Life in the Fishbowl

They may be big fish, but it's life in the fish bowl for publicly owned dealership chains.

“We face a high level of scrutiny from the media, Wall Street and manufacturers,” says Mark Iuppenlatz, senior vice president-corporation development for Sonic Automotive Inc.

He adds: “We're under the microscope. So we tried to instill a high level of control and consistency.”

That means trying to use a standard operating procedure to run hundreds of dealerships of various makes in different parts of the country. It's not easy, he says.

Public ownership has its ups and downs.

High among the advantages is the ability to raise lots of money. That's essential as the value of prime dealerships climbs — in no small part because the “publics” acquisition efforts have driven up prices of stores.

Automotive retailing has become more capital intensive, Iuppenlatz tells the California New Motor Vehicle Board's third annual roundtable.

“Large urban dealerships are worth tens of millions of dollars,” he says. “They can be a challenge for an individual to buy.”

Meanwhile, virtually every auto maker is spurring dealers to invest millions in renovating existing stores and building new facilities of uniform designs. Such capital requirements often persuade independent dealers to sell their stores to consolidators.

For a healthy store in a vibrant market, “we're talking in the range of a $50 million transaction,” says Jerry Heuer, president of AutoNation Inc.'s Power brand group of dealerships in Southern California. “For a private dealer, it's a good exit strategy. Publics have been good to privates.”

On the list of disadvantages for publicly owned dealership chains are all those watchful eyes, many of them skeptical, some unforgiving.

Dealership consolidators have fought hard to gain respect on Wall Street. Consequently, market analysts are not the utter skeptics they were when the consolidation movement took off in the mid-1990s. But the analysts closely monitor the consolidators' progress on Wall Street and Main Street.

“A private dealer doesn't have to deal with Wall Street, but the publics do and that's significant,” says Frank Dunne, General Motors Corp.'s newly retired executive director of sales, service and marketing-retail relations.

He adds: “It's interesting to watch the scrutiny.”

Auto makers can be particularly tough in expecting publicly owned dealership chains to perform well — under the threat of preventing them from buying more stores.

For example, last year Ford Motor Co. vetoed the privately owned Bill Baker Group in San Diego from selling a Ford dealership to publicly owned Asbury Automotive Inc. The reason? Ford was displeased with the performance levels at some other Asbury-owned Ford stores elsewhere.

To placate auto makers' sales expectations, dealership chains “will sometimes sacrifice profit for volume,” says Iuppenlatz. “But that's not a good long-term model.”

He adds: “The manufacturers expect us to perform to the highest standards in order for us to continue to grow. There's a higher level of accountability and scrutiny.”

It's hard to get away with something.

“It's out there if you do something stupid,” says Heuer. “We've put in processes and training to protect ourselves. Problems with a store in California led to those processes.”

He's referring to Gunderson Chevrolet (now Power Chevrolet), an AutoNation store in El Monte, CA. In 2001, several of employees were charged with defrauding about 1,500 customers.

“It made us realize how important processes are; a consistent application of menu selling of finance & insurance products, full disclosure and training,” says Heuer.

Likewise Sonic, which has been stung by F&I scandals at some of its dealership points, now uses background checks, drug tests and the like to get rid of “bad apples” at individual stores, says Iuppenlatz.

He says Sonic stores' F&I offices have moved from selling anti-theft vehicle identification number etchings on windshields and toward extended service contracts.

Despite their high profiles, the publics remain a small part of auto retailing.

“It's still a very independent business,” says Fritz Hitchcock, owner of Hitchcock Automotive Resources, a privately held 6-store dealership group based in City of Industry, CA. “As a 35-year dealer, I don't think the publics will gobble up all the great opportunities.”

But David Wilson, another owner of a private dealership group, says the public chains have big appetites and deep pockets.

The latter is of particular importance in California, where property values are high.

“It's a big pond, but if you're not careful you can get your head handed to you,” says Wilson, whose 12-store group sold 32,800 new units last year. “With land at $30 a square foot, expanding the number of your service bays can become an $8 million project.”

There are six publicly owned dealership chains in the U.S. AutoNation tops the list followed by United Auto Group, Sonic, Asbury, Group 1 Automotive Inc. and Lithia Motors Inc.

Collectively their nearly 900 stores sold 998,723 new units last year and garnered about $47 billion in total revenues, according to Ward's data. They account for about 6% of new-vehicle sales in the U.S.

The consolidation movement was slow in coming to automotive retailing compared to other industries, including banks, veterinarian hospitals and funeral homes. (Ben Hollingsworth, head of Group 1 Automotive, started out consolidating the latter.)

“Auto retailing is where banks and hardware stores were 20 years ago,” says Iuppenlatz. “Ours is a difficult, complex business that's resisted consolidation until now. The business is moving in that direction, but it's still highly unconsolidated.”

Most dealership consolidators learned by trial and error.

Says Iuppenlatz: “It's a unique business, and there was no model. No one had taken it to a national scale. We're making it up as we go along. Today, the model is more refined.”

Sonic's model of late is to ease up on acquisitions and concentrate on improving operations at existing stores.

Heuer says AutoNation started in the mid-1990s with a good idea but a “poor business model.”

It purchased dealerships willy-nilly. It spooked auto makers that wondered what was going on with this seemingly over-ambitious new company snapping up so many dealerships.

Today AutoNation has a clear business strategy and disciplined acquisition plan. Dealership veterans such as Michael Jackson and Michael Maroone run the company. Says Heuer: “We've taken a more business-relations approach with the manufacturers.”

Hitchcock foresees a natural consolidation in auto retailing that “has nothing to do with the publics.”

He explains, “For the domestic auto companies in particular, there are many markets that are overdealered.”

He points to one California market where six Toyota dealerships are outselling 15 Ford stores.

“If you don't have market share and you are overdealered, you're at a competitive disadvantage,” says Hitchcock.

Chains Try to Be Community-Minded

By Steve Finlay

Auto dealers are often community-minded, contributing to local projects, joining civic clubs and serving on various hometown boards and committees.

Tom Novi, executive director of the California New Motor Vehicle Board, wonders if that might change as publicly owned dealership chains acquire more stores and ship in managers to run them.

He sees a difference between a dealer who owns a store and a dealer principal who's working for a chain and looking to get promoted to a bigger dealership elsewhere.

“The allegiance to a community might not be as strong for a person who's not going to be there long vs. a multi-generational owner,” says Novi.

But executives of dealership chains say they're trying to encourage store managers to get involved in civic affairs.

“Everyone understands that to sell vehicles it's important to be seen, to be involved in the community,” says Mark Iuppenlatz, senior vice president of corporation development for Sonic Automotive Inc.

He acknowledges that Sonic's dealership managers were moved around a lot in the past. “But the model is changing to keeping people in the same stores for the sake of stability,” he says. “Those stores tend to outperform others.”

AutoNation Inc. promotes personnel from store to store, but those are often in the same markets, says Jerry Heuer, president of AutoNation's Power brand group of dealerships in Southern California.

“We encourage our people to join the Kiwanis, Optimists and school boards,” he says. “It's good for them and good for the communities.”

Group 1 Pays $51.1 Million for More Dealerships in California and Texas

Publicly owned dealership chain Group 1 Automotive Inc. has completed the acquisition of the Peterson Automotive Group, consisting of two dealerships in the Sacramento area and another two in San Diego with total annual revenues of approximately $320 million.

“This acquisition gives Group 1 outstanding operations in three of the most desirable markets in California, including our existing Los Angeles platform, the Miller Automotive Group,” says B.B. Hollingsworth Jr., Group 1's chairman, president and CEO. “We are pleased that Chuck Peterson has agreed to join Group 1 as president of our new platform. He is highly respected in the industry, and his 35 years of automotive experience will bring valuable insight to our company.”

The Sacramento-area dealerships, located in Folsom, are comprised of Toyota/Scion and Kia franchises. The San Diego dealerships consist of Dodge, Chrysler, Jeep, Kia, Subaru, Hyundai and Isuzu franchises, for a total of nine franchises under the platform.

Houston-based Group 1 also recently acquired Pontiac and GMC franchises to augment the Maxwell Automotive Group platform in central Texas. The franchises will operate from a newly developed dealership in Austin, and are expected to generate approximately $55 million in annual revenues.

“This is a natural addition to one of our outstanding platforms and gives the Maxwell Group 11 franchises,” says Hollingsworth.

Total paid for completing both transactions is approximately $51.1 million in cash, net of cash received, and 306,321 shares of Group 1 common stock.

Group 1 currently owns 88 dealerships in 10 states.