Special Coverage

NADA Convention & Exposition

SAN FRANCISCO – Independent used-car dealers can add to their list of woes the fact their new-car brethren are becoming a bigger competitive threat.

Franchised dealers always have sold used cars, but lately they’ve stepped up that portion of the business because it offers better profit margins than new-car sales.

It’s always been tough for independent used-car dealers. And it’s getting tougher. “Especially as franchised dealers redouble their used-car efforts,” says auto analyst Tom Kontos, an executive vice president for Adesa Analytical Services.

Used-car sales in the U.S. last year fell 2.7% to 41.4 million units, compared with 2006.

In selling about 14.3 million pre-owned vehicles last year, franchised dealers took a modest hit, sustaining a scant 0.2% decrease.

In contrast, independent used-car dealers saw a 4.6% drop in 2007 sales of just over 13 million units. That ties with 2002 as their worst sales year of the decade, Kontos says at the National Automobile Dealers Assn.’s annual convention here.

Private-party, used-car transactions totaled about 14 million, a 3.3% decline.

“Independents suffered the most,” Kontos says. “I won’t call it a demise, but it’s a decline in prospects for them in 2008.”

Yet, profitability margins are better for selling used cars than new vehicles this year, he says.

Going head to head with franchised dealers can put independent auto retailers at a distinct disadvantage.

Franchised dealerships typically are bigger, better funded and run more disciplined operations. New-car dealers also do more vehicle trade-ins, which regularly replenish their used-car inventories.

Additionally, Kontos says franchised dealers enjoy the advantage of participating in auto makers’ certified pre-owned vehicle programs that have proven popular with consumers in recent years.

Another advantage he cites is that many car buyers believe a transaction at a franchised dealership offers more peace of mind.

Still, he says, “independents serve a niche.”

Franchised dealers’ pre-owned inventory tends to be newer, about 2 to 5 years old. Independent dealers’ stock runs about 3 to 8 years old.

Some franchised dealers have gone so far as to switch new-car facilities into used-car outlets.

For instance, the Baker Auto Group in San Diego, CA, last year returned its franchise to Ford Motor Co. and converted its store into a pre-owned vehicle operation.

“It made a lot of sense for us to do that,” says CEO Michael Baker, noting there are four other Ford stores within a 5-mile (8-km) radius.

The Baker Group retains nine new-car franchises.

Used-vehicle sales peaked in 2001, then began a 4-year decline, NADA Chief Economist Paul Taylor says. “But when the economy does pick up, we’ll see stronger sales.”