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If You’re Not In, You’re Out

As a professional speaker, writer, and commentator, nothing gives me greater satisfaction than knowing something I did or a thought I expressed had an effect that motivated you to respond and take positive action.

When writing my article, “The Elephant in the Room,” for Dealer Magazine’s Sept. Issue, I expected some comments, debates, agreements, and disagreements. But the response was stronger and more strongly emotional. Dozens of dealers read the article and asked me questions. AND the voices I heard loudest were the executive management of the dealerships and dealer principals.

It seems that I hit a nerve bringing up a subject that was already on everyone’s mind, but nobody wanted to talk about it until they knew how other people felt. So many of the people I spoke with said, “You know, Jim, I’ve been considering doing that, but it’s a big commitment, and I was wondering how it would work out in my market?”

The truth is that every dealer needs to seriously consider building and operating a ‘stand-alone’ used car dealership with no ties to the manufacturer. As I pointed out in the previous article, each one of the large public companies is opening its own used car branded dealerships. You have to ask yourself why. Lithia Motors is conducting an aggressive rollout with their Driveway Dealerships, selling at a pace of more than 40,000 units annually.

Group 1 Automotive Inc. is expanding its ‘AcceleRide Platform’ with no franchise affiliation, and it’s currently accounting for more than 10% of the company’s sales.

Asbury Automotive Group‘s ‘Clicklane’ shows similar viral growth with month-over-month record sales.

Sonic Automotive has expanded its eCommerce platform for its EchoPark used-vehicle-only business, and they claim it’s accounting for 80% of their national traffic.

Penske is close to the vest, but the numbers are conceivably substantial for their used and certified pre-owned platform and ‘CarShop’ stores.
Every one of the major corporations makes the same claims that these platforms convert twice to three times more than their franchised sites, and the stores branded without franchise affiliation perform better and close with less friction.

I know that most of these corporations’ CEOs and top officers have admitted, off-record, that they launched these independent branded dealerships to create brands that are not under the manufacturer’s influence and controls and to get the manufacturers out of their data and customer information.

A case in point that I looked at closely was CarMax, the largest used car retailer in the business.

They finally sold off their last new car Toyota franchises in 2021 and are now totally independent. Remember, CarMax was the first public company to get a new car franchise when they were awarded a Chrysler-Plymouth point right in Norcross, Georgia, where I lived at the time. We now see CarMax selling off the last of their franchised dealerships, two highly profitable Toyota Dealerships. Even though Toyota is one of the most dealer-friendly franchises, they still walked away from the manufacturer controls.

Every one of these major players has seen the writing on the wall as the manufacturers become more abusive and profits on new car sales have diminished in normal times as the manufacturers cut margins.

If a dealer wants more evidence, just look at how your manufacturers are trying to ‘weasel’ into the used car business using your inventory and making you take all the risks and make all the investments.

It puzzles me why any dealer would even consider allowing the manufacturer or any vendor access to your used car business. A dealer would have to be crazy to sign up and allow GMs Car Bravo, Ford’s Blue Advantage, or any of the vendors dying to be your “Partner” in a joint used car venture. In my opinion, you must be absolutely nuts if you allow any manufacturers or vendors into your customer data.

When one of these pretenders tries to tell you that they are your ‘Partner,’ you need to run and don’t look back.

With Carvana and Vroom teetering on the edge of bankruptcy, dealers have proven our resilience in taking back the market.

Even though the used car market is crashing hard right now (as I predicted repeatedly), the reckoning is upon us. Even though values are dropping, there is still the certainty that a strong, robust, used car market with strong demand will emerge right behind it as the dust settles.

If the average car is sold four times as a used car, you can count on the last dealer that sold that car making substantially more gross profit than the original dealer that sold it new.

And I can tell you from experience that there are used car dealers making substantially more than the largest franchised dealers in some of the major metros.

I recently interviewed Matt Damos, a Budget dealer in Louisville, Kentucky, selling 250 preowned units per month at ridiculously high profitability. And my friend Tracy Myers with Frank Myers AutoMaxx in Winston-Salem, North Carolina, is knocking the cover off the ball.

Whether you start your own privately branded used car dealership (I would), that’s up to you, but one thing you need to consider seriously is getting ready for the increased volume of subprime business we are about to deal with industrywide.

Predictably, when we as an industry began selling cars for $10,000 or more above MSRP and financing people for 84 months and even 96 months, when used car prices skyrocketed to twice what they’re worth, and when runaway inflation hit us with higher interest rates; the result was predictable.

The Consumer Financial Protection Bureau says delinquencies and repossessions are now higher than 35% of outstanding loans.

Monthly car payments are averaging $667 for new vehicles and $515 for used onesoriginating in the second quarter of 2022. That’s more than a $100 increase year over year. That is why one of every three Americans has a credit score under 620. And it will get worse. Before this recession is over, and as the over-valued cars and trucks we’ve been marking up for the last two years come home to roost, I can realistically predict that subprime finance customers will be more than 50% of the population. Repos are already beginning to flood the market, and used car values are dropping and approaching freefall.

So, you and your dealership need to become proficient in subprime finance. Whether you open a separate stand-alone dealership or operate out of the current showroom, it’s coming and will be a major part of our business. The best dealers will start seriously lining up your lenders and attending classes and seminars. Domestics and imports, even highline dealers, will deal with a wave of subprime customers. These people are largely going to be victims of circumstances beyond their control. The economy, runaway inflation, inflated values, and high-interest rates caused them to have car payments they truthfully could never afford. Many people with previously good credit will now be subprime customers.

Most of these customers will still be coming in online, so you’ll need special websites (that’s why having your own independent brand is better) and a well-trained BDC to deal with the new customers.

It’s going to be a dramatically different world in automotive as the manufacturers try to go to the agency model and get rid of large dealerships and inventory (which won’t work) as they try to go to direct sales (really won’t work). Of course, they will fail and come crashing down hard. In the meantime, there are many savvy dealers who will launch their own brands. And you’ll be there to pick up the pieces and save them on
your terms. Remember I said that. JIM #AlphaDawg

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