Suddenly, Detroit Stops Fighting The Dealerships Of The Future
Jon E. Lancaster, who owns four small auto dealerships in Madison, Wis., worries that his days in retailing may be numbered. Glitzy, computerized auto superstore chains, such as AutoNation USA and Circuit City Stores Inc.'s CarMax Auto Superstores, are spreading across the nation. Lancaster and many mom-and-pop dealers lack the cheap capital that's available to the newcomers, who can afford to outdo him on everything from inventory and spiffed up showrooms to high-profile advertising campaigns. "I do feel very threatened," he says.
He isn't the only one. Just a year ago, Big Three and Japanese carmakers were brushing off the notion that the new breed of auto retailers was going to change distribution radically in the 100-year-old industry. Ford Motor Co. was the most stubborn, flatly refusing to grant new-car franchises to publicly held companies. But since December, AutoNation, the chain owned by H. Wayne Huizenga's Republic Industries Inc., has paid $116 million for seven Ford and Lincoln-Mercury franchises in Ohio and California, with Ford's approval. Why did Ford pull an about-face? "There are major changes under way," says Ford Chairman Alexander J. Trotman. "We have to move with the times."
BYZANTINE. To manufacturers, the trend is a mixed blessing. Retail expenses account for 20% to 30% of a car's price, Trotman says. And carmakers won't mind if publicly funded megadealerships use economies of scale and cheaper capital to shrink those costs. New competition also could help them streamline bloated dealer networks. That's something they can't easily do on their own: Dealers are protected by Byzantine state franchise laws. But carmakers also fear the super-retailers could one day become powerful enough to influence car pricing and other policies. Warns Robert J. Thomas, chief executive of Nissan Motor Corp. USA: "Somebody will have the chutzpah to carry it off."
Enter Huizenga. Since he and partners formed AutoNation in November, 1995, the company has amassed 22 new-car dealerships and opened seven used-car superstores. In November, it bought Alamo Rent-A-Car Inc. for $625 million. On Jan. 6 it agreed to buy National Car Rental System Inc. for $600 million in stock and the assumption of $1.7 billion in debt. And on Jan. 13, AutoNation inked a deal allowing it to buy General Motors Corp. franchises, then quickly did $300 million in stock deals to nab 14 dealers in Florida, New York, and the Southwest. Huizenga's aim: to build a cradle-to-grave company that finances, sells, rents, leases, and repairs cars. "This industry needs a change," says AutoNation Chief Executive Steven R. Berrard, who says, only half-jokingly, that Detroit shouldn't worry: "It's a huge industry--$350 billion in used cars alone. All we want is 50% of it."
Despite the threat implicit in Huizenga's rapid expansion, auto manufacturers are bowing to changes they know they can't prevent. Indeed, some dealers, eager to cash out their franchises, are prodding the companies with lawsuits to let them sell. G. Richard Wagoner Jr., GM's president for North American Operations, says he would like to see the traditional dealer system continue. "But it ain't just our call," he says. "We've got to find a way to reach some sort of accommodation with [the new auto retailers]."
ON THE HUNT. That may mean cutting more deals with publicly held dealer groups, such as New York's United Auto Group Inc., a chain of 40 new-car dealerships and eight stand-alone used-car stores run by ex-adman Carl Spielvogel. Flush with $65 million after UAG went public in October, Spielvogel is on a spree. He's gunning for revenues of $2 billion next year, up from $800 million in 1995. Spielvogel gleefully reports that he'll be on the hunt at the convention of the National Automobile Dealers Assn. in Atlanta next month: "I've got a suite, and I expect to have a lot of visitors come in." His advantage, he says: sheer size and easy access to capital. "We have economies of scale, and we're able to borrow at a lower rate," he says. "We'll attempt to pass that on to the customer."
Nissan's Thomas, for one, says carmakers should move forcefully to stay in the game. In a blistering Jan. 13 speech at an industry conference in Detroit, he blamed shortsighted manufacturers for giving outsiders a chance to take over their business. His prescription: Beat them to the punch by consolidating auto franchises and eliminating "all the excessive and unnecessary overhead and investment costs." Even those whose view is rosier agree that radical changes lie ahead. Says Ford's Trotman: "It makes competition tougher for everyone, but it makes life better for the customer." That may be bad news for dealers like Lancaster. But for car buyers and makers alike, these are interesting times, indeed.