Sonic Automotive Takes on CarMax

Used Car
Source: Thinkstock
New and used car retailer Sonic Automotive Inc. (NYSE: SAH) announced Monday morning that it plans to open the first of a chain of used-vehicle stores under the name of EchoPark in Denver later this year. The company said it will offer a “revolutionary customer experience,” including a whole new way to search for, buy, service and sell pre-owned cars.

EchoPark will operate as a subsidiary of Sonic and will challenge the country’s largest used-car dealer, CarMax Inc. (NYSE: KMX), which has been described as the Walmart of used car dealers. CarMax operates one new car store and 131 used-car superstores in 64 states and was originally spun out of Circuit City in the early 1990s.

Sonic Automotive claims 123 franchised stores in 14 states, of which 21 are collision-repair shops. At its EchoPark used-car stores, prices will be set by a central office rather than at each store. The company says this will eliminate haggling over price.

General Motors Co. (NYSE: GM) tried the same no-haggle policy with its Saturn brand and that part of the Saturn experience was widely viewed as successful primarily because GM dealers were guaranteed an exclusive market and the parts supply chain was better.

The U.S. market for used cars totaled about 42 million in 2013, nearly three times the volume of the market for new cars. According to The Wall Street Journal, used cars also generated more profit per vehicle than did new cars, yielding 13% compared with just 3.8% for a new car.

Sonic believes that there is room for another player in a market that already includes just one other publicly traded player, Asbury Automotive Group Inc. (NYSE: ABG), which is smaller than Sonic, in addition to CarMax.

Investors were not rushing either in or out Monday morning, moving Sonic’s share price up about 1.5% to $24.69 in a 52-week range of $21.05 to $27.87. Daily average volume is just under 350,000 shares.

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