New Road Ahead

Automobile dealerships, the independent, often family-owned businesses that are so emblematic of Southern California, are looking at profound change these days. Publicly owned corporations, with bundles of Wall Street money, are paying calls, asking owners if they want to sell their franchises.

For many of Southern California’s 802 dealers, the effect is golden.

“Large, well-run dealers are worth more today; their businesses have increased in value,” says Bert Boeckmann, owner of Van Nuys-based Galpin Motors, the nation’s largest Ford dealer.

Public buyers, such as Wayne Huizenga’s Republic Industries, “are good; they raise the credibility of the dealer business, which has never had the respect of Wall Street before,” says Greg Penske, whose Penske Group owns Longo Toyota in El Monte, the largest auto dealer in the United States.

But Darwinian forces are also behind the coming of public ownership to the closed world of car dealing. Changes will winnow out an overpopulation of dealers in the nation’s largest car market.

“The 71 Toyota dealers in Southern California sell as many new cars as the 116 Ford dealers,” says one expert, suggesting a shakeout of huge dimensions.

To be sure, Southern California is no sleepy Podunk. Car dealers here are sophisticated and innovative; probably more than a dozen in the region do more than $400 million in annual sales. Such operators don’t need Huizenga or any other smart aleck teaching them their business.

Yet big and small, local dealers face a shakeout. The deciding factor will be the power of public capital and a vision of car retailing that is different from anything traditional dealers have conceived, says Donald Keithley, a partner of J.D. Power & Associates, the Agoura Hills research firm.

Thanks to investor enthusiasm, Republic and other public firms such as United Auto Group, Circuit City’s CarMax chain, Medford, Ore.-based Lithia Motors and Amarillo, Texas-based Cross Continent Auto Retailers already have high-priced stock with which to make acquisitions. And Huizenga has introduced the concept of car superstores in Phoenix and South Florida.

Car buyers will benefit ultimately from lower prices, although initially the emphasis of new operators will be on cutting inventory expense by making car buying faster and easier.

Traditional dealers who do not figure out ways to cut expenses will become noncompetitive. Some familiar car brands will disappear.

“The options are for dealers to consider going public themselves or being acquired by a public company,” says Fritz Hitchcock, chairman of Hitchcock Automotive Resources, which owns Ford, Nissan, Infiniti, Toyota and Mazda dealerships in Puente Hills.

The turmoil is forcing car dealers to examine their business anew. Car retailing, in one sense, is not very profitable, netting 1 to 2 cents on each dollar of sales, and even that amount these days is earned on used cars and parts and service, not new-car operations, Boeckmann explains.

But return on invested capital is quite another matter. A well-run franchise with a good location can earn an astounding 100% on equity in a single year. When Lexus franchises were first awarded, “the return was 108% the first year,” says Penske, whose operation owns Toyota, Lexus, Mercedes, Honda and Cadillac franchises in Southern California.

That’s why auto dealers have always been local business leaders in American society and why the most successful could acquire other franchises to diversify.

Still, for all the big money, the business was cozy and old-fashioned. The car manufacturers had to approve each franchise sale, which traditionally has been priced at a low two to three times a dealership’s profit. And dealerships kept new and used cars, parts and service under one roof.

But fewer businesses are like that today. “Even sports teams and chicken franchises sell for higher prices than good automobile dealerships,” Keithley says. And the new operators may split operations, “creating category killers” in new cars or parts or whatever.

The public auto companies, with stock selling at 50 to 100 times their fledgling earnings, are paying more than traditional prices. The recent sale to Huizenga of Magic Ford in Valencia, a cash transaction, was at roughly five times Magic’s profit; Huizenga’s purchase in December of Maroone Automotive in Florida, for $200 million of Republic Industries stock, was at a much higher multiple of Maroone’s profit.

So Southern California dealers are considering how much their businesses are worth and what their response to public ownership will be.

Boeckmann, who has two sons in the business, was asked by Huizenga’s company if he wanted to sell and said no. He plans to expand further and has formed a cooperative venture with other dealers nationwide, called Drivers Mart, for volume selling of new and used cars.

Boeckmann is also opening a Saturn dealership in the Santa Clarita Valley, the second for his company.

Saturn dealerships sell more cars per dealership than any make except Ford--and Ford’s figures are swelled by fleet sales to rental companies. That means Saturn dealerships, which General Motors awarded with spacious territories for each, are highly profitable.

But not all car brands are profitable, and dealers are going to become choosy, says Hitchcock. “The good multiple-brand operators are going to make tough decisions as to which cars they want to carry,” he says.

Some experts estimate that of 40 or so car makes on sale in Southern California, 25 may be vulnerable. A shakeout seems inevitable. And that could have profound effects on other businesses, such as real estate and newspaper, radio and television advertising.

Even in this big, sophisticated market, the effects will be widespread--some golden, some Darwinian--as traditional auto dealing comes into the era of fast-moving public money.