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.
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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."
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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.
