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.
Hamlin's Hamlin's
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
Peter Brown
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.
Ray Nichols
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.
Michael Richardson
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.
Coleman Hoyt
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.
