Penske to add more used-only stores

Penske Automotive Group Inc. is bullish on its standalone used-vehicle store strategy — three years in the making — as profits and volume grow.

Penske, the nation's second-largest new-vehicle retailer, plans to add four used-only superstores this year, including two on the East Coast and two in the United Kingdom. Sales volume at the company's used-vehicle stores is projected to increase by nearly 30 percent in 2019.

Used-vehicle sales at Penske's superstores in the U.S. and U.K. jumped 75 percent last year to 71,013.

"That number will grow to probably 90,000 in 2019," CEO Roger Penske told Automotive News this year. "It gives us a tremendous opportunity from the standpoint of diversity, from the standpoint of our business."

The used-vehicle superstores generated $1.27 billion in revenue in 2018 for Penske Automotive, up 78 percent, and earnings before taxes totaled $42 million last year. One superstore in Wakefield, England, consistently sells about 700 vehicles monthly. The outlets generated average transaction prices of $14,913 in 2018, up 2.7 percent year-over-year.

Penske got into the standalone used-vehicle business two years ago by buying CarSense, a U.S. chain with five stores in the Pittsburgh and Philadelphia markets, and CarShop, another chain of used-only supercenters with five locations in the U.K. In January 2018, Penske completed the acquisition of The Car People, a used-car superstore company in the U.K. with four stores.

The company's standalone used-vehicle business is aided by higher industry volume compared with new-vehicle sales, no concerns with franchise laws or having to sell certain brands, less-expensive facilities and rent costs that are a lower percentage of its sales, Penske said. There are also savings on personnel costs, with superstore employees receiving a salary and unit sales bonus. All give the company a competitive advantage, Penske said.

Penske's superstores also feature no-haggle prices, and sales employees become "more of an ambassador of the car," he said. Compared with new-vehicle stores, turnover is lower and sales-per-employee numbers are about double, Penske said.

"When you look at the compensation, we typically run between 25 percent and 30 percent of gross profit in a traditional retail store," he said. "And in the superstores, we run at half that, about 17 percent."

Penske plans to expand from 14 superstores to 18 this year. Stores in Glen Mills, Pa., outside Philadelphia; near Princeton, N.J.; and in Bristol and Nottingham in the U.K. will open in the second half of 2019.The new stores should be profitable after six to seven months, Penske told analysts this year.

Penske also has acquired real estate in the Phoenix area for possible future superstores and expects to open more stores in 2020. The company declined to provide details on locations or timing.

Analyst Stephanie Benjamin of SunTrust Robinson Humphrey has a buy rating on Penske in part because of its diversified business segments.

Benjamin, in an April research note to investors, said Penske's "used-vehicle expansion strategy should enable PAG to see above-peer top-line and earnings growth over the next several years."

Guggenheim analyst Ali Faghri in a December note to investors said Penske's used-to-new-vehicle-sales ratio was the highest among its peer group.

The retailer's strong focus on used vehicles "positions the company more favorably than peers in coming years as the new car retail business likely comes under further pressure," Faghri wrote.

David Whiston, an autos analyst with Morningstar, told Automotive News last week that it's too soon to tell which used-vehicle strategy among the publicly owned franchised dealership groups will work best, though he likes what Penske has done so far.

Penske's key public company competitors have different strategies around used vehicles, and turning a profit has been tricky for some.

Lithia Motors Inc. in 2007 launched the L2 Auto chain of used-only stores but exited the business, while Asbury Automotive Group Inc. launched Q auto in mid-2014 but by 2017 opted to close the stores.

AutoNation Inc. last year paused its used-only unit, AutoNation USA, with five stores. Group 1 Automotive Inc. in 2018 launched Val-U-Line, a brand for older and higher mileage vehicles sold at Group 1 stores.

Sonic Automotive Inc., like Penske, is increasing its count of standalone used-vehicle stores. But its selling model under the EchoPark name differs from Penske's. EchoPark profit is driven by the money it makes selling finance and insurance products with those vehicles.

Lithia and AutoNation also have made investments in online used-vehicle startups Shift Technologies and Vroom.

"All six of them are playing catch-up to CarMax," Whiston said. "Really, for more than a decade, these dealers weren't paying enough attention to used vehicles."

In 2018, at Penske's standalone used unit, total variable gross per vehicle slipped 11 percent to $2,121, but the decline largely relates to its acquisition of The Car People business in the U.K., Anthony Pordon, a Penske spokesman, wrote in an email to Automotive News. That business generally sells less-expensive vehicles and has lower grosses because of lower F&I product sales, he said. Penske sees the lower F&I there as an opportunity, Pordon said.
The average sales price on a used vehicle at one of Penske's franchised U.S. stores is about $29,000 vs. about $21,000 at a standalone U.S. used-vehicle store, but the variable gross margin at the superstores is about double that of a franchised store, reaching 13 to 14 percent, Roger Penske said.

Penske said he also keeps close eyes on Carvana Co., but he pointed to Carvana's net losses, which totaled $254.7 million in 2018 on sales of 94,000 vehicles.

Though Carvana has reported triple-digit revenue and unit volume growth in recent quarters, the online used-vehicle upstart is investing heavily in expansion.

Penske also is "taking an aggressive move forward to expand. We have a track record of profitability," Penske said.

"In fact, we could say that in some cases, the superstores in certain locations double the return on sales of a traditional new-car used business."

Penske, of Bloomfield Hills, Mich., ranks No. 2 on Automotive News' list of the top 150 dealership groups based in the U.S., retailing 236,000 new vehicles in 2018. It retailed 282,500 used vehicles for the same period, ranking No. 2 on Automotive News' list of the top 100 retailers in used-vehicle sales.