Smart: Not Just Cute; Profitable, Too

Penske Automotive Group is making hay while the sun shines on the Smart, making a fatter gross margin on the Smart brand at wholesale than it does at retail, on bigger, more-up-to-date, more capable cars from other brands.

Penske Automotive, one of the nation's biggest auto dealer groups, has the U.S. franchise for the Smart brand, which is built by Mercedes-Benz. Penske has appointed 73 U.S. dealerships in 35 states, including eight Smart dealerships that belong to the Penske Group.

The "independent distributor" structure is a throwback to the 1950s and 1960s, when import brands hired U.S. distributors in part because at the time, many of them couldn't afford to establish their own U.S. dealerships. In the case of Mercedes-Benz, the manufacturer probably didn't want to make the investment in a franchise that looked pretty risky, and likely to be confined to only a few U.S. markets. Even in Europe, with much higher gas prices, Smart has been a money-loser for the parent company, for most of Smart's 10-year history.

But in the U.S. market, of course, everything changed when gas hit $4 per gallon earlier this year; at the perfect time from the Smart brand's perspective, just a few months after its U.S. launch in February 2008.

In its quarterly report filed with the Securities and Exchange Commission on Nov. 5, Penske Automotive said that in the first nine months of 2008, it had $293.5 million in revenues from distributing Smart, and gross profits of $39.8 million (not counting profits from those eight retail stores). That gross profit includes parts sales, but this early in the Smart brand's U.S. life, there's probably not much demand for replacement parts.

The Smart brand accounted for U.S. sales of 18,156 units through September. Doing the math, that gross profit of $39.8 million, including parts, works out to a gross profit per vehicle of $2,192, or 13.6 percent of revenue. Throughout the rest of the Penske Automotive chain, the average gross new-car margin is 8.2 percent (excluding parts sales), so Smart is doing pretty well for itself.