In the mid 1990s, an automotive retailing revolution began which promised to change the landscape of the industry. It wasn’t the chrysalis of the Internet, but instead the aggregation of groups of dealers into public companies run by professional managers.
The theory was simple: A large public company could issue stock and grow by acquisition, gain scale, capitalize on operational synergies to reduce costs, and create tremendous shareholder value.
So far, the results have been mixed. While the market share of new vehicles sold by the top 20 public and private retailers continues to grow (from 4.2% in 1996 to 9.2 % in 1999), and the financial performance of the average public retailer over the past two years has been excellent (with earnings-per-share growth exceeding that of the average S&P 500 company, the stock prices of the public groups have languished.
AutoNation, the nation’s largest auto retailer, lost 60% of its value since mid-1998. The other public retailers have also significantly underperformed in the S&P 500. So why aren’t auto retailing groups getting any respect?
The consulting firm Accenture cites these main reasons public automotive retailers have struggled to keep pace with the market, despite their solid financial performance:
Continued investor hangover from the spectacular rise and decline in AutoNation’s and CarMax’s used-car operations in 1996 and 1997.
Belief that the current sales downturn will slow revenue and earnings-per-share growth. Investor realization of the difficulties of attaining economies of scale and margin improvements in automotive retailing.
Accenture also speculates that automotive megadealers retailers can stage a remarkable comeback with the public markets if they:
* Continue to grow and improve profitability through the downturn.
*Break through the barriers which work to suppress margins in the industry and improve pre-tax margin averages from the current 2% to 5% of sales or better.
The key question, of course, is how to grow sales and significantly improve margins at the same time -- not by 20 or 30 basis points, but by 200 to 300 basis points.
Accenture looked to retailers outside of the automotive industry who have staged remarkable comebacks in recent years, including Sears Canada, Gap Inc. and Best Buy. The firm also looked at a specialty equipment manufacturer, which launched a major retailer operations improvement program in 1999.
It then examined the methods these retailers used to improve their same-store sales and profitability and found several common levers for improvement.
The question: could an automotive retailing group drive the same kind of stock price appreciation by pulling the same levers? Accenture says yes. Here’s why:
*The potential levers for improvement are broadly (although not entirely) applicable to a typical dealer group operation.
*The effect of pulling these levers could actually be greater than with other retailing groups.
Here are the hypotheses one-by-one:
The Potential Levers For Improvement Are Broadly Applicable To Automotive Retailing
Although dealers have limited control over what they can buy and stock, most dealerships sell highly profitable accessories such as alarm systems, bed-liners, splash guards and other items. Leading retailers use sophisticated analyses to determine optimal SKU assortments based on market analysis, observation of store traffic patterns, and sales and profitability analysis.
Marketing and Advertising
Advertising is a significant expense for most dealer groups and is largely purchased without the aid of sophisticated effectiveness and placement analysis.
The advertising planning and production process is also more complicated in auto retailing (which includes regional joint original equipment manufacturer [OEM] and dealer group buys), affording more opportunity for potential improvement.
Though auto dealers will never be able to completely control what they purchase from OEMs, good dealers know that better ordering can drive faster turns with less discounting. Thus, the better one dealer gets at ordering, the more poorly equipped vehicles his competitors have to sell.
Dealers also spend a considerable amount on floor planning, information systems, parts, accessories, and other consumables, which could be reduced through fact-based negotiations, scale-based synergies, and other procurement analysis techniques.
The Accenture analysis shows, for instance, that a centralized procurement function which capitalizes on group purchasing power could save an average dealer (selling 1,000 cars per year) at least $3,000 per month in purchasing costs.
Store Asset Management
Though rationalizing real estate between stores has proven to be difficult, considerable improvement can be made in how modernization investments are rationalized and allocated between stores. Leading retailers have developed lifetime cost management techniques that could be applied to the dealer group environment.
Investments in higher service productivity can also pay off; several larger Toyota of Canada dealers invested in an improved capability in service scheduling and raised productivity by 12%.
Electronic Process Enablement
Most dealers currently have their own Web sites and some form of Internet lead referral service, as well as some capability to respond to customer e-mails.
However, most automotive retailing groups have a long way to go towards capitalizing on all of the possible benefits of electronically enabling (eEnabling) processes, from customer handling, customer relationship management, individualized marketing, to electronic procurement (eProcurement) and Web-based information systems.
Customer Contact Re-engineering
There’s an old adage in the auto retailing business when it comes to how dealers handle sales leads: The good ones do it well...but there aren’t too many good ones. Sophisticated retailers use new training and performance management tools to enhance salesperson performance. This requires process discipline, but discipline can be enforced with the right management approaches, tools and measurement techniques.
The productivity of new and used car dealer employees has improved remarkably little over the past 10 years, especially when compared to other retail employees.
Retailers in other sectors have found ways to improve productivity, including using better recruiting processes, new training techniques (some Web-based), rigorous career path and succession planning, and revised compensation methods, including profit sharing, stock ownership and stock options. Leading retailers have also learned how to roll out process changes in a highly decentralized organization and make them stick.
The Financial Effects Of Pulling The Levers Could Be Significant
In order to estimate how the improvement levers could affect the finances of a typical automotive retailer, Accenture looked at two companies more closely. When Best Buy, for instance, simultaneously pulled all of the improvement levers:
*Same-store sales increased by 14%.
*Gross margins increased by 33%, from 13.6% to 18.1%.
*Inventory turns improved by 43%, from 4.6 to 6.6 turns per year.
When a group of specialty equipment dealers simultaneously pulled all of the improvement levers:
* Sales of accessories increased from 25% to 40%.
* Gross margins on accessories increased from 10% to 15%.
* Inventory turns for accessories increased from 35% to 45%.
* Return on sales (total business) increased from 6% to 12%, doubling, in some cases, pre-tax owner income.
Accenture then looked at the income statement of a typical public automotive retailing group, applied some conservative improvement estimates, and calculated the resulting hypothetical end state. The firm found that the profit-before-tax of a typical automotive retailer could increase by nearly three times.
Thus, relatively small improvements in sales, gross margins and inventory turns can have a huge impact on the earnings of an automotive retailer. The potential for earnings improvement in auto retailing is actually greater than for retailers in other sectors, even though the levers are not 100% applicable, because margins in the industry are currently so thin, according to Accenture.
Some Accenture predictions:
* The automotive retailing market will continue to consolidate and the “market share” of new vehicles sold by the top 20 retailing groups will continue to increase.
* A few of the top 20 retailers will break through the “5% margin barrier,”, and their stock prices will increase dramatically.