The method Penske Automotive Group plans to continue using to fill inventories at CarSense — its standalone used-vehicle retail locations primarily in the Northeast with intensions on expanding — should delight auction general managers who see buyers for this dealer group mingle in their lanes.

Chairman Roger Penske said during the company’s latest conference call that about 80 percent of the vehicles CarSense stocks comes from auctions.

Penske also pointed to expected lifts in off-lease volume coming in 2018, 2019 and 2020 to help these CarSense locations that depend on Penske buyers with specific instructions on how to procure inventory, which currently sits at about 45 days’ supply.

“Well, I think we have to say that auction prices on a daily basis demonstrate the real value of the vehicles,” Penske told conference call participants. “So, we have a number of buyers and they’re out there looking at the marketplace.

“They have metrics that they’re looking at certain models, certain colors and markets that have been selling. So they have a past history. So they’re prepared to pay a particular price for these vehicles, and I think that we only buy the car if we want to fill in certain types of cars,” he said.

“In fact, I looked at some metrics during the week and it showed certain models that they were long on and certain models they were short,” Penske continued.

“So, they actually just don’t buy just cars. They buy specific models, and obviously we have a mix of SUVs and trucks along with cars,” he said. “Our customer is looking for a vehicle that’s probably 1 to 4 years old. The average selling price in the U.S. is $20,000. So we have a pretty good mix of vehicles. To me, we’re in a position to purchase many of these off-lease vehicles that come in, and the auctions today are ones that they offer this opportunity.

“There are some closed auctions for dealerships, and then obviously after that, we have the open auction opportunity to buy those vehicles, and then this helps us as we go forward. We manage our variable costs associated with these purchases,” he added.

The company reported that CarSense locations and CarShop operations — a similar standalone concept in the United Kingdom — retailed 11,125 vehicles during the second quarter, generating $193 million in revenue and $33 million in gross profit for Penske.

“We believe these used-vehicle supercenters further diversify Penske Automotive Group’s business and provide an opportunity to capitalize on the highly fragmented used-vehicle market,” the chairman said.

“We also believe these businesses provide an unlimited white space for scalable expansion. We have plans to expand into several new markets and continue to expect to double the number of locations within 24 months,” Penske added.

Penske also addressed a question about whether the company would establish its own finance company to serve as a captive-like provider for CarSense and CarShop locations; similar to what CarMax has in place.

“Well, I think if you look at CarMax, bottom line, they have a big impact with their financing,” Penske said. “They’ve done a terrific job. Right now, we’re using third-party financing and third party for the products that we sell.

“I don't know that at the moment that we have the capital available to start a finance company,” he continued. “It’s something we can look at once we have a history and maybe we get a partner to do something like that. But the good news is it’s an opportunity because we’ve seen the success that CarMax has.

“We just have to assess the risk on that if we go into that area, but I wouldn’t say that’s top of the list right now,” Penske added.

Online sales activities

With consumer trends pointing to more potential buyers wanting to complete deliveries mostly or even completely online, Penske shared an update about the company’s platform designed to do that. For the past 12 months, Penske has developed what it has been dubbed Preferred Purchase.  

Penske highlighted Preferred Purchase is now available at all of the dealer group’s stores.

“We think that this is an opportunity to reduce the cycle time for customers to buy a vehicle,” he told conference call participants. “I think that the closing rate as we look at this probably is three times higher than a normal purchase.

“And you, as a customer, can pick the vehicle, you can also supply your trade information, we'll give you a purchase price on your trade, you can look at a lease, you can look at a finance transaction and then you can call us obviously to complete it,” Penske continued.

Penske also highlighted that the closing rate for group customers using Preferred Purchase hit 24 percent in June. The chairman assured investors that Preferred Purchase can give the company the tool to compete with new industry participants such as Carvana and Shift.

“So when we look at it overall, this is the same thing that people are talking about, and we have it in place for every one of our dealerships,” Penske said. “I think that this will give us the ability to do this across all of our businesses and there’s no question that we continue to enhance this to make it quicker and more transparent to the customer.”