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.