Car Lot Owners Wheeling, Dealing

by George Waldon  on Monday, Dec. 18, 2006 12:00 am  

The confirmation last month of Crain Automotive Team's purchase of Little Rock Dodge wasn't yet old news before talk began building about more deals.
Larry Crain Sr. would neither confirm nor deny that his growing family of dealerships would be getting even larger in the coming weeks.
But the Little Rock businessman acknowledged that the auto industry was in flux, and that the market was conducive to more buying and selling.
"There are too many manufacturers, and as a consequence, you have too many dealers," Crain said. "You are going to see more consolidation. How much more would just be a guess."
Little Rock Dodge ranked as the sixth-largest dealership based on 2003 revenue of $200 million. That marked the last time Arkansas Business assembled a list of the largest automobile dealers, an effort that was discontinued because of widespread boycotting of the survey by dealers who accused competitors of submitting inflated figures.
Whether it's a buyer's or seller's market for dealerships depends on the individual business.
"If a dealer has a good franchise and is operating profitably, it is a seller's market," Crain said. "To the extent someone is not performing, then it becomes a buyer's market."
More dealerships have become comfortable with the notion of selling, especially those carrying domestic lines. Adding to the fiscal strain is the mounting overhead required to maintain franchise agreements with car makers and, in some cases, slumping sales.
How is this affecting the tally of auto dealerships around the state?
"It changes daily," Dennis Jungmeyer, executive director of the Arkansas Automobile Dealers Association, said with a laugh.
Jungmeyer's exaggerated point is that ownership has been shifting this year. The count through November is nine dealership sales, with two of those involving related transactions.
The pace is nothing like it was heading into the 1990s. Nine dealership transactions occurred during the first four months of 1990, and seven dealerships closed or filed for bankruptcy.
The current census of Arkansas auto dealers is 276. Sixteen years ago, the number stood at 335. Turn back the clock to 1979, and the count was 400.
After enjoying a fat 2003, some auto dealers have endured lean years. The economic climate has helped generate more interest in wheeling and dealing.
"We have some aggressive buyers, and business is as bad as it's been in 30 years," Jungmeyer said. "Buyers' perceptions are everything, and the losses of the Big 3 [General Motors, Ford and Chrysler] have a certain trickle-down effect on buyers.
"Right now, this market is more concerning the large dealers, with more pressure to produce from Wall Street."
Even large dealer groups on the national scene are drawing their share of tire kicking from would-be buyers.
Perhaps the highest-profile car shopper is MSD Capital Ltd., the private investment firm founded on Michael Dell's computer fortune.
Industry reports have suggested that MSD is scoping out both private and public dealer groups, including Asbury Automotive Group Inc. of New York.
Asbury ranked as the sixth-largest megadealer with total 2005 revenue of more than $5.3 billion, according to Ward's Dealer Business. In terms of total units sold for the year, Asbury ranked No. 1 with 719,409.
In Arkansas, Asbury owns the North Point Auto Group. That 1998 purchase now encompasses Toyota, Ford, Lincoln, Mercury, Nissan, Hyundai, Mazda and Volkswagen dealerships in North Little Rock and Sherwood; BMW, Nissan and Volvo in Little Rock; and Hyundai in Bryant.
The megadealers also are selling pieces of their empire. United Auto Group Inc. of Bloomfield Hills, N.Y., sold in September a portion of its Arkansas holdings to Dwight Everett, who retired as an area vice president of the company a year ago.
That transaction created Everett Buick Pontiac GMC in Benton from what was originally a part of the Landers family of dealerships that UAG acquired in 1995.
UAG, which operates 319 retail automotive franchises, ranked as the second-largest megadealer with 2005 revenue of more than $9.8 billion.
Asbury's and UAG's entries in the Arkansas market were paved by acquisitions involving the state's two largest auto dealers, McLarty Cos., led by Mack McLarty, and Landers Auto Sales Inc., led by Steve Landers.
Landers, who left UAG three years ago to repurchase Landers Toyota in Little Rock, teamed up with McLarty to form Landers-McLarty Auto Group in 2004.
Together they have assembled nearly a dozen U.S. dealerships and 13 in Brazil, and each owns separate family dealerships in Arkansas.
Steve Landers believes further dealer consolidation is possible as market forces come to bear.
"There could be more of it going on," Landers said. "I don't know if it's over. The market is over-dealered."
Landers said automakers were trying to reduce their dealer count in a move that parallels efficiency efforts by their plants and work force. In addition to pressures from manufacturers, dealers are contending with the troubles of domestic automakers and roller-coaster gasoline prices.
"It's a tough business environment right now," Landers said. "I've been doing this 37 years, and I've seen good times and bad times. The dealers who have been through something like this before will survive. Clearly, Toyota and Honda have a leg up on the domestics."
Fletcher and Gwatney
The business of an auto dealer is characterized by thin profit margins and ever-growing capital requirements. In the 1990s, that led to the birth of large public and private holding companies buying multiple dealerships and building giant operations.
Fletcher Auto Group of North Little Rock remains on the acquisition trail, unfazed by the big-dollar capital requirements of operating successful dealerships.
"The few dealerships I've looked at [buying], the owners are wanting three to five times net earnings," said Frank Fletcher Jr. "I'm looking at a dealership in Joplin, Mo., that is making zero in its domestic line business.
"He wants three times what he made two years ago at his peak. The reason he's asking that price is that he knows we can do better with his dealership."
How expensive is it to launch a built-from-scratch dealership?
"We're looking at a new Honda dealership," Fletcher said. "We're looking at putting up $19 million. We've got to go out in the backyard and get the big jar of money for this one."
While new car sales capture much of the attention, Fletcher said the more reliable profit center was used car sales.
"We sell 75 percent of our new cars for zero profit," he said. "I know a lot of people don't believe that, but it's true. The used side of the business is much more profitable.
"We average selling 100 or more used units a month, and I personally evaluate the potential of every used car. That doesn't always involve getting the top dollar. One of the lessons I learned from Mr. [Sam] Walton was to go down in price and do more volume."
Bill Gwatney, CEO of Gwatney Chevrolet in Jacksonville, said guarding return on investment required constant attention and overseeing the cost of inventory, advertising, real estate, equipment, facilities, training requirements, parts and people.
"It's more expensive to operate a dealer than perhaps ever before," Gwatney said. "Manufacturers are making more facility requirements than ever before, requiring more capital investment than ever before.
"Then there's required training for personnel, special tools and training for new models. Dealers are asking themselves, 'How much capital am I willing to put into the business?' You have to have staying power."
There is talk in auto circles that perhaps an Arkansas dealership group might float a small stock offering to fund growth to a new level. Expansion through acquisition is the most common vehicle.
Gwatney's Little Rock Auto Group Inc. entered the capital city in 2004 when it bought Chenal Parkway Buick Pontiac GMC and University Truck Center in Little Rock from Bob Fewell.
Gwatney acknowledged that his firm had been mentioned as a potential buyout target these days.
"It has," he said. "I think you will see more consolidation in the Little Rock market."
Whether a Gwatney dealership is involved in the selling, or buying, in the coming weeks remains to be seen.



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