Show and Sell

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:

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