Margin Compression Has Sonic Leaning on F&I, Fixed Ops
Charlotte, N.C. — Record-high used-vehicle sales, strong growth in fixed operations gross profit and a healthy F&I department helped deliver a strong four-quarter performance for Sonic Automotive in spite of continued new-vehicle pricing pressure.
Sonic sold a record-setting 35,058 new vehicles on a same-store basis during 2015's end-of-year quarter. Due to pricing pressure, however, new-vehicle gross profit fell 4.9%. The drop was mainly driven by luxury brands like BMW, Mercedes Benz and Audi.
“We did experience some new-vehicle pricing pressure due to various external factors, which contributed to lower gross profit per unit amount in some brands,” said Bryan Scott Smith, Sonic's CEO and president, during the group's Feb. 23 quarterly investor call. “A combination of transparency in pricing and high levels of inventory supply for specific manufacturers impacted profitability on a new retail unit sales basis. We’ll continue to work with our OEM partners to optimize our inventory and days supply.”
As many other automotive retailer’s quarterly reports have shown, the recent decline in oil prices have adversely affected sales performance in Texas, and Sonic is no exception. Its Houston highline stores felt the brunt of the pressure from declining oil prices.
Executive Vice President of Operations Jeff Dyke said the combination of cheap oil, shifting consumer demand to other vehicle segments and an overabundance of production are to blame for its luxury segment’s poor numbers. He said Sonic can withstand long-term pricing pressures, noting the dealer group will lean on its F&I and used-vehicle operations to offset margin compression.
For the quarter, the group's F&I profit per retail unit grew 5.4% from a year ago to $1,330. That helped drive up total F&I gross profit 9.6% from the prior-year period to $83 million.
"We’ve got lots of room in our F&I, and our vehicle services contract penetration is going up. We feel like we’ve got a great team and a lot of room there,” Smith said. “So, again, I’m not speaking for the industry. I’m just speaking for Sonic. We’ve got plenty of room to grow our F&I and look for that to continue to grow this year.”
The retailer’s used-vehicle segment sold a record 28,220 retail units. Gross per unit on a same-store basis dropped 4.7%. Gross profit from continuing operations, however, rose by $6 million.
Sonic’s Denver-based pre-owned storefront, which operates under the EchoPark Automotive brand name, retailed 764 units during the four quarter and posted revenue of $18 million. Gross profit for the used-vehicle outlet totaled $2 million, while gross profit per unit came in at $1,233. Additionally, the store, which employs a one-touch sales and F&I process, averaged $1,047 in F&I PRU during the fourth quarter 2015.
Sonic opened the first EchoPark location in Denver on November of 2014. It was marketed as a new dealership concept featuring no-haggle pricing, noncommission-based sales associates, and no dedicated F&I managers. It also touted a process that could complete deals in about an hour.
While performance at the current EchoPark hasn’t been groundbreaking, Sonic officials, who maintain high hopes for the new store concept, said the group plans to open additional location by the end of the first half of 2016.
“We’re also scouting and acquiring properties in other markets,” Smith said. “We’re closely tracking our customer feedback and it’s been outstanding and encouraging. We’re creating raging fans. What we’re hearing is that it’s the best car-buying experience that they’ve ever had.”
For the full year, Sonic Automotive retailed a record 138,129 new vehicles, 117,123 pre-owned units, and posted gross profit of $1.4 billion. In the roughly nine months the group's EchoPark location has been in operation, the store retailed 3,225 vehicles.
Dealer group official maintained a positive outlook for the rest of the year, predicting 2016's SAAR will be between 17.3 million and 17.7 million units.
More Industry

World EV Adoption Set to Grow
A new report says the segment, despite recent setbacks in some regions, is poised for acceleration as many countries look to reduce pollution.
Read More →
Black Book: Weekly Market Update
Wholesale automotive auction business stayed steady last week as bidders encountered lower prices, analysts observed.
Read More →
Pricing Transparency Drives Purchase Consideration
An annual study by JD Power found that clear pricing matters to consumers on automaker websites, so much so that it increases their purchase consideration.
Read More →
Black Book: Weekly Market Update
Used-vehicle market depreciation was the prevailing story in the wholesale market last week.
Read More →
Smaller Is Looking Better
A growing number of Americans in the market for a new vehicle are opting for more affordable options, not waiting for market stability to bite the bullet.
Read More →
U.S. EV Market Slowly Stabilizes
U.S. electric-vehicle interest is slowly stabilizing since a major dip in sales after last year's end of the federal EV tax credit, and hybrids remain the leading electrified power train.
Read More →
Global EV Market Entering New Phase
Automakers are making investments to lower battery costs and optimize production to meet changing consumer needs.
Read More →
Black Book Weekly Market Update
The holiday weekend, not surprisingly, put a drag on wholesale automotive activity last week, analysts observed.
Read More →
Auto Affordability in Context
Cox Automotive points out the complex circumstances that have led to eye-popping vehicle prices.
Read More →
Black Book: Weekly Market Update
Automotive auction inventory increased last week, giving choosy bidders even more leeway.
Read More →