3 . 1 1 . 2 0 1 9NAICS CODES: 441120

SIC CODES: 5521

INDUSTRY PROFILE

Used Car Dealers

Companies in this industry sell a variety of used vehicles including passenger cars, light trucks, SUVs, andpassenger and cargo vans. Major companies include CarMax, DriveTime, and America's Car-Mart (all based in theUS), as well as Nextage and Hanaten (both based in Japan), Cargiant (UK), Porr Equipment Services (Austria),and Automobiles Delec (Canada).

Leading countries for used car sales outside the mature markets of the US, Europe, and Japan include Brazil,India, and China. The Chinese used car market has seen rapid growth.

The US used car dealer industry includes about 25,000 dealers with combined annual revenue of about $85 billion.Auction houses and wholesalers that buy and sell used vehicles are not included in this industry. Dealers that sellboth new and used vehicles are covered in a separate industry profile.

Demand is driven by consumer spending and interest rates. The profitability of individual companies dependson high inventory turnover, exceptional customer service, and effective marketing. Large companies provide awider variety of vehicles. Small companies can offer a boutique car-buying experience and provide moreindividualized customer service. The US industry is highly fragmented: the top 50 companies account for about25% of revenue. About 55% of US used car dealers have fewer than five employees.

Used car dealers compete with the used car divisions of new car dealers and with private sellers. Dealers thatoffer repair and maintenance services compete with a variety of independent shops and chain outlets.

Sales of used cars and light trucks are the primary source of revenue; some dealers also provide financing androutine maintenance and repair services. The used car market can be segmented by price or type. Some dealerssell a mix of used mass market and luxury cars.

Dealers acquire used vehicles from a variety of sources, including auctions, trade-ins, other dealers, leasingcompanies, and rental companies. Companies typically have limited influence over the colors and features ofcars received.

Used car dealers consider several factors such as a car's age, mileage, and condition when determining itsvalue. Used vehicles may need reconditioning prior to sale.

The used car dealer business is seasonal: traffic increases in the spring and summer months beginning with taxrefund season. Dealerships that build inventories in the fall and winter are better positioned for sales peaks.Rising used car supply typically follows surges in new car sales by a few years.

Technology

Used car dealers must be well-versed in a variety of car makes, rather than specializing in one brand. Advancednew car technology can create hurdles for dealer service departments that don't have instant access tomanufacturers' car manuals.

Customers typically buy used cars for their value, as some new cars can depreciate quickly during the first fewyears. Buying a car either used or certified pre-owned (CPO) allows consumers to afford a luxury vehicle or to

Industry Overview

Competitive Landscape

Products, Operations & Technology

Sales & Marketing

pay cash for an older model.

Used car dealers rely on several marketing vehicles such as newspaper, TV, radio, and outdoor (billboard)advertising and direct mail for promotion. Large companies engage in national advertising. Because millennial carbuyers research potential purchases online before visiting a dealership, even used car dealers with a brick-and-mortar operation must have robust and easy-to-navigate websites.

Independent used car dealers with an online presence can reach potential buyers nationwide and are better able tocompete with dealers who rely on marketing partnerships with websites like AutoTrader.com and Craigslist.Intense competition among dealers has made trust and customer satisfaction key factors for repeat business.Used car salespeople have suffered from negative publicity about high-pressure sales tactics, makingalternatives such as web sales, fixed-price selling, and noncommissioned sales staff more enticing to somecustomers.

The average US retail price for a used car reached $20,085 in the third quarter of 2018, up 3.5% over theprevious year, according to Edmunds.com. The increase was driven in part by more lease returns comprised oflight trucks and SUVs. As consumers have shifted their preference to larger vehicles, their higher prices arereflected when they enter the used market.

Sales are seasonal, with peaks during spring and summer. Profit margins are generally higher on used luxurycars than other makes and models. Used car dealers that serve subprime customers, or "buy here-pay here"dealers, often finance and service loans rather than use outside lenders. The industry is capital-intensive:average annual revenue per worker in the US is about $514,000.

Working Capital Turnover by Company Size

The working capital turnover ratio, also known as working capital to sales, is a measure ofhow efficiently a company uses its capital to generate sales. Companies should becompared to others in their industry.

 

 

Regulation

Federal, state, and local laws regulate dealer advertising, sales, financing, employment, and repair operations.Consumer protection and truth-in-lending laws affect sales practices and customer-financing programs.Environmental laws affect service operations, since repairs may involve disposal of hazardous materials andwaste.

Used car sales are especially high in the mature markets of the US, Europe, and Japan. Due to the local natureof used car retail, the industry is highly fragmented. Major companies based outside the US include Nextage and

Finance & Regulation

Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and representsfinancial performance of over 4.5 million privately held businesses and detailed industry financial benchmarks ofcompanies in over 900 industries (SIC and NAICS). More data available at www.microbilt.com.

International Insights

Hanaten (both based in Japan), Cargiant (UK), Porr Equipment Services (Austria), and Automobiles Delec(Canada).

In China, the growing use of online channels to buy and sell used vehicles is driving an increase in used carsales, as are surging sales of new vehicles and a growing logistics industry. Historically, sales of new carsoutpaced used ones due to poor quality manufacturing limiting the life span of Chinese cars, as well as areputation for sketchiness among sellers due to limited market standards, according to Bloomberg. However, alifting of government restrictions on used-car sales between provinces and improving quality of Chinese-madecars are boosting the country's used car market.

The market for used cars in India -- another major growth market -- is expected to increase 15% each year toreach $75 billion by 2023, according to Mordor Intelligence. Like China, the country had previously lacked amarket of organized dealers to process sales, with most consumers opting to buy used cars from within theircircles of family, friends, and acquaintances. However, an organized sector is emerging to meet an increaseddemand, driven in part by increasing disposable income. Still, due to taxation, Indian cars are one of the mostexpensive in the world, influencing consumers to buy used over new.

In the US, Texas generates the most used car dealer revenue, followed by California, Florida, North Carolina, andPennsylvania.

Used car dealers need to recruit sales staff more frequently, as turnover is higher among dealerships thatemploy more entry-level sales staff. Average hourly wages for US used car dealers are moderately lower thanthe national average. Injury rates for the industry are moderately lower than the national average.

Industry Employment GrowthBureau of Labor Statistics

Average Hourly Earnings & Annual Wage IncreaseBureau of Labor Statistics

Regional Highlights

Human Resources

Demand: depends on consumer spendingNeed effective marketingRisk: fluctuations in interest rates

Industry Growth Rating

How does the company perform during adverse economic conditions or periods of weak consumerdemand?Consumer demand for used cars can be affected by employment, consumer spending, and fuel prices,especially on the upper end for luxury vehicles.

How do fluctuating interest rates affect the company's business?Significant increases in interest rates can reduce consumer ability to buy cars.

What is the company's online marketing strategy?Used car dealers face growing competition from companies with robust online marketplaces that focus on buyingand selling used vehicles.

What strategies have helped the company attract new customers?Some dealers are making changes aimed at being seen as more consumer-friendly, such as replacing thetraditional commission-based pay system with non-commissioned sales staff.

How does the company leverage social media?More used car dealers are developing social media strategies to better communicate with customers, handlecustomer service issues, and inexpensively market their dealerships.

Which technology tools would enhance the company's customer experience?Technology tools are expected to reshape the customer experience at used car dealerships in the coming years.

Call Prep Questions

Conversation Starters

US consumer spending on durable goods, an indicator of auto sales, fell 1.0% in October 2019 compared to thesame month in 2018.

The bank prime loan rate, which indicates the finance rates available to dealerships and automobile consumers,was 4.75% as of the week of December 16, 2019, down from a rate of 5.25% the same week in 2018.

US personal income, which drives demand for automobiles, rose 4.4% in October 2019 compared to the samemonth in 2018.

US retail sales for motor vehicle and parts dealers, a potential measure of demand for autos, increased 3.9% inthe first eleven months of 2019 compared to the same period in 2018.

Industry Indicators

US personal consumption expenditures on used cars are forecast to grow at an annual compounded rate of 4%between 2019 and 2023. Data Published: August 2019

Industry Forecast

First Research forecasts are based on INFORUM forecasts that are licensed from the Interindustry EconomicResearch Fund, Inc. (IERF) in College Park, MD. INFORUM's "interindustry-macro" approach to modeling theeconomy captures the links between industries and the aggregate economy. Forecast FAQs

Cyclical Demand - Consumer demand for used cars can be affected by employment, consumer spending, andfuel prices, especially on the upper end for luxury vehicles. During economic downturns, customers maypostpone a purchase or opt for inexpensive makes and models. When new car sales drop, the pipeline for usedvehicles weakens.

Interest Rates Affect Sales - Significant increases in interest rates can reduce consumer ability to buy cars.Most customers buy vehicles with loans. Increasing interest rates can reduce profits by affecting both salesvolume and dealer costs. Low interest rates or 0% deals can help drive sales.

Critical Issues

Competition for Services - Used car dealers face growing competition from companies with robust onlinemarketplaces that focus on buying and selling used vehicles. AutoTrader.com, TrueCar.com, Craigslist, and eBayfeature used car listings that often include professional photographs and consumer research about each makeand model. Startups like Carvana, an online-only used car dealer backed by DriveTime, allows customers topurchase, finance, and trade in cars through its website.

Skilled Labor Shortages - During periods of high demand and as older technicians retire, used car dealers havedifficulty finding skilled service technicians. Cars have become more complex, making service jobs morechallenging and requiring constant training for workers to remain current. Technicians need math, electronic,computer, and analytical skills to service sophisticated vehicle components. An increased focus on vocationalstudy at high schools is helping to promote trade careers among millennials.

Business Challenges

Fluctuating Gas Prices - Drastic shifts in gas prices can change what types of vehicles consumers want. Highgas prices drive consumers to seek fuel-efficient used cars, including hybrids and electric cars. Low gas pricesfuel demand for thirsty SUVs, trucks, and minivans.

Pressure on Profits - Several factors are contributing to compressed profit margins among used car dealers.Internet-driven pricing transparency, increased competition, and rising operational costs are forcing dealers to sellmore cars in less time to maintain profitability.

Home Delivery Option - More used car dealerships are eliminating the need to visit the dealer by offering ahome delivery option. CarMax began testing home delivery in fiscal 2017 in Charlotte, North Carolina, as a newconvenience for customers who want to skip the visit to the dealership. Online used car dealers such as Carvanaalso offer home delivery.

Business Trends

Creating a Positive Sales Experience - Some dealers are making changes aimed at being seen as moreconsumer-friendly, such as replacing the traditional commission-based pay system with non-commissioned salesstaff. Fixed-price selling eliminates price haggling and can create a more customer-friendly sales process.Spending less time at the dealership is also a goal for consumers. CarMax, for example, allows customers tocomplete the entire car-buying process from home and offers vehicle delivery as well as an in-store expresspickup that can be completed in 30 minutes.

Social Media Investment - More used car dealers are developing social media strategies to better communicatewith customers, handle customer service issues, and inexpensively market their dealerships. Many consumerstap a variety of auto review sites to research cars before heading to dealerships. Social media interactions play amajor role in driving car purchase and service decisions across all generations of consumers (not justmillennials), according to JD Power.

Customer-Facing Technology - Technology tools are expected to reshape the customer experience at used cardealerships in the coming years. Dealers are leveraging technologies for electronic record keeping, servicecheck-in with tablet computers, and mobile apps for service appointment scheduling in an effort to streamlineoperations and appeal to tech-savvy consumers. Electronic records can also improve workflow betweendepartments at larger dealerships.

Widening Price Gap Between New and Used Vehicles - Higher new car prices are leaving some buyersseeking out quality used vehicles as a reasonable alternative. The gap between the price of a new and preownedcar is at one of its widest points in more than a decade, according to Edmunds.com. The average price of a newvehicle in Q3 of 2018 was $35,992, compared to $20,085 for a used car.

Industry Opportunities

Achieving Volume Vehicle SalesAs margins on vehicles shrink due to competition from online retailers, used car dealers must generate volume toenhance profitability. Dealers use advertising, warranties, special events, and service incentives to lurecustomers, and adjust prices as necessary to close sales.

Developing a Loyal Customer BaseMost sales at used car dealers are local, and many are to past customers. Companies develop longer-termcustomer relationships through positive initial purchase experiences. Dealers may also offer preferred serviceand warranty arrangements.

Improving Profit MarginsIn addition to volume sales, financing and service operations can help boost profits. Analyzing revenue andmargin contributions can indicate where more incentives and marketing emphasis can help improve profitability.

Executive Insight

Chief Executive Officer - CEO

Chief Financial Officer - CFO

Maintaining InventoryBecause sales are seasonal, used car dealers need to stock up during off-peak periods to ensure inventoryvolume is adequate to meet demand, without accumulating an excess. Offering incentives helps drive sales ofslow-moving vehicles year-round. Dealers should anticipate a rise in availability of previously leased vehicleswhen car manufacturers roll out new models.

Leveraging the InternetUsed car shoppers are increasingly using the Internet to research and even buy cars. Competitors likeAutoTrader.com and Craigslist.com offer low-cost platforms to match buyers with sellers. Some dealers areadding service and maintenance scheduling to their sites as a customer relationship management (CRM) tool.

Networking Information Management SystemsDealership management is complex and involves integrating information from many operational areas. Used cardealers operate their own computerized systems for sales, service, parts and vehicle inventories, andaccounting. Used car franchisees network their information management systems to the parent company tofacilitate efficient communication. The dealer's IT department (or a contractor) is responsible for networking thesesystems and ensuring smooth operations.

Recruiting and Retaining Service TechniciansBecause the service department is a key profit center and turnover tends to be higher at used car dealerships,companies must rely on a small staff of trained ASE-certified service technicians to perform service andmaintenance work. Companies may recruit at trade schools or high schools, which offer automotive trainingprograms, to find qualified workers. Retaining technicians requires competitive salaries for master certifiedtechnicians and competitive benefits that include health care, paid vacations, and retirement programs.

Implementing Training Programs for Sales and Service StaffCars and trucks have become increasingly complex due to rapidly advancing technology. Both sales and servicestaff need comprehensive vehicle knowledge to effectively sell and service vehicles. Used car dealers mayoffer staff incentives to complete training programs and attain certification in specific areas.

Creating a Positive Sales ExperienceThe used car dealer industry must fight the image of shady salespeople and an unpleasant purchasing process.High-pressure sales tactics have caused many consumers to avoid used car lots. Some dealers are replacing thetraditional commission-based pay system with noncommissioned sales staff. Fixed-price selling eliminates pricehaggling and can create a more customer-friendly sales process.

Driving Dealer TrafficCompetition among used car dealers is intense, and small operations struggle to attract foot traffic. Companiesmust develop market-specific programs that will draw customers. Dealers should use a combination of price,service, and specials (financing, insurance, customizing) to differentiate themselves. Special events, such asonsite radio broadcasts, create excitement and help attract customers.

Chief Information Officer - CIO

Human Resources - HR

VP Sales/Marketing - Sales

What programs does the company use to reach annual volume targets?Dealers use advertising, warranties, special events, and service incentives to lure customers, and adjust pricesas necessary to close sales.

How does the company develop customer loyalty?Companies develop longer term customer relationships through positive initial purchase experiences. Dealersmay also offer preferred service and warranty arrangements.

What are the company's biggest profit opportunities?Analyzing revenue and margin contributions from sales, financing, and service can indicate where moreincentives and marketing emphasis can help improve profitability.

Executive Conversation Starters

Chief Executive Officer - CEO

Chief Financial Officer - CFO

How does the company optimize inventory levels year-round?Because sales are seasonal, used car dealers need to stock up during off-peak periods to ensure inventoryvolume is adequate to meet demand, without accumulating an excess.

How has the Internet changed the way the company operates?Competitors like AutoTrader.com and Craigslist.com offer low-cost platforms to match buyers with sellers. Somedealers are adding service and maintenance scheduling to their sites as a customer relationship management(CRM) tool.

How has information management technology helped the company's operations?Used car dealers operate their own computerized systems for sales, service, parts and vehicle inventories, andaccounting. Used car franchisees network their information management systems to the parent company tofacilitate efficient communication.

How does the company manage and retain its service staff?Companies may recruit at trade schools or high schools that offer automotive training programs to find qualifiedworkers. Retaining technicians requires competitive salaries and benefits that include health care, paid vacations,and retirement programs.

What types of training programs does the company offer?Both sales and service staff need comprehensive vehicle knowledge to effectively sell and service vehicles.Used car dealers may offer staff incentives to complete training programs and attain certification in specificareas.

How is the company improving the car-buying experience?Some dealers are replacing the traditional commission-based pay system with noncommissioned sales staff.Fixed-price selling eliminates price haggling and can create a more customer-friendly sales process.

How does the company increase foot traffic?Competition among used car dealers is intense, and small operations struggle to attract foot traffic.

Chief Information Officer - CIO

Human Resources - HR

VP Sales/Marketing - Sales

Quick Ratio by Company Size

The quick ratio, also known as the acid test ratio, measures a company's ability to meet short-term obligationswith liquid assets. The higher the ratio, the better; a number below 1 signals financial distress. Use the quick ratioto determine if companies in an industry are typically able to pay off their current liabilities.

 

Financial Information

COMPANY BENCHMARK TRENDS

 

Current Liabilities to Net Worth by Company Size

The ratio of current liabilities to net worth, also called current liabilities to equity, indicates the amount duecreditors within a year as a percentage of stockholders' equity in a company. A high ratio (above 80 percent) canindicate trouble.

 

 

Data Period: 2018 Last Update November 2019

Table Data Format Mean

 

Company Size All Large Medium Small

Size by Revenue   Over $50M $5M - $50M Under $5M

Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and represents financial performance of over4.5 million privately held businesses and detailed industry financial benchmarks of companies in over 900 industries (SIC and NAICS). Moredata available at www.microbilt.com.

Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and represents financial performance of over4.5 million privately held businesses and detailed industry financial benchmarks of companies in over 900 industries (SIC and NAICS). Moredata available at www.microbilt.com.

COMPANY BENCHMARK INFORMATION

NAICS: 441120

Company Count 15285 46 972 14267

 

Income Statement

Net Sales 100% 100% 100% 100%

Gross Margin 8.3% 7.8% 8.3% 11.0%

Officer Compensation 0.8% 0.4% 1.3% 2.3%

Advertising & Sales 0.8% 0.7% 0.7% 0.9%

Other Operating Expenses 5.2% 5.0% 5.0% 6.3%

Operating Expenses 6.8% 6.1% 6.9% 9.5%

Operating Income 1.6% 1.6% 1.3% 1.5%

Net Income 0.6% 0.7% 0.5% 0.6%

 

Balance Sheet

Cash 10.3% 9.8% 11.6% 11.2%

Accounts Receivable 13.7% 13.3% 15.2% 14.4%

Inventory 56.1% 56.3% 55.9% 55.6%

Total Current Assets 84.7% 84.1% 87.0% 85.6%

Property, Plant & Equipment 5.4% 5.5% 4.6% 6.1%

Other Non-Current Assets 9.9% 10.5% 8.4% 8.3%

Total Assets 100.0% 100.0% 100.0% 100.0%

Accounts Payable 2.7% 2.1% 4.6% 4.1%

Total Current Liabilities 37.1% 36.6% 39.3% 37.9%

Total Long Term Liabilities 9.3% 6.7% 14.5% 18.6%

Net Worth 53.6% 56.7% 46.3% 43.5%

 

Financial Ratios

(Click on any ratio for comprehensive definitions)

Quick Ratio 0.65 0.64 0.69 0.70

Current Ratio 2.28 2.30 2.21 2.26

Current Liabilities to Net Worth 69.3% 64.4% 84.9% 87.0%

Current Liabilities to Inventory x0.66 x0.65 x0.70 x0.68

Total Debt to Net Worth x0.87 x0.76 x1.16 x1.30

Fixed Assets to Net Worth x0.10 x0.10 x0.10 x0.14

Days Accounts Receivable 12 13 12 12

Inventory Turnover x6.66 x6.38 x7.88 x6.97

Total Assets to Sales 24.8% 26.0% 21.0% 23.2%

Working Capital to Sales 11.8% 12.3% 10.0% 11.1%

Accounts Payable to Sales 0.7% 0.5% 1.0% 0.9%

Pre-Tax Return on Sales 1.0% 1.1% 0.8% 0.9%

Pre-Tax Return on Assets 4.1% 4.2% 3.8% 4.0%

Pre-Tax Return on Net Worth 7.7% 7.4% 8.2% 9.2%

Interest Coverage x2.82 x2.98 x2.39 x2.58

EBITDA to Sales 1.9% 2.0% 1.6% 1.7%

Capital Expenditures to Sales 0.4% 0.4% 0.3% 0.3%

 

Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and represents financial performance of over4.5 million privately held businesses and detailed industry financial benchmarks of companies in over 900 industries (SIC and NAICS). Moredata available at www.microbilt.com.

ECONOMIC STATISTICS AND INFORMATION

Annual Construction put into place - Census Bureau

Annual Retail Sales Growth - Census Bureau

Change in Consumer Prices - Bureau of Labor Statistics

Used Car Dealers

Acquisition multiples below are calculated medians using at least 3 US private industry transactions completed

between 1/2008 and 12/2019 and are based on middle-market transactions where the market value of invested

capital (the selling price) was less than $1B. Data updated annually. Last updated: December 2019.

Valuation Multiple MVIC/Net Sales MVIC/Gross Profit MVIC/EBIT MVIC/EBITDA

Median Value 0.1 0.5 1.8 1.2

MVIC (Market Value of Invested Capital) = Also known as the selling price, the MVIC is the total consideration

paid to the seller and includes any cash, notes and/or securities that were used as a form of payment plus any

interest-bearing liabilities assumed by the buyer.

Net Sales = Annual Gross Sales, net of returns and discounts allowed, if any.

Gross Profit = Net Sales - Cost of Goods Sold

EBIT = Operating Profit

EBITDA = Operating Profit + Noncash Charges

VALUATION MULTIPLES

SOURCE: DealStats (formerly Pratt's Stats), 2019 (Portland, OR: Business Valuation Resources, LLC). Used with permission. DealStats isavailable at https://www.bvresources.com/learn/dealstats

Auto RemarketingNews resource for the pre-owned car industry.

Automotive Industries Association of CanadaNews and links.

Automotive Service AssociationMagazine, news, events, and links.

JD Power and AssociatesConsumer information and forecasts for the auto industry.

Kelley Blue BookNews and reviews for the used car industry and top 10 lists.

National Independent Automobile Dealers Association (NIADA)

Industry Websites

State association information, government watch, events, and magazine.

Used Car Dealer MagazineMonthly trade publication of NIADA for news, trends, technology, financing, marketing, and operations.

Ward's Dealer BusinessDealership news.

CPO - certified pre-owned

NADA - North American Dealers Association

CRM - customer relationship management

Glossary of Acronyms