Sonic tweaks its strategy on EchoPark rooftops

Number of stores scaled back, online tools added

Sonic has seven stores under the EchoPark used-vehicle umbrella, with plans to add more.

Sonic Automotive Inc.'s strategy for its EchoPark stand-alone used-vehicle brand is evolving.

After nearly four years of operation, the adjustments come as Sonic has learned what services EchoPark customers want and as the retailer adopts best practices gleaned through its acquisitions of other used-only dealerships. A key change: Sonic has scaled back the number of stores planned for EchoPark.

Instead of the hub-and spoke model, with one big store and several smaller stores serving a market, EchoPark will start with one large store in a market and consider additional locations later, Jeff Dyke, Sonic's executive vice president of operations, told Automotive News.

At "our big stores in Denver and Dallas and in San Antonio, we're selling a ton of cars," Dyke said. "If I can sell more cars out of one location than I can out of two, or the same out of one than I can out of two, then that just reduces complexity, creates simplicity and allows us to make more" money.

In the coming weeks, Sonic also will rebrand two existing stores into EchoPark locations, roll out a vehicle appraisal app and pilot a nearly 100 percent online buying tool at one EchoPark location, complete with appraisal and loan approval capability. Much of the change involves combining EchoPark's technology and culture with the pricing model and inventory management system gained in Sonic's 2017 acquisition of Driversselect, a used-vehicle operation in Dallas, Dyke said.

Dyke: "Reduces complexity"

Sonic, one of the country's largest retailers of new and used vehicles, has long had big aspirations for EchoPark.

When it announced the brand in August 2014, Sonic executives talked of having stores in 50 markets with as many as 10 rooftops per area. CEO Scott Smith has said he foresees EchoPark one day being bigger than the company's franchised business.

EchoPark launched its first dealership in late 2014 in Colorado and grew to six locations in the state by June 2017 before expanding into Texas. In June of this year, two smaller EchoPark stores in Colorado closed.

Property available

Sonic currently has seven stores under the EchoPark umbrella, including five operating with the EchoPark name. The other two, locations in Colorado and Texas that currently operate under theCarCash brand name selling older used vehicles, will be converted this week to the EchoPark name, Dyke said.

The dealership group plans to open two more EchoPark stores this year: Charlotte, N.C., on Oct. 8 and Houston on Dec. 10. Under the previous approach, EchoPark would have opened three stores in the Houston market vs. the one it now plans. The location in Houston can hold 2,000 vehicles.

"Should we need another location down the road to keep up, then we'll certainly add it because we've already got the property," Dyke said.

The growth will continue in 2019 with plans for an EchoPark in San Antonio in the first three months of the year and another in an undisclosed location, Dyke said. Beginning in 2020, Sonic will ramp up store expansion for EchoPark, he said.

"We will systematically grow the business as it gets profitable," Dyke told analysts on Sonic's second-quarter earnings call. "We're not going to go out and just throw a bunch of stores out there and eat up a bunch of profitability. We're going to do this wisely, methodically, profitably."

Bret Jordan, managing director and research analyst with Jefferies, said he's not surprised Sonic has scaled back on its number of rooftops. He noted that AutoNation earlier this year paused its expansion of used-only AutoNation USA stores after opening five stores, while Asbury Automotive Group last year exited its stand-alone Q auto used-vehicle business after launching it in mid-2014.

"The jury's out [on EchoPark's success] because as we've seen from others, it's hard, A, and, B, to make it profitable without a service or finance operation, we haven't seen it yet," Jordan told Automotive News.

Driversselect influence

In 2017, Sonic bought Driversselect, a successful high-volume dealership in Dallas. Rick Nelson, an analyst with Stephens Inc., said Sonic's strategy change for EchoPark has evolved because of that acquisition. Driversselect has had "monster volume" selling used vehicles up to 3 years old with less than 30,000 miles that have low margins but high penetration selling service contracts, he said.

"They're replicating that model in the existing EchoPark stores," Nelson told Automotive News, adding EchoPark will need fewer stores per market because of it.

In 2016, Sonic bought AutoMatch USA, with four used-only stores in Georgia and Florida. Plans then called for converting those stores into EchoPark locations by the end of 2017. That didn't happen because the locations were not large enough to house the volume needed, Dyke said. Sonic operated some of the AutoMatch stores for a while, but they have since closed.

But through the AutoMatch deal, Sonic acquired CarCash, a brand the company is leveraging under EchoPark. The AutoMatch stores housed CarCash buying centers, which helped boost vehicle inventory by buying cars from customers who were only in the market to sell their vehicles. Those centers have been replicated in other EchoPark locations. The new appraisal app about to launch will carry the CarCash name.

Sonic of Charlotte, N.C., ranks No. 5 on Automotive News' list of the top 150 dealership groups based in the U.S., retailing 133,728 new vehicles in 2017. It retailed 123,489 used vehicles for the same period, ranking it No. 6 on Automotive News' list of the top 100 dealership groups in used-vehicle sales.

Profit driver?

Despite trimming the planned store count, Sonic said, EchoPark is a growing piece of the company's overall revenue and ultimately its profitability goals.

For the first half of the year, EchoPark sold nearly 13,000 vehicles. In the second quarter, EchoPark sold 7,459 vehicles and its revenue of $180.2 million more than tripled from a year earlier. Though EchoPark has posted an operating loss of $8 million through the first half, Dyke said the unit made money in June and July. Sonic projected in its second-quarter earnings call that EchoPark would add $15 million in profitability to the company next year.

It takes a year for each EchoPark store to get up to volume potential, Dyke said. At that point, each EchoPark store should sell as many as 1,200 to 1,500 vehicles a month.

Sonic is targeting big, pre-owned sales markets for EchoPark. Dyke mentioned states such as Florida, Georgia, Arizona and Pennsylvania but gave no specific cities. Sonic has disclosed that it has bought property in Austin.

"It's 45 million pre-owned cars a year being sold in this country," Dyke said. "They're being sold in all the big populations, and we're going to get our fair share of that."

You can reach Melissa Burden at mburden@crain.com -- Follow Melissa on Twitter: https://twitter.com/MelissaMBurden

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