonic deployed 9,680 vehicles to its wholesale channels in Q1, a 16.5-percent jump from a year earlier. The losses the company took on those units spiked 224 percent from $141 in Q1 of last year to $457 this past quarter.

“We shifted our strategy during the quarter related to the number of used vehicle inventory we are carrying,” Sonic chief financial officer Heath Byrd said in a news release.

“The decline in used gross per unit and the increase in wholesale loss resulted from us aggressively disposing of units to reduce our overall days’ supply of used vehicles,” Byrd continued.

“Additionally, we believe we found a good compromise between volume and gross for new vehicles and we were able to grow both fixed operations and F&I gross profit compared to the first quarter of 2017,” he added.

Byrd also touched on Sonic’s overall performance as well as the ongoing initiative in the used-vehicle space — EchoPark.

“The first quarter met our internal earnings expectations and we remain confident with our full year earnings guidance,” Byrd said.

“We remain committed to growing our franchise store operations and our EchoPark brand,” he continued.

“In addition to our dividend of $0.06 per share distributed during the first quarter, we continue to honor our commitment to return capital to shareholders as we repurchased approximately 1.2 million shares of our common stock for approximately $23.4 million,” Byrd went on to say.

Lithia manages Q1 used-sales lift despite challenging weather conditions

MEDFORD, Ore. - 

The challenging winter weather experienced in much of the dealership footprint held by Lithia Motors left its mark on the first-quarter performance the dealer group reported on Wednesday.

Despite the Northeast getting especially pounded by snow and other elements preventing potential buyers coming to showrooms, Lithia managed a 4.2-percent improvement in used-vehicle retail sales during Q1, turning 31,677 units. That’s up from 30,404 used vehicles retailed in Q1 of 2017.

Lithia’s fortunes moving new metal were not so fruitful, as the dealer group watched new-model sales soften by a similar pace. Lithia retailed 33,886 new vehicles in Q1; a figure 4.3 percent lower than the 35,415 turned in the year-ago quarter.

“Vehicle sales improved sequentially each month of the quarter,” Lithia president and chief executive officer Bryan DeBoer said in a news release. “January and February were softer than expected and we experienced more severe weather than typical in the Northeast throughout the quarter.

“Despite the slower start, we finished strong with a record March, generating over 70 percent of our earnings,” DeBoer continued. “We expect this momentum to continue throughout 2018 and beyond.

“While fixed operations remains strong, sales shortfalls in January and February created an urgent call to action for our leaders to more aggressively pursue the over $200 million in unrealized earnings potential available to us,” he went on to say.

As DeBoer referenced, Lithia reported that its service, body and parts same-store sales increased 3 percent.

And whether group stores retailed a used or new vehicle, Lithia generated an extra 5.4 percent per unit in gross within the F&I department, collecting $1,380 with each vehicle rolling over the curb with financed packages included.

All told, company-wide Q1 revenue increased 19 percent to $2.7 billion. As a result, Lithia tabulated that its Q1 net income per diluted share came in at $2.07, a 3-percent increase over $2.01 per diluted share reported in the first quarter of 2017, and a 16-percent increase compared to adjusted net income of $1.78 per diluted share in the same period of 2017.

The company said its Q1 net income was $52 million, a 3-percent increase over $51 million reported in the first quarter of 2017, and a 16-percent increase compared to adjusted net income of $45 million for the same period of 2017.

Lithia also reaffirmed its outlook of full year revenues of $12.0 to $12.5 billion and earnings per share of $10.60.

The group’s board of directors approved a 7-percent increase in Lithia’s dividend to $0.29 per share related to Q1 financial results. Lithia expects to pay the dividend on May 25 to shareholders of record on May 11.

Year to date, Lithia has repurchased 90,000 shares at a weighted average price of $98.02 per share. Under its existing $250 million share repurchase authorization, approximately $154 million remains available.

Editor’s note: Watch for an upcoming report that will contain more insights from Lithia executives about the company’s Q1 performance and future expectations.

Group 1 grows Brazil operations with Toyota market acquisition, Honda store expansion


Group 1 Automotive announced Monday that the company has gained new Toyota sales territory in São Paulo, Brazil and will also relocate one of its top Honda dealerships in the area.

Group 1 built its newly opened T-Drive Toyota Alphaville dealership after purchasing selected assets of the Toyota Alpha Trevo Automoveis store in the western São Paulo suburb of Alphaville.

The new store is Group 1’s fourth Toyota dealership in Brazil and is expected to generate $45 million in annualized revenues.

“Toyota is the largest brand partner for our company overall and we are excited to significantly expand our relationship in Brazil,” Group 1 president and chief executive officer Earl Hesterberg said in a news release.

“We see great growth potential for our existing stores and the new opportunities associated with this acquisition will provide a large Toyota operating footprint for us throughout Brazil's largest city," Hesterberg continued.

Group 1 was recently awarded several additional new Toyota points of representation, according to the company.

Among the four dealerships in the greater São Paulo metropolitan area operated by Group 1, the company said it plans to relocate its Honda dealership located in the suburb of São Bernardo do Campo to expand substantially.

“We have enjoyed great success with the Honda brand in Brazil, even during the severe market downturn,” Hesterberg explained. “The relocation of Honda São Bernardo do Campo to a much larger facility with freeway visibility will likely enable us to double our revenue for this dealership in a fairly short period of time.”

Group 1 operates a total of 17 dealerships in Brazil, which includes BMW, Honda, Jaguar, Land Rover, MINI, Mercedes-Benz and Toyota.

Roadster introduces cross-shop enabling e-commerce solution for dealer groups

CARY, N.C. - 

Dealer groups with multiple rooftops can give owners scale for certain efficiencies, but they sometimes present problems for potential buyers.

Roadster is trying to eliminate possible shopping issues so groups can turn metal quicker — and possibly for more gross profit — no matter which dealership might have a vehicle on its lot.

Roadster launched its new Express Marketplace solution for dealer groups in conjunction with NADA Show 2018 in Las Vegas last week. 

Similar to Roadster's Express Storefront e-commerce platform launched in 2016, its new offering can allow dealers to put their entire car-buying process online but is specifically designed to meet the merchandising needs of dealer groups, in particular.

While Express Storefront is tailored for individual stores, Express Marketplace can give car shoppers access to a dealer group's full inventory so they can easily cross-shop across all the brands within a group.

“This allows dealer groups to have a fully commerce-enabled website for their dealer group so that they can pool their marketing dollars and drive efficiency through that site at the dealer group-level. And then have each piece of inventory go to the individual dealership when somebody is ready to transact,” explained Roadster chief marketing officer Michelle Denogean during a phone demo of the new solution for AuSM led by chief executive officer Andy Moss.

With Express Marketplace, dealers can merchandise all their inventory in one place and provide the same commerce capabilities across each vehicle.

The new platform's deal-building tools can allow customers to desk their own deal, then pick up where they left off on a dealer’s Express Storefront or physical location.

“Instead of being just for store X, Y and Z, this site is really aimed at the group where you can literally have inventory from across all 5, 10 and 30 brands — all in one place,” Moss said.

“This process is actually happening with the individual dealerships, but you’re initiating it from the actual dealer group site, providing a consistent experience across each of their stores that are a part of the dealer group.”

Moss explained that the platform is ideal for dealer groups that have 10 to 30 stores in a specific geographic location and want to offer consumers a modernized retail experience.

“The product is focused on the dealer groups because there's lots of groups that have close proximity to many of their stores and this gives them the opportunity to refocus their advertising efforts on a regional basis at the group level — as opposed to on a store-by-store case,” Moss explained.

“We see a lot of demand for that piece of it.”

Dealer groups can choose to show inventory within a particular area, or expand to reach consumers more broadly.

“It also works pretty well for the independent’s that want to provide commerce capabilities for their full inventory of used cars across all of their locations,” Moss added.

Five key retailing solutions provided by Express Marketplace include:

  • Multiple payment options
  • Easy trade valuation
  • Service and protection plans
  • Optional accessories store
  • Secure credit application

Moss said, “Most dealerships are missing the opportunity to upsell accessories as part of the deal and in a very margin-constrained environment, every dollar makes a difference to whether that deal is profitable or not.”

As customers desk their deal, Express Marketplace can allow dealer groups to introduce them to a range of add-ons that they can purchase as part of their deal without overwhelming them.

“On the service and protection plan side, across the board, we’re hearing that the back-end gross associated with these types of transactions is better,” Moss explained. “It partly is because you get several bites at the apple for presenting products.”

Group 1 explains 3 ways it's reinvesting in used vehicles


Sonic Automotive has EchoPark and Penske Automotive Group has CarSense; specific store branding initiatives to turn used vehicles.

Now another of the large publicly traded groups is venturing down this road, too, as Group 1 Automotive recently explained the principles of its latest used-car project — Val-U-Line — a proprietary brand for high mileage pre-owned vehicles.

Group 1 cautioned Wall Street observers that the company efforts to cultivate as well as enhancements to aftersales and retention programs for critical dealership employees would impact its first-quarter financial performance.

Specifically, the company said in a news release, “First quarter earnings will be negatively affected by weak market conditions, including pressure on used-car margins, as well as costs associated with a series of long-term, strategic investments designed to further strengthen the used vehicle, parts, and service components of its business.”

And part of the investments includes Group 1 launching Val-U-Line, a proprietary brand for older model, higher mileage pre-owned vehicles. Leadership explained Val-U-Line targets a growing customer demand and enables the company to retail lower cost units that would have otherwise been sent to the auction.

With an all-new internal online buying center, an upgraded internal auction capability, and a new transportation infrastructure, Group 1 said that it expects the Val-U-Line brand to capitalize on the company’s scale, provide incremental volume and grow to represent 10 percent of the company's used-vehicle business.

As part of this initiative, Group 1 indicated that it has significantly enhanced the used vehicle compensation structure and opportunities for its sales associates. While there will be increased costs associated with these changes, the company expects to benefit from increased productivity and retention over time.

To support the launch and integration of Val-U-Line, the company has added a used car director and functional support team at the corporate level.

Group 1 U.S. president Daryl Kenningham said, “We believe that we have significant upside to our used vehicle sales volume by better leveraging our existing dealership locations. We have become preoccupied with marketing service loan and off-lease vehicles and have neglected the higher mileage spectrum of the used vehicle market. 

“As we deploy the Val-U-Line brand within our U.S. operations, we will evaluate the strength and success of this model for strategic replication in our U.K. market where similar opportunities may exist,” Kenningham continued.

Group 1 chief executive officer Earl Hesterberg touched on the aftersales and employee retention initiatives.

“One of the major challenges and obstacles to improving our dealership performance is the difficulty in hiring and retaining a high percentage of our key dealership customer facing service advisors and skilled technicians,” Hesterberg said. “Therefore, we have taken some aggressive steps in work scheduling for many of these critical professionals, which will incur some significant incremental near-term cost, but should allow us to meaningfully increase sales volumes and customer satisfaction in the long-term."

To support additional parts and service growth, the company has also enhanced service personnel compensation.  This includes an increase to the fixed component of service advisor pay, the creation of a well-defined path for career advancement, and the roll out of a new, flexible work schedule featuring substantially more days off over the course of a year to attract and retain talented service advisors and technicians.

Additional actions include the finalization of an in-house Service Advisor University dedicated to training the company's more than 800 U.S. customer service personnel.

“While these actions are putting near-term pressure on our financial results, we believe they are necessary to better position the company for future growth, as well as prepare us for the potential ongoing evolution in the automotive retailing space,” Hesterberg continued. “In addition to the cost of the previously announced employee bonus of $500 that will add $2.9 million to first quarter 2018 costs, we estimate the total cost of these strategic initiatives will add approximately $3 million to our costs in each of the first and second quarters of 2018.

“When coupled with a recent tightening in market conditions in both the U.S. and U.K., which includes pressure on used vehicle margins in the U.S. that have declined approximately $200 per unit in the first two months, the combined effect is expected to negatively impact our first quarter earnings,” he went on to say.

These latest two used-vehicle projects come on the heels, Group 1 taking a series of actions, including expansion of used-vehicle sales within its existing facility footprint and a variety of investments in dealership employees and technology to support these targeted growth areas.

“Based on a strategic review of our operations, we have reaffirmed that our used vehicle and aftersales segments are the key elements of our business model, which need to be strengthened to compete more effectively in the auto retail environment as it continues to evolve in the future,” Hesterberg said.

“The recent peak in the new vehicle market in both the U.S. and U.K. and the flood of nearly-new and off-lease used vehicles into these markets are applying significant pressure to our margins, which require that we seek additional used car and service volume to compensate,” he went on to say. “To set us on that path, we have made the conscious decision to make some significant upfront investments to support our long-term strategies.”

The company added that it will further detail these investments and initiatives during the upcoming Bank of America Merrill Lynch 2018 Auto Summit scheduled for Wednesday, as well as the first quarter 2018 earnings results teleconference on April 26.

Lithia to add dealerships, boost used-car sales this year


For the past two consecutive years, Lithia Motors acquired dealerships that generate over $1 billion in annualized revenue, and it is poised for additional growth this year, said its president, Bryan DeBoer.

Speaking during Lithia’s quarterly conference call on Feb. 14, DeBoer also said the group expects to continue making progress toward increasing its used-vehicle per-dealership, per month count.

Lithia opened one dealership and acquired 18 others in 2017, and dealership acquisition activity in 2018 is “off to a robust start,” he added.

In January, Lithia acquired Ray Laks Honda in Orchard Park, N.Y., and Ray Laks Acura in Buffalo, N.Y., which are expected to generate $140 million in annualized revenue.

“The plateauing new-vehicle sales environment seems to be further accelerating the number of acquisitions available, and we believe 2018 activity may exceed 2017 totals,” DeBoer told analysts and reporters on the call.

DeBoer said Lithia expects recent federal tax reform to create positive gains “in both our existing store operations as well as new acquisition opportunities.” The company’s effective tax rate will drop to 27 percent from 38 percent, resulting in an incremental $40 million in annual cash flows, he said.

At the time of the reporting for this story (in February) for the print edition of AuSM, Lithia owned 171 dealerships representing 30 brands in 18 states.

DeBoer said Lithia retailed an average of 67 used vehicles per month, per store in the quarter that ended Dec. 31, up from 66 used units per store in the year-ago quarter, putting it closer to its goal of 85 used vehicles per store, per month.

Though Lithia’s newly acquired stores typically sell fewer than 40 used cars and trucks per month, its “seasoned” stores exceed 85 per month, and some sell as many as 200 used units per month, DeBoer said.

Lithia stores that sell lower volumes of used vehicles have the location, people and potential to “expand their reach, and there really is no limit to what the upside is,” he said. 

“That’s why that 85 units — our seasoned stores do more than that — we believe that’s realistic.”

(Editor's Note: This story first appears in the March 15 print issue of AuSM. After this story was written for that issue,  Lithia announced on Feb. 27 that it had acquired Day Automotive Group in Monroeville, Pa., a suburb of Pittsburgh. Then on March 1, Lithia announced that it had acquired six marquee stores from Prestige Family of Fine Cars in Bergen County, N.J., including a BMW, Mini, Mercedes-Benz, Toyota and two Lexus stores.)

CPO down; other used sales up

In the quarter, same-store sales of certified pre-owned vehicles dropped 7 percent, sales of its “core” units increased 8 percent and sales of its “value auto” units increased 3 percent.

In a previous conference call DeBoer said Lithia’s “core” used vehicles are 3 to 8 years old and generate a gross profit margin of about 12 percent; “value auto” vehicles are over 8 years old and yield a gross profit margin of about 18 percent; and its gross profit margin on certified vehicles is 8 percent to 9 percent.

DeBoer said sales of CPO vehicles in the fourth quarter decreased because the supply of lower-cost, core vehicles is growing, and the company typically acquires its value auto vehicles as trade-ins on core vehicles.

“We make a higher margin on those (core) vehicles, which we’re excited about,” he said.

“Lastly, it’s a lot less likely when you sell core and value auto vehicles that you’re going to be cannibalizing new like you do on certified, which can be difficult. So, we always are preferential to core for that single reason.”

Tax law changes help

Lithia’s net income in the quarter benefited from a gain of $32.9 million related to changes in the federal tax law in December. 

Lithia’s net income in the quarter that ended Dec. 31, rose 74.2 percent to $89.4 million; it’s revenue for the quarter grew 17.9 percent to $2.7 billion compared to the previous year.

For all of 2017, Lithia’s net income rose 24.4 percent to $245.2 million; it’s revenue for the year grew 16.2 percent to $10.1 billion.

The company’s new-vehicle retail sales grew 17.3 percent in the quarter to 45,202 units, and for the year were up 14.7 percent to 167,146 units. Its retail used unit sales in the quarter grew 12.3 percent to 32,242, and for the year rose 14.5 percent to 129,913.

On a same store basis in the quarter Lithia’s:

  • total revenues were up 2.6 percent to $2.3 billion, and total gross profits were up 4.3 percent to $346.2 million;
  • new-vehicle units sales were up 0.8 percent to 38,669, and used unit sales were up 2.8 percent to 29,273;
  • gross profit per new vehicle retailed grew 14.2 percent to $2,182; gross profit per used vehicle retailed dropped 9.3 percent to $2,003 and finance and insurance gross profit per unit was up 6.7 percent to $1,342 and
  • service, body shop and parts revenue increased 4 percent. Customer pay work increased 4 percent, warranty work increased 4 percent, wholesale parts increased 1 percent and body shop work increased 6 percent.

Of the vehicles Lithia retailed in the quarter and on a same-store basis, it arranged financing on 71 percent, sold a service contract on 44 percent and sold a lifetime oil product on 25 percent, said John North, the company’s chief financial officer.