Used-Car Superstores Pulling Back on Plans

The nation’s two largest operators of used-car superstores appear to be tossing in the towel on their narrow strategy of killing the competition with size and service instead of price.

CarMax Group said Tuesday that it will delay expansion of its superstores into the Los Angeles area until next year as it tests a new strategy of opening smaller stores in other metropolitan markets.

CarMax, which is about 77%-owned by Circuit City Group, said it doesn’t have enough stores to successfully enter the Los Angeles market this year. The company hasn’t turned a profit since it began operating in 1993.

CarMax said it now plans to open about 10 stores in an 18-month period when it enters the Los Angeles market next year. The initial plan calls for six hub and four satellite stores, spokeswoman Dandy Barrett said.

Rival Republic Industries Inc. already has said it is halting expansion of its chain of AutoNation used-car stores after it opens its sixth Southern California facility in Torrance in April. That cancels plans the company had for an AutoNation in Anaheim later this year. Republic is also planning to add new-car franchises to many of its 37 used-car stores, making them little different than a traditional new-car dealership with a big used-car lot attached.

Republic said several weeks ago that it is slowing down because of a soft used-car market.

But the problem isn’t really a weak used-car market, industry analysts say. Instead, the problem is in the way Republic and CarMax have approached the market.

“Used-car sales are booming,” says Chris Denove, director of consulting operations for auto retailing guru J.D. Power & Associates Inc. in Agoura Hills. “What these two companies are finding is that their aspirations for raising the level of used-vehicle retailing, while very noble, aren’t very profitable.”

Both companies have tried to compete with traditional used-car retailers, including the used-vehicle operations of new-car dealers, by promising a high level of service and a huge selection.

Their prices, however, have tended to be on the high side--reflecting a belief that consumers are willing to pay a premium for that selection and service.

“Both provide a wonderful environment for the consumer,” Denove says. “But if they are not pricing competitively and turning their inventories quickly, they cannot make a profit.”

CarMax said it now plans to add several smaller satellite stores in metropolitan markets. That will allow it to serve more customers while cutting costs, because the satellites will share purchasing, reconditioning and business offices with their superstore hubs, the company said.

“Our large markets appear to require a more dense storing pattern, because greater traffic congestion limited the effective trade area served by each CarMax,” President W. Austin Ligon said in a statement.

CarMax, based in the Richmond, Va., suburb of Glen Allen, said it has been testing the satellite plan in Miami, Fort Worth and Dallas.

“It’s a real positive that they’re taking a step back before they blasted into another market,” said analyst Skip Helm of William Blair & Co., who has a “strong long-term buy” rating on the stock.

CarMax has been a drain on Circuit City earnings in past quarters. For its fiscal third quarter, the 28-store auto chain had a loss of $7.3 million, or 7 cents a share, on sales of $345.9 million. Sales at CarMax locations open at least a year fell 4% in the quarter.

In the second quarter, the company’s loss reduced Circuit City’s earnings by $2.28 million, or 2 cents a share.

Still, it’s too soon to know what effect the new store format will have on the company’s performance and how that will reflect on Circuit City, a company executive said.

“It’s a bit premature to talk about earnings right now,” Chairman Richard Sharp said in a conference call.

CarMax shares rose 6 cents to close at $4.44 on the New York Stock Exchange. Circuit City shares rose $2.69 to close at $59.50, also on the NYSE.