Back in April, Manheim announced it was expanding its Retail Solutions operations to provide clients greater access to high-quality services that can produce retail-ready vehicles. During a discussion about its second-quarter results last week, Sonic Automotive described how Manheim is a “great business partner for us,” especially as the dealer group is looking to gain more momentum with its EchoPark stores — rooftops that only turn used metal.

Sonic’s EchoPark locations currently are all in the Denver area, which happens to be one of seven markets where Manheim Retail Solutions operations are in place or planned.

“Manheim is a great business partner for us. We love them. They're working their tails off. They're doing about half the inventory right now in the Denver market from a reconditioning perspective for us, which obviously lightens our load, overhead, that kind of thing. So slowly but surely they’re going to grow with us in the Carolinas and they’re going to grow with us in Texas,” Sonic president and chief executive officer Scott Smith said.

As the Sonic boss mentioned, Manheim revealed back in the spring that along with Manheim Denver and Manheim Chicago, the company was going to bring its Retail Solutions operations to:

—Manheim Orlando
—Manheim Houston
—Manheim St. Louis
—Manheim Detroit
—Manheim Darlington in South Carolina

Auto Remarketing joined the festivities in the Palmetto State as Manheim celebrated that portion of its $5 million investment. And happy clients such as Sonic evidently are showing that Manheim made a shrewd move.

“We’ve got plans and they’ve already made investments,” Smith said. “We’re going to continue to recondition cars as well. Right now, what we’re seeing is we’ve got such a demand, our business is growing cyclically, it’s taking both companies to really keep up for the number of stores that we have.

“And so hopefully as we move forward over the years here, Manheim will assume 100 percent of that and we’ll be out of the reconditioning and refurbishment business moving forward. But a little hybrid model between now and then as they get ramped up and we teach them some things and they teach us some things and we work together to accomplish that goal,” Smith went on to say.

When asked why Sonic would tap Manheim to handle so many responsibilities, Smith pointed out the financial impact to the group’s balance sheet, especially as Sonic tries to ramp up EchoPark’s performance that was one of the highlights of the second-quarter financial statement.

“We don’t have to build the facility to recondition cars. We don’t have to have the buying team. We don’t have to have all the technicians, all the staff, everything you have to have, so the economics will be significantly better,” Smith said.

More details about EchoPark

By the time Sonic executives faced questions from Wall Street observers, five EchoPark locations in Colorado were turning used vehicles. Sonic executive vice president of operations Jeff Dyke elaborated more about the group segment’s most recent performance.

“Thornton, which is our big hub, turned a profit for the quarter. That was our original store that opened up. The other two stores that opened up originally certainly are improving, Centennial is on its way there. Cash flow I think it’s close to being positive or positive,” Dyke said.

“Highlands Ranch, as we look at it, we probably under-built that store. It holds a 100 cars, and we really needed it to hold 150-plus cars. So that one is not improving as fast as we like it,” he continued.

“Then the other two stores that we just opened came out of the chute significantly faster than the stores that we originally opened, so we’re very excited about where we are,” Dyke went on to say. “Cash flow looks good. Profitability is certainly moving along for what we forecast if not better.

“And then our other two markets, Texas and the Carolinas, from a property perspective are coming on quickly, so nothing but positive things,” he added. “The feedback that we’re getting from our guests on EchoPark is nothing short of, ‘It’s just fantastic.’ If you read the feedback that we get, it’s unbelievable.”

While EchoPark locations have the capability to handle some service work for their customers, Dyke explained why Sonic isn’t shouting it from the top of the nearby Rocky Mountains, referencing again why Manheim is in play.

“We’re just not marketing it. We’re not out there running huge promotions and things like that to drive a bunch of business in because quite honestly we don’t have the available shop hours to handle it if they do come in,” Dyke said.

“We’ve reduced the number of head count on the EchoPark side in that marketplace, and Manheim’s increased their head count,” he continued. “We’re in the middle of kind of shifting as they take on more responsibility and they learn. They've got to produce a lot more cars than they’re producing today and they’re working on that.

“We’ve got a team that meets every week. We have a call. We’re just kind of moving through a transition as they learn and grow. So no, we’re not out there pushing yet. That would be a mistake on our part. We'd upset customers, and our whole EchoPark is about guest experience. We’ve got to make sure that we're prepared for that when we do start advertising and marketing,” Dyke went on to say.

Culture shift to online sales

An investment analyst questioned Sonic’s investment in brick-and-mortar facilities like EchoPark as platforms such as Carvana gain more steam in retailing vehicles through an entirely online process.

“Obviously, there’s no question that’s where the industry is going,” Dyke said. “The big question is how fast does it get there? If you still look at the volume leaders in all the markets, they are still brick-and-mortar stores, and so we are working on what we call Sonic Digital One Stop, and that is the ability for our guests to shop and purchase a vehicle online without ever having to come to our stores.

“As the industry moves that way, you need much less brick-and-mortar on both the new car side and the pre-owned side, but at the same time we're trying also to build our brand, and so that's why we've taken the opportunity to not build these big tens of millions of dollar palaces for pre-owned,” he continued.

Dyke indicated an EchoPark location costs Sonic about $7.5 million for the property and showroom. That value is meant to augment what the dealer group can do online with what it’s calling the Sonic Digital One Stop, which is projected to launch at the end of the year.

“We are working diligently with some of our vendor partners that we built One Sonic One Experience with and we look forward to introducing that to our customer base,” Dyke said.

Smith chimed in about online vehicles sales, too.

“It's important to note that nobody in the industry has a 100-percent paperless transaction that's going on right now. Every state has different franchise laws and different requirements on paper that has to be signed,” Smith said.

“To my knowledge we are as far ahead as anyone in the industry as far as delivering vehicles where the customer never, ever has to step foot at a dealership,” he continued. “We can do the entire transaction from the comfort of you sitting in your underwear, on your couch or out by the pool, you can buy car. We'll deliver it to your house with paperwork and you can sign it. Never have to see or speak to a single individual. We have that today.

“That's real. It’s not vaporware that happens. I don’t want to mislead you. It’s a very, very small percentage of our business. But if you think of these online retailers that you think that are out there just sucking up the industry, they're not,” Smith went on to say.