Published:
Monday, March 11, 1996
Edition: METRO
Section: BUSINESS
Page#: 01D
AUTO SUPERSTORES
By SOURCE: JOHN J. OSLUND; STAFF WRITER
Second of two parts
Deep-pocket
national retailers are charging into the auto business with the same
`category killer' formula that drives Best Buy and Circuit City. Will
Twin Cities area dealers beat them or join them.
Dealers in Twin Cities area brace for impact as new selling techniques
crash into marketplace The nation's latest automotive drama is called
"Revolution in the Showroom." The story began several years ago at
booming discount electronics retailer Circuit City's headquarters
in Richmond, Va. Executives were brainstorming for new markets to
conquer to maintain the company's enviable growth trajectory into
the next century. They chose the used-car business. Their weapon:
the "category-killer" approach employed by volume discounters such
as Best Buy, Home Depot and Circuit City itself. This one's called
CarMax, and the game plan is to kill off local car dealers by offering
customers a no-haggle buying experience, premium used cars and trucks
from 400- to 1,000-vehicle inventories, money-back guarantees and
generous warranties. The way CarMax President Austin Ligon sees it,
consumers will flock to the new superstores and the days of the old-style
car dealer are numbered. "They won't go quietly into the night," Ligon
cautioned. "Believe me." Meanwhile, in Apple Valley, Oldsmobile dealer
Jim Paul remains calm. Aware of how electronics superstores have won
customers with their low-margin, high-volume strategies, Paul nonetheless
said he believes that his traditional method of doing business will
survive the competitive advances of CarMax and the others. "We are
not a little guy with eight RCA TVs on the shelf in Wadena," Paul
pointed out. "I have 90 employees here, high-paid ones. And we move
2,200 cars a year. If I were them, I'd take a long, hard look at the
Midwest before they charge into it." Paul is airing a radio ad that
pokes fun at auto superstores - even though there aren't any in the
Twin Cities area market. Indeed, CarMax has no plans for a Minnesota
superstore for "at least 18 to 24 months," Ligon said. But as CarMax
rolls out its national campaign, he promises a Twin Cities area presence
"sooner rather than later." While some quibble with the term "revolution,"
just about everyone agrees that it's no longer business as usual in
auto retailing. Somewhere between Ligon's bluster and Paul's bravado,
fundamental consumer-driven changes are recasting a business that's
resisted change for nearly 90 years. If this were not so, would Minnesota's
biggest auto dealer - Jim Lupient - charter a plane to check out three
superstores in Georgia, North Carolina and Wisconsin as he did last
month? Lupient, with 24 dealerships, didn't get that big by ignoring
industry trends. "If Circuit City is successful, the dealers are going
to have to jump on the bandwagon," Lupient said. "And even if they
are not successful, they are still going to change the way cars are
sold. Between Circuit City and Saturn, the changes are coming." Lupient,
who owns the Saturn stores in the west metro area, said the GM subsidiary's
experiment with "Saturn-certified used cars" has been a runaway success.
The cars are inspected closely and sold with Saturn's "no-haggle"
sales approach. They come with a three-day money-back guarantee and
a warranty. That basic approach - premium used cars sold with little
or no negotiating and a generous warranty - is the formula behind
CarMax and Driver's Mart, a partnership based in Grand Rapids, Mich.,
consisting of nine of the nation's biggest dealers. John Bergstrom,
a Wisconsin auto dealer and a Driver's Mart investor, said the organization
will open seven stores this year and has plans for 100 nationwide.
Lined up at starting line For now, Lupient is hedging his bets. While
he's pondering an invitation from Driver's Mart to join the national
partnership, in the meantime he plans to open three used-car superstores
of his own in the Twin Cities area within the year. At 400 cars each,
Lupient's stores will be smaller than the typical CarMax location.
But they will follow the same no-haggle sales formula used at the
Saturn stores, Lupient said. Across the country, dealers are facing
the same decision. In suburban Cleveland, Ed Mullinax has built Mullinax
Ford into the nation's No. 1-selling Ford organization with the one-price,
no-haggle sales approach he pioneered in 1975. Mullinax has been watching
the superstores, too. "It is probably something we are going to do,"
he said. "Every time the automobile business gets upgraded, it loses
a bit of the used-car stigma. And I think that's good for the business.
It will cause everybody to get better." Like any industry, auto retailing
is subject to passing fads. But there's too much money involved in
the superstore movement to ignore. In December, Circuit City announced
that it had refined the CarMax formula enough to take the concept
national with plans to open seven more used-car superstores in addition
to its four in the South and East. In November, Blockbuster founder
Wayne Huizenga announced plans for a similar national superstore chain
called AutoNation USA. Last month, the Driver's Mart group joined
the fray. `Five years of chaos' J.D. Power, the California-based auto
industry consultant, predicts that by March 1997 at least three national
used-car chains will be operating in major markets around the country.
That will place additional pressure on dealers, whose ranks have thinned.
Nationwide, the number of new-car dealerships has shrunk about 18
percent since 1980 to about 22,800 today, the National Automobile
Dealers Association said. In Minnesota, the competitive climate has
been even more harsh. There were 803 new-car dealers in 1980 compared
with 503 now - a 37 percent drop, the Minnesota Auto Dealers Association
said. (About 150 of the remaining 503 Minnesota dealers operate in
the Twin Cities metro area.) Meanwhile, the dealer's traditional cash
cow - new-car sales - has shrunk to just 6.3 percent of profits from
78.5 percent in 1985. Higher new-car prices and the rise of leasing
programs have have shifted the profit center to used cars, where today's
dealers make 47.5 percent of their earnings, compared with just 7
percent a decade ago. The superstores are attacking the used-car market.
The pressure on traditional dealers only will increase during what
industry consultant Mark Rikess calls the coming "five years of chaos."
High-tech shopping Rikess, a Los Angeles-based consultant whose clients
include CarMax, pointed to several factors that he predicts will halve
the ranks of traditional dealers within five years. First is the rise
of the used-car superstores, which are well-financed. CarMax's parent,
Circuit City, is publicly held, for example, so it has access to global
capital markets. These stores will take used-car market share from
local dealers while also cannibalizing some of their new-car sales
and further depressing new-car margins. The second major factor, Rikess
said, is the rise of the Internet and other advanced information technologies.
Twin Cities area auto dealers are experimenting with the Internet
through a used-car database called AutoBase. Computer users can shop
the World Wide Web for used cars advertised there by participating
dealers. The search engine allows users to shop by make and model
as well as by price and mileage. Because of the Internet's great reach,
dealers using the Web sites will capture incremental sales from a
larger market "footprint" than is possible with conventional print
or broadcast advertising, Rikess said. The superstores, meanwhile,
were created with high technology in mind. Ligon said the first employee
hired at Circuit City to develop what has become CarMax was not a
salesperson or a mechanic but an information systems expert. At CarMax,
customers don't walk the lot. Instead, they use touch-screen computer
kiosks sprinkled about in the showroom to shop an electronic catalog
of the lot's inventory. When they spot a car they want to see, a salesperson
fetches it for them or directs them to it. Employees use bar code
stickers on the cars to update the database and track sales information
- just like grocery stores. Of course, customers have to come to the
store to use the CarMax computers. "The Internet is a great information
tool, but not a great closing tool," Ligon said. "It is quite possible
to put all that [information] on the Internet. But we have chosen
not to promote long-distance buying." At CarMax, computers also speed
the sales process from shopping to qualifying the customer for a loan
to conducting credit checks. "Technology is used as an enabler, but
not as a substitute for the salesperson," Ligon said. "But it is only
by using information technology that you can take the long, slow steps
out of the process." `Silent salesperson' These stores get so busy
that the sales staff can't take care of everybody, Rikess said. So
the kiosks become sort of a "silent salesperson." The computers also
track hits on different types of cars and collate the information,
so CarMax inventory buyers have a better idea what cars to keep in
stock. Bottom line? The computer kiosk is replacing the checkered
sport coat as the most colorful attention grabber in the showroom
- besides the cars themselves. "The surviving dealers of the future
will use information intelligently," said Bob Fitzharris, an analyst
with J.D Power. "Those that don't won't survive." Yet despite the
hoopla, not everyone is convinced that the end of the franchised dealer
is at hand. "If bigger means better, then they will do all right,"
said Paul from his Apple Valley Olds dealership. "I am not sure it
is." Paul said he thinks how dealers handle customers - not just how
they handle information - is the real key to success. "I think people
are just begging for good one-on-one treatment," he said. The category
killers A new breed of retailer is trying to bring wide selection,
friendly service and rock-bottom prices to the sale of used cars.
Although about a dozen superstores have opened around the country
- most in the south and east - more than 30 are planned CarMax Richmond,
Va. Stores: 4 open, 7 announced. Background: This wholly-owned subsidiary
of publicly held Circuit City Stores Inc. is counting on success in
the car business to keep Circuit City's growth curve rising. Began
in Richmond n 1993 and decided to go national in late 1995. Keys to
the CarMax high-volume strategy are sophisticated information management
and no-haggle sales philosophy. Norcross, Ga. stores recently awarded
Chrysler-Plymouth-Jeep-Eagle new car dealership. Driver's Mart Grand
Rapids, Mich. Stores: 7 planned to open this year. Background: Owned
by nine of the nation's most profitable dealers who have combined
sales of more than $3 billion at more than 100 dealerships. The concept
blends Saturn's no-haggle strategy with WalMart's high-volume, low-margin
formula said John Bergstrom, a Wisconsin dealer and a Drivers Mart
investor. United Auto Group New York City Stores: 2 stores, one in
Jersey City, N.J., the other in West Little Rock, Ark. Up to 10 planned.
Background: This partnership of 41 dealers operates large stores in
the traditional way: sales people negotiate on price. Unhappy customers
can exchange cars within two weeks. Car America Madison and Neenah,
Wis. Stores: 2 open Background: New car dealers Jon Lancaster and
John Bergstrom have opened a high-tech superstore by moving all used
car inventory from Lancaster's four dealerships to the Car America
site. Heart of the super car concept is touch-screen kiosk from which
customers can view the cars in stock. Car Choice Bloomfield Hills.,
Mich. Stores: 1 open, 8 planned for 1996 Background: Back by Detroit-area
investors, this group beat legal challenges from other area dealers
before opening its first store in suburban Detroit. Hopes to sell
used and new cars. AutoNation USA Fort Lauderdale, Fla. Stores: Four
planned for 1996, none open. Background: Private investors including
Wayne Huizenga, co-founder of Blockbuster Video, and James Moran of
Southeast Toyota Distributors. Moran's JM Family Enterprises is one
of the nation's largest auto retailing families. Source: Automotive
News Dealers find that sellinhg new cars isn't as profitable as it
once was... U.S. dealer profits by department.
1985 1995
New vehicles 78.5%
6.3%
Used vehicles 7.0 47.8
Service and parts 14.5 45.9
and fewer dealers can make a go of it
Number of
new car dealerships#
1985 24,725
1986 24,825
1987 25,150
1988 25,025
1989 25,000
1990 24,825
1991 24,200 .
1992 23,500
1993 22,950
1994 22,850
1995 22,800
Beginning
of the year Source:
NADA Industry Analysis Division
