With That Out of the Way

Las Vegas — First you sell the vehicle, then you start making the real profits.

So says Greg Young, chief accounting officer for Sonic Automotive, a dealership chain with $8 billion in annual revenues.

Nothing happens until you sell the vehicle, he says. But he cites Sonic founder Bruton Smith's philosophy: “The car sale is the springboard to other profit opportunities.”

Those include finance and insurance and fixed operations, which have lower revenues but offer higher profits than new-vehicle sales.

At Sonic, F&I accounts for 2% of revenues but 16% of gross profits, while fixed operations accounts for 14% of revenues but 45% of gross profits in 2006.

“F&I is not the glitziest part of an auto dealership but it is good for profits,” Young says at the 2007 Auto Finance Summit here. “A lot of others focus on sales of new cars, which are considered the sexiest part of the business, but they're not the most profitable.”

One of Sonic's F&I strategies is to try to convert customers who've arranged direct auto loans through a financial institution, says Todd Weeks, Charlotte, NC-based Sonic's director-retail lending.

“We try to maximize profit by trying to get those customer to go with one of our preferred lenders, but obviously not at the risk of the vehicle sale,” Weeks says.

Sonic's F&I efforts have been paying off.

Its F&I profit per unit (excluding fleet sales) broke the $1,000 mark this year in 2007 compared to $924 in 2004. It started to pick up in 2006 when Sonic began focusing on extended service contracts to drive product penetration.

Sonic, ranking No.3 on the Ward's Mega Dealer 100, reported F&I revenues of $191 million in 2006.

Store by store, Sonic also has rolled out the use of electronic F&I menus to enhance product presentation and ensure compliance with government regulations.

That roll out has been purposely slow. “We are doing it one store at a time,” Young says of introducing e-menus to 150 stores in 15 states, mainly in the Southeast and California.

“Before, we would roll out a new technology (simultaneously) across the line,” he says. “But in doing that, we discovered one third would embrace it, one third would kind of get it and one third would ignore you. Doing it one store at a time is better.”

A lot has changed at Sonic over the years.

That includes the introduction of a strict F&I compliance program after the dealership chain got into trouble because of F&I abuses at some of its stores in the early years of the decade.

That led to a wave of firings as well as compliance training, auditing as well as rate and profit caps.

“Compliance and training is important to us,” Young says. “We don't want any of our folks with their hands in the cookie jar.”

Another change has been Sonic's approach to acquiring dealerships.

The firm went public in 1997, using capital from that initial offering to go on a dealership buying spree. At one point, it was on average buying a dealership once every 11 days.

In 2005, Sonic “shifted from being an acquisition company that operates dealerships to being an operating company that acquires dealerships every once in a while,” Young says.

In 2004, it began to dispose of its smaller stores in remote locations and replace them with larger stores selling luxury and Asian brands in major markets. Today, domestic brands account for only 17% of Sonic's dealership portfolio.

“We considered ourselves turn-around artists buying small, struggling stores,” Young says. “But they didn't turn around as much or as quickly as we wanted. Now, our acquisitions are of larger, better stores.”

Acquisitions in 2007 include Mercedes-Benz of Calabasas, Assael BMW and Mini and Long Beach BMW.

During a soft new-car sales year, Sonic is protected by its geographic diversity, its skew towards luxury and import brands and its focus on the growth opportunities of F&I, fixed operations and used-car sales, Young says.

In previous years, Sonic typically did not own the real estate of its dealership facilities. “Now, we are shifting to own more real estate to take advantage of lower financing rates, Young says.