Sonic Automotive to Open Used Car Chain

Article by Christina Rogers, the Wall Street Journal:

Sonic Automotive Inc., one of the country’s largest car-dealer companies, will open a chain of preowned-vehicle stores hoping to move on the turf of used-car retailer CarMax Inc.

Sonic today will announce the creation of EchoPark stores, with the first dealership opening in Denver this autumn, a few miles from a CarMax store. Like CarMax, EchoPark will provide no-pressure shopping to customers disillusioned with traditional selling techniques.

Sonic prices will be set by a central office, rather than each store, eliminating haggling. Customers will deal with one salesperson from start to finish.

The EchoPark move comes amid healthy demand for preowned cars, which typically give dealers bigger margins than new cars. Americans bought about 42 million used cars last year, nearly three times as many as new cars. Dealers generated 3.8% in profit last year on the sale of each new car. That was down 5% a decade earlier and far less than the 13% on used cars, according to the National Automobile Dealers Association. EchoPark expects an average selling price of about $17,000. Eventually, it hopes to expand to other U.S. cities, adding one to three major markets a year.

Sonic isn’t the first megadealer to take on CarMax, the nation’s largest retailer of used cars, with 135 stores. Lithia Motors Inc. in 2007 opened stand-alone used-car stores but abandoned the strategy the next year in the economic downturn.

Asbury Automotive Group Inc., which is smaller than Sonic, also is building a line of stand-alone used-car stores. It opened its first in Tampa, Fla., in June under the Q auto brand.

“It’s too big a market and there is too much of an opportunity,” said Sonic’s executive vice president of operations, Jeff Dyke. CarMax sits “in their own world without any competition really,” he said. “We think there is plenty of room for us.”

CarMax’s revenue rose 15% in the fiscal year through February to $12.6 billion, selling a half million cars. The company reported an average selling price of $19,408 for used cars and gross profit of more than $2,000 per vehicle.

Sonic posted $8.8 billion in 2013 sales. It reported an average of $20,327 in revenue for each used car and a gross profit of $1,402 per vehicle.

A CarMax spokeswoman responded to Sonic’s plan by saying that “competition is good for the marketplace.”

EchoPark is part of a larger $350 million investment by Sonic to revamp its approach to selling cars. “We’re looking down the road and saying there is a new generation of buyers coming along and they’re going to buy cars differently,” Mr. Dyke said.

Sonic executives are so confident of used cars’ growth potential that internally they have dubbed the new venture the “tree trunk.” It eventually will become the company’s core business, with new-car sales a “branch.” New-car sales currently make up 55% of Sonic’s retail sales.

The fragmented used-car market provides an opportunity for Sonic, but the company will have to work hard to be a dominant player, said Morningstar analyst David Whiston. “You have to establish a brand,” he said. “That takes time. That’s not just about spending the money.”

Sonic executives said they studied the CarMax model and admired its success but that EchoPark would be different in many ways, starting with the stores’ look.

“If they are the Wal-Mart of this model, I would say we are somewhere between the Target and the Starbucks,” Sonic Vice Chairman David Smith said recently.

Rather than rows of cars parked out front, EchoParks will have showroom displays and keep most inventory out of immediate sight. There will be one hub store for each metropolitan area to hold the region’s inventory.

Shoppers can have cars delivered for viewing and test drives at smaller neighborhood stores, which also will provide service work. In Denver, Sonic plans to open a hub and at least four other neighborhood stores.

Sonic plans eventually to have its own financing arm, as CarMax does.

Sonic’s overhaul of the sales process also will extend to new-car sales. The company aims to eliminate the so-called pain points of buying a car and make the process simpler and faster, starting with getting buyers out the door in under 45 minutes. It currently takes the average buyer 2.38 hours to purchase a car, according to Transactions also will be handled with electronic tablets, cutting paperwork.


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