Show and Sell
Bill Hamlin hit upon the idea of selling late-model used cars the way dealerships sell new cars. He offers financing, insurance, service contracts, a polished eight-bay service area, and even a playground for the kids. Would you buy a used car from this man?
Bill Hamlin rolled into Springfield, Ill., 12 years ago from Cedar Point, Ill. (population 319), with $190 in his pocket. The state capital, a sleepy city set amid the cornfields, still held sufficient opportunity for a man as dogged as Hamlin. He found work as a cook, a UPS dispatcher, and a real estate salesman. Then he started selling cars, and that was something he really liked.
In 1989 he founded Hamlin, Power & Reaves Ltd. (HPR) to offer direct-mail services and sales training to car dealers around the country. The company now has 400 customers and annual sales of $10 million, and Bill Hamlin no longer lives life quite so close to the bone. He now drives a Bentley, a forest green cocoon of a car that carries him around town in the cool luxury of soft leather and burled wood. But to say that Hamlin is content with his success is akin to saying that Donald Trump was ready to quit after the first building and the first wife.
At 34, Hamlin is an edgy entrepreneur. Given to flamboyant sartorial accents -- florid tie, fat watch, diamond-encrusted cuff links -- he exudes a "What's next?" urgency. The man has no hobbies to speak of. "I don't have the time. I spend most of it thinking about my business," he says distractedly.
In one such reverie Hamlin's new business began to take shape. The idea was embodied, in fact, in the Bentley, for which Hamlin had paid $125,000 when the car was only a year old and had just 14,000 miles on it. A year earlier, some high-flying trader at the Commodity Board of Trade in Chicago who buys a new Bentley every year had laid out $200,000 for it, brand-new. In that yawning spread between the price of the new Bentley and what he had subsequently paid, Hamlin saw an opportunity: he could sell used cars to people who thought they wanted to buy new ones but didn't want to pay full price.* * *
HPR Automotive Superstore, looking every bit like a new-car dealership, opened for business in May 1994 on Dirksen Parkway, Springfield's auto row. A crisp awning hoods the building's windows, and the cars, washed daily, gleam in neatly arrayed ranks. "Every week we get a few people coming in who ask if these are new cars," remarks the store's general manager, Ron Dunkel.
They aren't, but that's the idea Hamlin wants to create. He sells late-model, well-maintained cars that appeal to many would-be new-car buyers because they cost thousands of dollars less than the same cars bought new. And when Hamlin sells a car, his gross margin on the sale is likely to be three times the new-car dealer's.
Hamlin's business owes its existence to a shift in the economics of the car business that involves three basic variables.
The first is price. Cars keep getting more expensive. From 1989 to 1993, the average price of U.S.-made luxury cars rose nearly $2,000 each year. In fact, prices on some models rose even faster. A Cadillac Seville that cost $20,000 in 1989 retailed for $36,000 five years later.
The second variable is quality, which has also increased. Cars today are built better; they last longer. Says Peter Brown, editor of the Detroit-based Automotive News, the industry's leading trade journal: "It used to be that a three-year-old car was considered old. It could be a junker. Today that same car can be very clean."
But a third variable -- depreciation -- hasn't changed much. In its first year the average new car loses 28% of its value. Drive it off the lot, and you're immediately the proud owner of an expensive used car.
In other words, new cars cost more and last longer but still lose value rapidly. Says Hamlin: "If you think about it, there's no reason why anyone should buy a new car today."
Or sell one, for that matter.* * *
Hamlin, who is no stranger to the auto-retailing business, says that there are few advantages to being a new-car dealer once you get past the greater glamour and credibility. In fact, he points out, the new-car business is fraught with perils that a skilled used-car dealer can skirt. To wit:
Economic Tribute. New-car dealers -- known in the trade as "franchise" dealers -- may be local big shots, but in Detroit they take a number and stand in line along with all the other franchise dealers. They are beholden to manufacturers for the privilege of putting up their Ford, Buick, or Chrysler signs. In addition, new-car dealers often must pay a lump sum for the goodwill associated with the franchise they purchase from another owner.
The Good, the Bad, and the Unsalable. Dealers and carmakers don't always share common interests. Dealers want the popular models. Manufacturers want to move what they produce. Dealers must take the bad with the good.
Vigilant Consumers. Today, with the dealer's cost on a given car available from any number of publications, customers often walk into the showroom knowing exactly what they want to pay. If they don't get their price, they walk down the street to a rival dealer and price his product. Well-informed consumers have squeezed dealers' margins harder than Toyota or Nissan ever could. Ted Orme of the National Automobile Dealers Association (NADA), which represents most new-car dealers in the United States, says the average gross profit margin on a new car in March 1995 was 6.7%. But, Orme points out, "a dealer's expenses are close to that 6.7%. So he's really just breaking even on every sale." Last year, according to the NADA, new-car departments of franchise dealers returned less than 1% net profit on sales.
In contrast, the average gross profit on used-car sales by those same dealers now stands at 12%, according to the NADA. Moreover, since overhead expenses relating to the used-car operation are lower, more money from the used-car department falls to the dealer's bottom line. Last year it was 2.2% of sales. In a volume-driven business like this one, a 2% margin means a good living.* * *
Three years ago, for the first time since World War II, more used cars than new were sold in America. The annual U.S. market for used cars now totals more than $50 billion, with about 50 million cars and trucks changing hands each year. Over the past 10 years the average selling price of a used vehicle has risen from $6,000 to $10,750. That may sound high, but it's well below today's average new-car price of $19,925.
Brown of Automotive News says a smart used-car dealer can "easily" generate gross margins of 18%. Used cars produce greater profit not only because they are in demand but also because selling them remains more art than science. While the pricing of new cars has become increasingly objective and quantifiable, the pricing of used cars remains subjective and perceptual. "No two used cars are alike," notes HPR Automotive Superstore's Dunkel. Once two identical Mustangs leave the lot, they become unique. They are driven and serviced differently. Their value, no longer stated on a factory invoice, is now in the eye of the beholder.
None of that is news to new-car dealers. After all, they account for some 30% of all used-cars sales. Still, they invest relatively little in selling used cars, despite the higher margins they fetch. Franchise dealers typically will staff gleaming new-car showrooms with their best people. Meanwhile, the used-car end of the operation has to make do with who and what is left over -- second-best.
And yet, Dunkel asserts, the used-car department demands and deserves better, because its rewards and risks are so much greater. "The new-car manager has the invoice in front of him. He knows what he paid for the car," says Dunkel. But the used-car manager must make buying decisions daily based on what he thinks the market is telling him. "He's like the manager of a stock portfolio," adds Dunkel. "The value of that portfolio is shifting all the time. It's very volatile. So he'd better be right when he buys that car."
But often he's not, and that's where Hamlin saw his opening. Franchise dealers, anxious to sell another new car, will sometimes pay too much for the used car they are taking in trade in order to seal the deal. Hamlin, with no franchise to protect or manufacturer breathing down his neck about meeting a monthly quota, doesn't face those pressures. He can buy what he wants, when he wants. If he must pay a premium for a car, he is free to weigh it against his carrying cost and how long he thinks he can afford to hold the car.
In sum, he has more flexibility than a franchise dealer.* * *
Bill Hamlin signed a 15-year lease on a defunct used-car dealership on Dirksen Parkway, agreeing to pay $2,900 a month in rent. He invested $475,000 in improvements, including a brand-new eight-bay service facility. He also put up $300,000 in stock and cash to secure a $2-million line of credit with a local bank to purchase inventory -- some 150 cars. (About $250,000 of the start-up funds came from profits at Hamlin's first business, HPR. The rest came from his bank account.)
Some franchise dealers along the strip looked askance. "A lot of them thought I was totally crazy," Hamlin recalls. "They thought I had more money than brains." But Hamlin just saw himself as "the underdog in a prizefight." He was the scrappy new guy on the block who had to go for broke and differentiate his store as much as possible from all the others along auto row. His big investment allows him to carry a wide selection of cars -- four times as many as the average, thinly capitalized stand-alone used-car dealer -- and present them in a setting more typical of a new-car dealership.
Equally important, Hamlin's dealership provides services more typical of a new-car operation, each of which represents its own profit center. HPR Automotive Superstore offers financing, insurance, service contracts, rustproofing, and routine service. While those areas accounted for just 13% of total revenues through the first half of 1995, they generated 54% of gross profit.
Hamlin's aggressiveness in mining those profit centers shows up in many small ways, including the following:
Financing. HPR Automotive Superstore has relationships with eight banks in town. That allows it to offer ample choice and flexibility in rates and terms. As a result, Hamlin can arrange financing for 80% of his buyers, a very high penetration rate. The industry average is 65% for franchise dealers and less than 25% for independent used-car dealers.
Reconditioning. HPR Automotive Superstore puts an average of $200 into reconditioning each car it sells. An extensive checklist, pasted in the car window, details the work done by the service department and is signed by the mechanic responsible. If anything on that checklist goes wrong during the 30-day warranty period, the car comes back for repair to the mechanic who did the original work. When HPR Automotive Superstore sells a car, the customer meets the service manager, a custom more typical of new-car dealers.
Maintenance. Emphasizing service has paid off. HPR Automotive Superstore's service department opened in October 1994 and did $2,000 in sales that month. By June 1995 it had ramped up to $20,000 a month, and the company was projecting service sales of $400,000 for the year. Like most franchise dealers, HPR Automotive Superstore offers shuttle service and loaner cars to its service customers.
"The average used-car facility is not much more than a sales lot," Ron Dunkel concludes. "It doesn't have these other profit centers."
Dunkel himself is one of Hamlin's most valuable assets. With 34 years in the business, Dunkel knows most of the car dealers in and around Springfield. He buys about 50% of HPR Automotive Superstore's cars at local auctions and the other half from dealers looking to get rid of trade-ins they fear they can't move. He looks for one-owner cars with fewer than 15,000 miles per year on them. As he is not under a manufacturer's pressure to hit a monthly sales quota on new cars, Dunkel thinks he is less prone to overpay for trade-ins. Also, he can more freely tailor his inventory to changing seasonal demand and public tastes. "I can usually start buying particular cars before they get scarce and expensive," says Dunkel. "I get a jump on the market, and we can afford to hold a vehicle longer than other dealers."* * *
Bill Hamlin figures he has to sweat the details in his business, because the kind of buyer he's after -- the kind who might otherwise be pricing new cars -- cares about the little things. HPR Automotive Superstore has a manager who supervises only detailing work, and two other employees who just wash the cars. The salespeople are neatly turned out in matching polo shirts and dark slacks. While the service department's eight bays are routinely full, the floor remains spotless. There's a playground for shoppers' kids. The cars are parked in precise rows, spaced so that one car's open door can't ding another. Hamlin groups his cars according to size and color, because a compact looks even smaller next to a big truck, and a brown sedan looks dull next to a red one.
By last January Hamlin's detail-sweating was getting him nowhere fast. The business had produced a cumulative loss of $150,000, and he was starting to wonder what he had wrought. "I was thinking to myself, 'Why did I put so much money into this sucker?" But with the new year, business began to pick up as the $200,000 HPR had spent in advertising over the previous six months kicked in. Sales for the first half of 1995 jumped to $4.6 million, with 260 cars sold and $215,000 in service revenues. The business turned a pretax profit of $286,000. By the end of June, HPR Automotive Superstore was averaging more used-car sales each month than at least 10 of the 16 new-car dealers in Springfield, most of whom had been in business for 10 years or more. For all of 1995, Hamlin projects sales of $9.9 million, with 520 cars sold, $400,000 in service revenues, and a pretax profit of $600,000.
Springfield, Hamlin says, is the right kind of market for his concept, because there is just one of each franchise dealer there, and without direct competition the dealers developed a complacency he intends to take advantage of.
But he'd better move fast, because competition is coming. "New-car dealers are now paying more attention to used cars," says Brown of Automotive News, "because on new cars the margins are so thin. The new-car business is growing slower than the economy."
And then there's Circuit City.
The electronics-retailing giant has also gone into the used-car business, through its subsidiary, Carmax, which so far has five locations -- two in Atlanta and one each in Orlando; Charlotte, N.C.; and Richmond, Va. Last year Carmax's Richmond store sold 4,050 cars at an average price of $13,664 to gross $55.3 million, according to the investment research firm Sanford Bernstein & Co. That's 30 times the sales of the average used-car dealer. Carmax turned over its inventory 8.4 times, more than twice the industry average. Furthermore, industry rumor has it that retailers such as Kmart and Sears Roebuck & Co. are now thinking of getting into the business.
To compete against those kinds of players requires, among other things, good management. Dunkel says that growth in Hamlin's market niche will help the company attract skilled managers. "When people become more familiar with the concept, we will be able to attract quality people," he says. "They will be less hesitant to join us."
But growth could be constrained by supply. As demand for good used cars expands, prices will rise and margins narrow. "We have good connections," counters Dunkel. "If it gets tough, we'll still get our fair share." Besides, Dunkel doubts that most franchise dealers will ever make a strong commitment to used cars. He argues that their new-car sales will always demand their best talent.
Next March, Hamlin plans to open a second location, on the west side of town, where much of the city's population growth is and where there are no car dealers. He expects to invest $5 million in land, building, and inventory. The new location will carry more high-end cars and more imports, and the service area will be larger -- 14 bays. "We'll have a big window into the service area," he says, "so people can see what's going on." Among the amenities Hamlin expects to provide is a shuttle service customers can take to the local mall while their cars are being worked on. He also foresees $1 million in sales from the service department at this new location in 1996.
In October 1996 Hamlin hopes to open a third store, in Champaign, Ill. By then, he believes, he will have proved the concept well enough to attract serious financial backing. Maybe he can take the company public. Says Hamlin: "There are specialty chains selling just about everything, but you don't find them in the car business. If I had the capital, this could be the Wal-Mart of the car business."
Company: HPR Automotive Superstore
Concept: Sell late-model used cars and provide a level of service more typical of a new-car, or franchise, dealership
Competitive advantage: HPR Automotive Superstore deals exclusively in used cars, which generate higher profit margins than new cars do while offering consumers substantial savings. Because it isn't tied to a particular new-car manufacturer, HPR Automotive Superstore can tailor its inventory to stock only the most popular models.
Projections: Current-year revenues of $9.9 million and pretax profits of $600,000. In 1996 HPR will open two additional locations and expects sales of $19.6 million and pretax profits of $1.2 million.
Hurdles: Increased competition from companies with much deeper pockets. Finding good managers. High capital requirements for growth.
William K. Hamlin, 34, President and CEO
Family: Wife, Kelly
Personal funds invested: $250,000 invested in capital improvements, $300,000 pledged as collateral to establish $2-million credit line for purchase of inventory
Equity held: 89% of parent company, Hamlin, Power & Reaves Ltd.
Salary: $200,000 (drawn from parent company)
Entrepreneurial roots: Father owns a restaurant and motel, where Hamlin worked growing up. Arrived in Springfield with $190 in his pocket -- and no car.
Last job held: Real estate salesman
Other companies started: HPR Automotive Marketing, which offers direct-mail and sales-training services to auto dealers
On entrepreneurship: "I love competition. Most of the dealers in this town have grown complacent. I feel like the underdog in a prizefight. No one expects me to win."
HOW BILL HAMLIN EXPECTS TO MAKE MONEY
The Industry at a Glance
Bill Hamlin saw an opportunity in the big spread created by the price of a new car and the corrosive effects of depreciation.
Average cost of a new car at retail: $19,925
Average value of a new car after one year of depreciation: $14,345
Average gross margin on a new car: 6.7%
Average gross margin on a used car: 12%
Source: The National Automobile Dealers Association statistics, March 1995.
Best of Both Worlds
HPR Automotive Superstore is a hybrid. It attempts to combine the competitive advantages of both new-car and used-car dealerships while minimizing the disadvantages of each. Here's how Hamlin sees his business as compared with his competitors' businesses.
Ability to Ability to Ability to
Credibility Finance Multiple Stock Focus on
with Large Profit Gross Popular High-Margin Range of
Customers Inventory Centers Margins Models Business Services
HPR Automotive Superstore Fair Yes Yes High High High Wide
New-Car Dealers Fair Yes Yes Low Fair Low Wide
New-Car Dealers' Used-Car Departments Low Yes Yes Fair Fair Low Slim
Independent Used-Car Dealers Low No No Fair Fair Fair Slim
The Competitive Edge
Hamlin figured he could enhance profitability by offering the array of high-margin services typically associated with a new-car dealer.
Revenues Gross Profits
Vehicle sales 87% 46%
Finance and insurance 5% 26%
Service 4% 10%
Other 4% 18%
Plans for Growth
Hamlin's projected sales and profits are based on his opening a second HPR Automotive Superstore in March 1996 and a third in October 1996.
1/95 - 1995
Projections 6/95 (whole
($ in millions) (actual) year) 1996 1997 1998
Unit Sales 260 520 1,120 1,980 2,160
Vehicle Sales $4.6 $9.5 $19.6 $33.6 $36.6
Service Sales $0.2 $0.4 $1.8 $4.1 $4.9
Gross Profit $1.0 $2.1 $4.5 $8.5 $9.7
Pretax Profit $0.3 $0.6 $1.2 $3.0 $3.8
WHAT THE EXPERTS SAY
Editor, Automotive News, in Detroit, the leading trade journal for the auto industry
This is not a slam dunk. We are now seeing a groundswell of appreciation for the used-car market by new-car dealers. There are more nice low-mileage used cars available than there used to be, but more dealers are interested in having those cars. So Hamlin will have to pay more for his cars, and he will not have the market to himself. In this business you also really have to watch your overhead. It eats into your operating margins. Until the first business is solidly profitable, he should not go out and open additional stores. He's getting ahead of himself.
Chairman, BSCAmerica, Inc., in Baltimore, a network of companies involved in automotive and financial services
The automobile business is very volatile. Finding the right talent and retaining it over time is hard. I would worry about depth of management here. Hamlin also says he will be able to hold onto cars longer than the competition can. He would be smart to develop a policy of dumping a car he holds longer than 30 or 45 days. Otherwise, he ends up with an inventory imbalance -- too many cars that no one wants. Used-car values peaked last April. New-car prices have been running 3% ahead of inflation, used-car prices 8%. Eventually, those lines will converge, and new cars will become a better bargain than used cars. There will be a significant adjustment downward in used-car values by 1997 and 1998. It will also be harder for dealers to find desirable late-model cars, because there is pent-up demand for them. The average American drives an eight-year-old car. When he comes in to trade for a new car, he experiences sticker shock. He buys a used car, but he won't spend a lot because there are so many other places he can spend his money. That squeezes margins. It's also tough to beat the manufacturers at their own game because they, in effect, subsidize the franchise dealers through their captive finance companies. They can outlast Hamlin.
President and CEO of ADT Automotive Inc., in Nashville, which owns 30 car-auction centers in the United States, transacting $7 billion in annual sales
Hamlin has discovered one thing: the franchise dealers' relationship with consumers over the years has been a disaster. Being friendly instead of antagonistic is his magic ingredient. That's in his favor. But sooner or later supply will be a problem, because domestic manufacturers sell a lot of their cars in closed auctions at which only franchise dealers can bid. I just did a computer analysis of the cars we sold in one week and the number of two-year-old, low-mileage vehicles in that group that would be available to nonfranchise dealers like Hamlin. The answer is about 10%. Meanwhile, the number available to franchise buyers is 36%. That means that dealers like Hamlin have to fight for that 10% of the supply, and it could get worse if franchise dealers put more pressure on manufacturers to sell more cars through closed auctions. As more people get into this business, supply will not be sufficient to meet demand. His costs will go up, and his profits will shrink.
Franchise dealer in Acton, Mass.
With more cars under warranty longer, it's the new-car dealer who gets paid by the manufacturer to fix the car. So that's a lot of service income Hamlin won't see. To compensate he's got to have a very sophisticated service operation. Can he do that without being there every day? With service it's one customer, one car at a time. That's a hard thing to orchestrate and do well on a large scale. Hamlin does have a huge asset in the form of Ron Dunkel, but he'll need to have a Dunkel in his other locations. He's leveraged, and if a shift occurs in the market, he'll be overextended. New-car dealers, on the other hand, have the infrastructure in place to respond to what is happening in the market. Ford now enables its dealers to bid on late-model used cars by computer. And there will be a swing back to new cars as dealer incentives from manufacturers get larger. But Hamlin has only one kind of inventory: used. Finally, he's taking a huge risk with this new construction. It's not good to be out there all by himself on the west side of town. When people go to buy a car, they want to be able to go next door and compare. That could be a nice facility that someone else will end up owning some day.