FORT LAUDERDALE, Fla. -

Not surprisingly, AutoNation chairman, chief executive officer and president Mike Jackson spent most of the company’s quarterly conference call this past Friday explaining why the dealer group is embarking on an aggressive used-vehicle expansion project.

After reiterating what the company announced just before greeting Wall Street observers as well as the group’s third-quarter performance, Jackson began by stating the seed for AutoNation USA took root and began to germinate about five years ago. And it stemmed from what’s happening in the new-vehicle space.

“You have to take into consideration that the new-vehicle market is definitely cyclical with one to three phases: growth, plateau and decline,” Jackson said. “Now, you can be in plateau quite some time, but plateau brings a whole other set of issues.

“So if I go back five years ago, anticipating that plateau would eventually arrive, I said I need a strategy that we can take much more of our destiny in our own hands and continue to grow the business,” he continued. “Now to be able to do that successfully, I felt we needed two foundational elements. One was a brand that was well known in the marketplace already. And a digital capability that we knew could deliver sales. So we’ve done both of those steps successfully with the AutoNation brand. And with our AutoNation Express launch, it now delivers almost 30 percent of our sales from those sites.

“So having taken that step as preconditions, in order to give us the confidence that these stores would turn profitable quickly, we knew we needed a value equation for the consumer and an outstanding experience,” Jackson went on to say. “We know the customer craves fairness and transparency and price. And that means they need to be One Price. So then we said, well the brand has to be in alignment between our existing franchise business and this extensive business; therefore, we have to One Price our existing pre-owned business. That started already this year, as a conditional element, and has gone extremely well, and we will have all AutoNation franchise pre-owned One Price sometime at the beginning of next year, but certainly by the time the first AutoNation USA Stores open.”

Along with those online activities, AutoNation USA locations are going to be standalone pre-owned vehicle sales and service centers. Those facilities also will offer AutoNation-branded parts and accessories.

“These AutoNation USA stores have a customer care component,” Jackson said. “We wanted a value story there. We do very well taking care of cars that are new-to-5-years-old, 6 years old, 7 years old, and then there is a big drop-off. So we want to attract that market, but we need a value equation. So, we’re a significant purchaser of products already today. So we went through major suppliers and negotiated exactly what the consumer would want and are launching AutoNation-branded parts and accessories.

AutoNation confirmed that it’s using $500 million in capital to get AutoNation USA going.

“We’re highly confident of the degree of trust from the customer because of the AutoNation financial products that we’d already launched,” Jackson said. “Again, we went through the major suppliers. Say we have a profound understanding what the consumer wants, here’s the value equation we have to meet, but now the customer has to trust the product and so it has to be branded AutoNation. And we see already that the adoption rate in all the AutoNation-branded stores is approaching 95 percent of the AutoNation customer care products.”

Jackson also touched on how other firms have endeavored to do what AutoNation is doing.

“Referring back to megastores, I was here for that and there were many customer-friendly elements that I liked. There were cradle-to-grave elements that didn’t make sense, like the whole linkage between the rental car business and the megastores,” Jackson said.

“The megastores, having said that they had many customer elements that were to be admired, were conceptionally completely the wrong size and scale with no ability to fix it. And most importantly, there was no alignment between the franchise business and what would be this freestanding business. So, conflict was inherent,” he added.

So why is Jackson confident?

“All those issues are resolved today, and we now move into this brand-extension step with many more elements in alignment with the existing business and in a very strong position with the goal of having much more control over our destiny,” Jackson said.

“What we see is a significant opportunity to grow in the much larger pre-owned business, but doing it from a position of strength,” he added.

Growth in wholesale activities

Jackson addressed not only how AutoNation is going to procure inventory to fill these AutoNation USA locations, the dealer group boss also touched on why the company is delving deeper into the auction business.

First, AutoNation explained how it will find the inventory that will turn at these new stores.

“Obviously, we’re going to need a lot more inventory. And we’ve worked very hard to build a central acquisition team to do that. Then we can supply incremental product both to our existing AutoNation franchise business and the AutoNation USA stores,” Jackson said. “It’s the reason we’re building an auction system for what we do acquire in trade. That we have a very good way to balance inventories, and I’m not worried about supply. I think we have that pretty well thought through.

AutoNation chief operating officer Bill Berman then joined the conversation.

“What I would add is, once again because of our centralized capabilities, we have access to inventories that not everybody else has,” Berman said. “We will be buying from auctions to a limited extent. There’ll definitely be the ‘We’ll buy your car component,’ which is to sit here and attract inventory from consumers that are not looking necessarily to purchase a vehicle. Plus, we have our current source of inventory which comes from trade-ins from our existing stores.

“Plus, with the influx of cars coming off of lease over the next 12 to 18 months, there’ll be additional inventory that’s going to come in at the existing new car franchise. Of course we’ll not be able to handle all of it, and we’ll be able to use that inventory to help supply our USA stores,” he added.

AutoNation owns and operates a successful wholesale auto auction in southern California, which processes more than 25,000 vehicles annually. With an opportunity to leverage its expertise and expand in an attractive growth market, the company plans to open four additional AutoNation-branded auto auctions over the next two years, starting in Orlando, Fla., and Houston during the first half of 2017.

“We’re finding the auction system that we have in California gives us outstanding market information and gives us the highest value for the vehicle that is not appropriate for us to retail, so that auction is very profitable for us,” Jackson said.

“I think building an auction system across the enterprise to run this integrated AutoNation pre-owned one-price system is a key component. And we think, yes, it will be profitable in and of itself,” he went on to say.

Assessment of automaker stair-step program

One topic Jackson addressed that wasn’t closely connected to the AutoNation USA project was how automakers might be leveraging stair-step sales strategies. Jackson referenced back to comments he made at the beginning of the year.

“I said those manufacturers who pursue stair-steps that result in multi-tier type pricing, it will be a disaster and very disruptive in the marketplace,” Jackson said. “Most manufacturers did not go down that road. Most manufactures, I give them credit, are running the business in a very disciplined way successfully with an eye on the future, and I see nothing to alarm me.

“Those who embraced stair-steps, whatever you want to call them, in the short-term, yes, you get a pull forward in sales, but over an extended period and certainly by the third quarter, it’s an extended period, clearly, it’s indisputable that these multi-tier pricing systems are so unpopular with the vast majority of customers and retailers that your business begins to decline,” he continued.

Jackson then mentioned how one domestic OEM is proceeding appropriately, in his opinion.

“If I bifurcate the world into disciplined and undisciplined, or rational and irrational, and look at the numbers, basically retail or the disciplined rational group is flat and it’s down 6 percent,” Jackson said. “For the stair-steppers, it’s eroding significantly, meaning it’s unsustainable.

“Now, I salute a company like Ford Motor Company that endeavored with their steps. They stepped away and have taken a much longer, disciplined view. They’re to be congratulated,” he continued.

Jackson then cited one foreign OEM that he disagrees with strongly over stair-step policies.

“The one practitioner who is still absolutely convinced that stair-steps is the way to go is Nissan, and obviously a very contentious situation at the moment,” Jackson said. “And the end of that story, I don’t know, but I do know it’s very disruptive to the Nissan business. I will have to see what happens there.

“But I think in principal, I think this is the big message,” he continued. “In principal, the whole industry has watched this story unfold in 2016. You cannot make the case that stair-steps work, and then what you see is they start dumping more into fleets to try to cover up the fact that it’s not working at retail. My view is it's unsustainable. But how it plays out with Nissan, I don’t know.”