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.