Used-Car Profit Engine
Used-car buyer Brad Francis is a pretty jovial guy, but he pasted on a grim look as he strode toward the auction hall here one cloudy November morning.
“This is my game face,” he whispered, as he took up his preferred position directly in the auctioneer’s line of sight.
Francis was at Manheim’s Southern California Auto Auction -- a wholesaler for dealerships -- looking to buy late-model vehicles for Santa Margarita Ford in Rancho Santa Margarita.
The dealership is expanding its used-car business, moving upscale for an increasingly affluent region. And Francis, who runs the used-car department, was hoping to find a few recent models that promise to sell themselves.
Used cars have been profit centers for new-car dealerships for decades, but never more than now. Hefty incentives that make new vehicles so attractive for consumers -- think zero-percent financing and cash back -- have stripped out most of the gain for dealers.
At car lots, new vehicles outsell used ones 2 to 1. But, according to the National Automobile Dealers Assn., the average profit is about $200 on each new car, compared with $300 to $400 for used cars.
In car-crazed Southern California, the margins can be far higher.
“I can make a lot more money on a good used car -- maybe $2,000 before costs versus $200 to $600 on a new-car deal,” said Fritz Hitchcock, chief executive of Hitchcock Automotive Resources, which owns seven new-car dealerships in Los Angeles and Orange counties.
The reason for such a giant spread: Southern California’s demographics make it a particularly good used-car market.
“There are lots of people buying them for sons and daughters heading off to college, for commuter cars and because they can’t really afford that new car ... but can get into a 2- or 3-year-old version of it,” Hitchcock explained.
This year, about 30 million used cars in the United States will be sold to retail buyers by 20,000 new-car franchises and 60,000 independent used-car shops.
To replenish their supply, dealers make regular trips to wholesale auto auctions like the one in Fontana, seeking a continual flow of late-model, low-mileage cars and trucks. In all, auctions will sell about 10 million vehicles nationwide.
“Sales of used cars helped a number of dealers survive the recession of the early 1990s,” said Dean Eisner, chief executive of Cox Enterprises Inc.’s Manheim Auctions, the nation’s largest auto auctioneer, with 83 sites, including seven in California. From that point on, they “really started seeing the profit potential.”
One advantage for a new-car dealer is that used-car prices aren’t limited by a manufacturer’s suggested retail sticker. What’s more, a dealer can sell whatever brands of used vehicles he wants -- even those well outside his normal bailiwick.
As Francis prowled the 83-acre Fontana lot in a gritty industrial area, he glanced at a list of vehicles for sale. He was concentrating on Fords, but used Hondas, Hyundais and General Motors models were also for sale. Cars eventually sold this day ranged from $50 clunkers in the “tow-only” category to a repossessed late-model Corvette that fetched nearly $30,000.
When Francis spotted a vehicle he liked, he checked for similar models in a palm-size wireless computer. Retail and auction price information on color and equipment combinations helped determine how much he could bid -- and still maintain a comfortable profit margin.
Although the auction catalog listed each vehicle’s mileage, remaining warranty, engine size and other details, Francis performed his own inspection.
He checked to make sure mileage in the car matched what the catalog said; he prefers vehicles with less than 25,000 miles. He eyed the tires too. If they were well worn, his dealership might have to shell out for new ones.
Color was also important. He avoided yellow models -- they are slow to sell -- and gravitated toward more neutral shades that are popular: white, black, silver or gray.
He even opened the doors to check for smells. A few years ago, Francis bought an expensive Lincoln Town Car through an Internet auction without knowing that it had been leased by someone who smoked cigars. “We tried everything, but we couldn’t get the smell out,” Francis recalled. “Fortunately, we were able to sell it to a smoker.”
Manheim’s auction started at 9 a.m., as an assistant drove the first vehicle onto the stage.
It was auctioneer William Goebig’s job to keep the product moving while pumping up the bidding. Auction firms generally receive commissions of less than 2%, so they make their money on volume. Most sales take about 40 seconds.
Francis stood with a group of 60 used-car dealers. One car he wanted, a 2002 Lincoln Blackwood, a luxury pickup, finally approached the auctioneer’s stand. He leaned in, concentrating on Goebig’s call as he started the bidding.
“Twenty-three [thousand], I’ve got twenty three, now twenty-three one, one, one, now two, two, now three, twenty-three three, can I get four.... “
A quick flick of his right fist signaled Francis’ first bid. Two more flicks and a competing bidder dropped out. Goebig announced Francis’ victory with a booming cry: “Sold!”
New, the Lincoln Blackwood sold for about $52,000. Francis was happy. He paid $24,500.
“This was a steal,” he said later. “It’ll retail for $30,000.”
Francis must spend about $1,500 for shipping, financing and refurbishing the truck, plus some other expenses. If the Lincoln does sell for $30,000, the dealership could pocket $3,500, after the salesman’s commission.
Goebig shouted “Sold!” more than 200 times in about two hours as a parade of Fords, Lincolns and Mercurys passed by. This, though, was just one of a dozen sales going on simultaneously in Manheim’s big metal building here. As things heated up, the rapid-fire patter of a dozen auctioneers stitched an acoustic crazy quilt, intelligible to only the most experienced ears.
By day’s end, almost 2,700 vehicles have rolled through Manheim’s lanes; nearly 1,900 have been sold.
Francis bought four vehicles: the Lincoln pickup, a red Ford Focus hatchback for $8,100; a 2003 black Ford Explorer sport utility vehicle for $17,800; and a white ’03 Lincoln Navigator SUV for $22,300.
“Most guys doing this are middle-aged,” said Francis, 52. “You’ve got to have experience to be any good.”
He will travel for deals. In October, he flew twice to a Sacramento auction to buy 28 low-mileage Mustang convertibles. Up north, the chilly fall weather tends to depress the market for cars with tops that come down.
Francis paid an average of $13,600 for each Mustang, or about $1,200 less than bidders at Southern California auctions were paying.
Santa Margarita Ford built a sales campaign around the used cars, offering them for $15,900 -- about $2,500 less than rival dealers.
“We’ve sold 14 in two weeks,” Francis said. “We couldn’t have done it if we didn’t have an auction system and had to go buy each one individually.”
For all of his cunning, though, not every used car that Francis picks sells -- at least fast enough. Santa Margarita Ford pays cash for its used cars and keeps about 60 on the lot at all times.
Those that don’t sell within 30 days are parked in back, where they are picked over by a parade of wholesalers. With the money from these sales, Francis will head back to the auction houses, looking to stock up again.
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Car auctions Estimated number of used vehicles sold annually in the U.S. through auctions (In thousands) General Motors: 600 Ford Motor: 500 Chrysler Group: 320 Toyota: 140 Nissan: 100
Source: Company reports
