Survival on dealer's row

John Zapp on his lot in Oklahoma City

A veteran car salesman turns to used cars to stay afloat.

By Alex Taylor III, senior editor

(Fortune Magazine) -- John Zapp's car dealerships - a Buick-Pontiac-GMC outlet and a Dodge-Chrysler-Jeep store - sit right on auto dealers' row in Oklahoma City, a mile-long stretch on the north side of town that's home to some 28 lots. All over this region the car business is soft, hurt by a slowing economy, high gas prices, and inventory from Detroit that isn't selling. Zapp and his salespeople watch as customers stream to Toyota and Honda next door. In January his gross profit per unit on new cars at his GM store was about a quarter as much as the Toyota outlet's - and he sold just a third as many new vehicles.

But after four decades in the car business, the 52-year-old salesman has learned that complaining about Detroit's shortcomings doesn't sell cars. "We decided this is all the floor traffic we're going to have, and we just have to do a better job with it," Zapp says. So he has shifted focus at his dealerships to a more lucrative practice: selling used cars.

He picked the right place. Nationally, car dealers sell two new cars for every used one; here on the southern plains, where mild winters ease the wear and tear, the ratio is closer to one to one. That's good for Zapp. All new cars leave the factory in the same condition, making it easy for consumers to comparison-shop, but each used car is different. So while he often makes a gross profit of $1,000 a unit on a new car, he can make twice that on a three-year-old used one.

Zapp has learned that the key to a successful used-car business is turning inventory. He can quickly size up a car's value and get rid of the slow sellers (hello, Chevy Suburban) by adding extras or running ads. Rather than maintaining a stock of 200 vehicles that turns every 60 days, as many dealers do, Zapp keeps 100 or so and turns them in half the time. "Volume is what matters," he says, pausing to send a stream of tobacco juice into a Styrofoam cup. "It keeps inventories clean, salespeople happy, and dealership owners off your back."

The strategy has been working. At his GM (GM, Fortune 500) store in January, Zapp outsold the nearby Toyota (TM) outlet in used cars while keeping just a 27-day supply. Better still, his profit per unit on used cars was seven times higher than on new cars, and used cars contributed 96% of his gross profit on vehicle sales.

Another tactic: Keeping salespeople eager by rewarding them with small cash payments for hitting targets. "Salespeople for the most part stay broke," he says. "If we can put $200 to $300 in their pocket for the weekend, it makes a difference."

On those rare occasions when he gets his hands on a hot new model, Zapp squeezes out every last penny. When four-door Jeep Wranglers were in short supply last year, he charged $500 to $1,000 over the sticker price. And he's looking forward to the arrival of the Dodge Challenger SRT-8, a reengineered version of the 1970s muscle car. He's expecting nostalgic baby-boomers to pay him $15,000 to $20,000 over the $38,000 sticker for the six units he's been allocated.

"The best used-car retailers are always the best new-car dealers," says Earl Hesterberg, CEO of Group 1 Automotive (GPI, Fortune 500), the publicly traded dealer chain that owns Zapp's lots. "If they know they can retail a customer trade-in off their own used-car lot, they can put $500 to $1,000 more into that trade - which makes a lot of incremental new-car deals." That hasn't helped new Pontiac sales, which are a third what they were a decade ago. But thanks to his used cars, Zapp made money at both his outlets in January, while two competing domestic dealers ran in the red. Struggling dealers take note: When Detroit sends you lemons, sell lemonade.