CARY, N.C. -

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When it comes to its AutoNation USA standalone used-car stores, the nation’s largest auto retailer has “paid our tuition” and is embarking on a decade-long doctoral in pre-owned cars, so to speak.

As detailed in quarterly earnings released in October, AutoNation plans on building five more AutoNation USA stores in 2021, adding to its existing five stores. AutoNation aims to have 30 of these pre-owned stores by the end of 2023, 55 by the end of 2025 and more than100 by 2030.

The five existing pilot locations for AutoNation USA have given the retailer a chance to strive to “have them perfected before we committed to a big rollout,” AutoNation chairman and chief executive officer Mike Jackson said during the company’s third-quarter earnings call in October.

“And we were really disciplined and took the time and the effort to get those stores just right,” Jackson said. “And I would say we had a lot of new ideas as far as customer process going in to the USA stores that we put in place and over time we realized that the processes we already have in our AutoNation stores are world-class and what the customers really embrace and like.

“So, we actually transformed our USA stores and all its processes, digital marketing, everything to standard AutoNation, which we use, and it made a huge difference in taking out costs and being effective,” he said.

“We also have confidence that the brand can move into new markets and be embraced by customers,” Jackson said. “So, with a very good outlook on understanding what we did right and what we did wrong — I use the expression, ‘We paid our tuition’ — it gives us a great deal of confidence to go forward.”

The next two AutoNation USA stores that AutoNation will open will be in Texas: Austin and San Antonio.

The exiting five AutoNation USA stores are “solidly profitable,” the company said in earnings slides. Breaking down some of the economics, AutoNation said in the slides that each AutoNation USA store requires $10 million to $11 million in initial capital investment.

AutoNation projects a standalone used-car store to hit the break-even point about a year after it opens. The initial run rate is expected to be reached in 18 months from opening.

AutoNation also shared forecasted metrics of an AutoNation USA store once it hits the initial run rate, some of which can be found below:

— 200 retail units per month
— $5.5 million in revenue per month
— Total gross profit of $680,000 per month
— Pre-tax profit of $200,000 per month

The latter metric would translate to $2.4 million annually in pre-tax profits.

“At $2.4 million, it’s an outstanding internal rate of return and one of the best investments we can make in the company, leveraging on our brand, our pre-owned 1PRICE process,” Jackson said during the call.

“And the way that we think about these USA stores is very much as point-of-sale delivery centers and speed-to-market reconditioning centers. It’s very cost-effective, rather than moving everything around and doing the reconditioning centrally,” he said. “Our speed-to-market is a real strength. What we’re saying and what we’re publicly committing to is this number, which we’re already achieving today, is well above our return threshold of a 15% internal rate of rate of return and therefore that’s what we went public with.

“Obviously, we’re ambitious and a continuous-improvement organization and ultimately, we will see if we can do more, but as far as a green light to build another 100 stores, we’re there.”

Buying used cars from consumers

Another pre-owned area in which AutoNation has gained moment is its “We’ll Buy Your Car” program.

During the third quarter, this program more than doubled the number of cars it had acquired in the second quarter, Jackson said during the call.

Chief financial officer Joe Lower said AutoNation sources between 60% and 75% of its used inventory from consumers, be it through We’ll Buy Your Car or a trade-in.

At the AutoNation USA stores, between 10% and 20% is sourced from We’ll Buy Your Car, Lower said, and at the franchised dealerships, it's about 10%.

“But that gives us a significant advantage from a procurement standpoint, if you compare it to the peers,” Lower said. “I don’t see anyone close to that percentage of … cars acquired from customers, which clearly is a benefit to us when we think through the value proposition we can offer our customers.”

Speaking later on used-vehicle volumes and inventory levels, Jackson would add, “We’re actually doing a very, very good job, and our speed to market is excellent. And I think our big advantage is that 75% of what we retail, we acquire from consumers, either through trade or direct purchases. And this puts us in a very good position on the gross profit side. And it’s very sustainable.

“Now, do we think we could have sold even more if we had them? I think so. And that’s an ongoing discussion within the company. But, of course, as we increase our footprint with USA stores, we’ll get significant growth there, and (once) you put it all together, and we feel ultimately AutoNation as a company and as a brand will retail over a million vehicles in the U.S.”