The two used-car standalone store outfits that Penske Automotive Group recently purchased — CarSense in the U.S., CarShop in the U.K. — should pull about $700 million in revenue each year, says the retailer’s chief executive, Roger Penske.

Buying these standalone pre-owned outlets, Penske said in a quarterly conference call this week, gives the dealer group a chance to diversity further and provides “a greater opportunity to drive used-vehicle sales in this growing segment of the market.”

“Opportunity,” seems to be the key theme when talking about the growing trend of retailers getting involved in the standalone used-car space.

And why not? The used-car market is one that has 40 million unit sales each year, as Penske pointed out in the call.

The acquisition of CarSense also gives Penske Automotive the chance to offer a different pricing option to its used-car customers.

Penske explained in the call that the dealer group’s used-car prices usually run from $26,000 to $28,000, whereas CarSense “probably” hovers in the $19,000 to $21,000 range.

“So we’re really going to access a different customer with a different model: fix price, salaried employees, unit bonuses,” Penske said of CarSense. “Based on our current understanding of that business, it’s really a no-haggle, no-fear buying experience — which we’ve heard about, and now we’re going to experience. And I think the question is, is this going to be an opportunity that we can then take into other markets?

“We think we can. There’s a lot of white space,” he said. “There’s no corporate identity and franchise agreements, so I think the used-car business is a real opportunity for us as we see the OE’s putting pressure on new-car margins.”

During the call, Penske was asked about growth and investment in the standalone used-car model and whether there were any limitations to consider from a bricks-and-mortar growth perspective.

Not only does he see the investment being much lower than a traditional dealership model, Penske plans to open two or more additional CarSense locations this year.

“Our peers have all been getting into this business, and I think that they see the capital expenditures, the investment in bricks and mortar being considerably less than going into the traditional dealership model,” Penske said. “And I think that this bodes well for us. And we look at probably adding at least two locations in 2017 here in the US, and also at least one in the UK, as we go forward.”

Acquisition versus building

Unlike its peers, Penske Automotive jumped into the standalone used-car space by acquisition, rather than building and opening stores. Penske was asked why this route was advantageous versus starting from scratch, so to speak.

“I think that you can take either course. I’m not sure that I’m any smarter than they are, but I would say that in our case, particularly, I see a business from CarSense, which has been perfected over 20 years in that Philadelphia-Pennsylvania-New Jersey market,” Penske said.

“There’s very attractive demographics there. There’s a high repeat business, so we’re getting a repeat-referral already coming out of that business, and we talked about the culture and the hiring process there (being) key,” he said. “And I think that it’s interesting, when we look at this new model, we now have, really, something that we can use to base our future growth because we have a successful model.”

Opportunity in off-lease

Penske reiterated that the used-car retail market is almost three times as large as the retail, non-fleet new-car market. Which, again, brings about a lot of opportunity for the retailer and its public competitors.

So too does the off-lease supply expected to hit the market. The Manheim 2017 Used Car Market Report forecasts 3.6 million off-lease units this year, with 4 million-plus expected for 2018.

In a press conference at the NADA Convention & Expo, Cox Automotive Inventory Solutions president Janet Barnard said a peak of 4.6 million off-lease units is projected for 2020.

During the call, Penske was asked a question regarding the potential supply opportunity of off-lease volume versus the margin pressure it can cause.

He noted that at the end of a lease, the customer can choose to extend the lease, purchase the car or a third option: the automaker takes the car back, Penske Automotive negotiates with the automaker to acquire the vehicle and then retails it.

That’s where CarSense could come into play, he said.

 “And I think the impact to move those obviously is better today with low interest rates. You certainly have zero-rate financing; you’ve got longer warranties you can put on that if they’re certified; and we have the benefit to move some of these vehicles that are available, we can go in and try to buy blocks of vehicles and CarSense would be a perfect place to put those,”  Penske said. “Remember if they’re 2, 3, or 4-year leases, they’re going to be in that sweet spot around $20,000 retail, which is exactly what we’re looking for, versus loaner cars that are coming out that might be as high as $30,000.”

Asbury’s Q auto

One of Penske Automotive’s peers in the used-car standalone space is Asbury Automotive Group, which also held its quarterly earnings call on Tuesday.

During the call, president and chief executive officer Craig Monaghan said: “We are down to two Q auto stores. The results in the quarter just aren’t material and I don’t think they’re worth talking about. I would say philosophically we believe there still continues to be an opportunity to go to market with alternative distribution channel at Q auto to sell cars that would otherwise go to auction.

“We’ve moved to a quality outlet concept; we're doing that in the Tampa market we think two stores are all we need to cover that market. I would say it’s still an experiment,” Monaghan said. “The definition of success for us is a business model that generates an ROI that's above our cost of capital.

“We’re not there yet; we’re hopeful we can get there. If we can make these two stores work, we’ll roll this concept out to the markets where we’ve got a footprint elsewhere around the country.”