CarMax, one of the new wave of used-car superstores that feature no-haggle prices, is coming to L.A. but don't expect any signs of panic among the local dealers.
While the super-dealer concept took Wall Street by storm last year, consumers have been less receptive to the idea, dealers and consultants say. And instead of stealing sales from traditional dealers, they even may be bringing more business to independent rivals.
So far at least, CarMax Auto Superstores, a division of Circuit City Stores Inc., "hasn't sent the independent used-car dealer scurrying for the shadows," said George Peterson, president of Santa Ana automotive-industry consulting firm AutoPacific Inc. "And it hasn't put new-car dealerships out of business. I think the jury is still out on whether it's going to be a mainstream part of the business."
During its initial push into Los Angeles next year, CarMax plans to open eight locations. The first will be in Carson, not coincidentally the site of the headquarters of Nissan Motor USA, which signed an agreement announced last week to sell new cars at the CarMax locations.
CarMax, which has a similar deal with Chrysler, has been looking for such tie-ins because it can get better deals on used cars by offering trade-ins to people buying new cars.
Other announced locations for Carmax dealerships include the site of the former Van Nuys Drive-In, smack in the middle of a cluster of dealers known as auto row, in addition to sites in Ventura, Duarte and Buena Park.
CarMax's strategy is to offer a large inventory at prices that are roughly $500 to $1,000 below standard book value. Prices are posted on the cars, and salespeople are forbidden from haggling.
"Our cars and all the things that go with them include a value and a forthright price that you can be sure is credible," said Val Brown, director of communications for Richmond, Va.-based CarMax.
But a study conducted in Houston found that only one in five shoppers who visited CarMax or AutoNation USA, the chain operated by Republic Industries Inc., ended up buying a car there.
Jim Callahan, an analyst for Dohring Co., a Glendale-based market research group that conducted the study, said the bulk of the cars carried by CarMax are less than five years old, and many used-car consumers are looking for older (and therefore less expensive) cars.
In addition, consumers may visit the superstore for a quote and then go to a competing dealer for a better price.
"In other surveys we've done, we find two-thirds of buyers feel they need to negotiate to get a good deal," Callahan said.
CarMax reasons that the price differences may be based on the fact that independents don't consider the cost of financing when they quote prices and don't offer the add-ons provided by CarMax, which include reconditioning and warranties.
But many of the larger independents do provide similar benefits. Some even offer promotions during which no haggling is allowed.
CarMax's financials reflect its growing pains. For the year ended Feb. 28, the company posted a net loss of $7.8 million compared with a loss of $266,000 the prior year. Though sales increased 71 percent to $874.2 million, most of that growth is attributable to the opening of new stores; comparable-store sales rose by only 6 percent.
CarMax attributed the weakness in sales and earnings to the pace of new store openings. Not enough stores were opened in each new market to support the advertising necessary to draw traffic. At the same time, officials said new-car prices had dropped substantially, making it less attractive for customers to buy used cars.
"Last year we opened a number of additional locations, and there was a loss expected because of the investment in doing that," Brown said. "Based on the model, we expect to generate earnings slightly above break-even in 1999."
Some consultants believe it's only a matter of time before the superstore idea begins to stick. Indeed, studies have shown that shoppers want to buy from superstores with large selections and the low prices.
The problem, analysts say, is that superstores so far haven't offered what they promise.
"I think it (CarMax) will be worrisome (to independents), but at this point in time dealers can still find a wonderful business opportunity against CarMax," said Doris Ehlers, a partner specializing in retail and distribution issues at J.D. Power & Associates, the Agoura Hills-based consultancy.
The stakes are high. About 30 million used cars, twice the number of new cars, are sold each year, according to Dohring.
Some dealers say they look forward to CarMax's entry into the marketplace because the chain brings with it a heavy advertising schedule that attracts serious shoppers to their neighborhood.
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