AutoNation pursues captive

AutoNation is “aggressively looking” at pursuing a captive, Chief Executive Mike Manley said during a call with investors in February, though it remains to be seen whether the vehicle retailer will build or buy its new financing arm. AutoNation is the third dealership chain in less than a year to disclose its intention to create a captive unit. In February, Penske Automotive CEO Roger Penske noted that the addition of a captive finance company would be an opportunity to bolster operations on the heels of growth in the U.S. and international markets. And in August 2021, Asbury Automotive management revealed that it was looking to build a captive finance business to expand further into the subprime sector. The difference between AutoNation and its counterparts, Penske and Asbury, is that AutoNation operated an eponymous captive 25 years ago. AutoNation created its original captive, AutoNation Financial Services , back in 1997. The unit was headed by longtime auto finance veteran Kevin Westfall, who had previously founded BMW Financial Services in 1990, and went on to co-found online vehicle marketplace Vroom in 2011. Interestingly, Vroom shelled out $300 million earlier this year to acquire subprime lender United Auto Credit , the first step in its plan to establish a captive finance arm. Initially, AutoNation Financial Services underwrote auto loans and leases. It offered extended service contracts, vehicle protection and maintenance programs and insurance products. At the time, AutoNation was a subsidiary of Republic Industries , which also owned National Car Rental , Alamo Rent a Car and several other rental car companies. Republic also operated 250 franchise auto dealerships and 26 AutoNation USA used-vehicle megastores. In 1997, Republic’s automotive retail revenue was $6.1 billion, and its operating loss for the line of business was $68.4 million. By mid-1999, AutoNation Financial Services had scrapped its leasing operations. Instead, it focused on the loan business to expand margins. “Each new or used vehicle sale presents our dealerships with the opportunity to finance the vehicle, sell an extended service contract or other finance and insurance product, and sell other aftermarket products, such as vehicle accessories or a theft-deterrent system,” the company wrote in its 2000 annual report. To that end, AutoNation unveiled a four-pronged program to bolster F&I at its dealerships. Despite these efforts, AutoNation decided to exit the loan space in December 2001. “AutoNation reviewed strategic alternatives associated with its auto loan business and determined that the business is not part of the company's core strategy,” the company said at the time, adding that fewer than 5% of the vehicles sold by AutoNation were financed by its captive. AutoNation Financial ultimately wound down the business, which had less than $100 million of receivables at yearend 2002. For the past two decades, AutoNation has relied on other lenders to finance its customers’ vehicle purchases and provide aftermarket products. Though many of the vehicle-protection products — like extended service contracts, maintenance programs, tire-and-wheel protection and GAP insurance — are AutoNation-branded, they are, in fact, underwritten and administered by independent third parties, some of which are manufacturers’ captives. For each product sold and loan or lease financed by these third-party lenders, AutoNation receives a commission. Meanwhile, AutoNation is growing. At yearend 2021, the company owned 339 new-vehicle franchises. And while the number of AutoNation used-vehicle stores has dropped to nine, the company plans to have more than 130 such stores by the end of 2026. Total revenue last year was $25.8 billion, and operating profit was $1.9 billion. These factors serve as the backbone for AutoNation’s decision to create a captive. In Manley’s words on the investor call: “I think it's important for the largest automotive retailer in the country to be able to offer finance through a captive where we can tailor-make services, where we can make sure that the relationships that we build with our customers are deep, where we can be flexible to make sure that we account for different cycles, different changes in buying habits. “So, I'm strongly in favor of that. And I think given the volume that we're writing and our aspirations, particularly about building out our stand-alone used-car sites between now and 2026, it’s absolutely appropriate for our executive committee to not just be looking at these opportunities,” but to be “aggressively” looking at them, Manley added. Auto Finance Risk Summit, the premier event for risk ad compliance management in auto finance, returns April 25-26 in San Diego. This event is the central resource for education and networking focused on best practices in risk management and will prepare your team for the dynamics of the evolving auto finance market. To learn more about the 2022 event and register, visit www.AutoFinanceRiskSummit.com .

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