Car Dealers Ready for Overhaul

RICHMOND, Va. —  To Evelyn Burgard, buying a car was about as much fun as going to the dentist.

So imagine her surprise when, after visiting four dealerships and enduring their pushy, fast-talking salesmen, she came upon CarMax--a high-tech retailer that calls itself “the auto superstore.”

What she found was a friendlier way to buy a car. She barely dealt with a salesman. She used a computer to pick out a ’94 Mercedes-Benz from a selection of nearly every make of car. She traded in her old Toyota, got financing and insurance--on the spot.

“I was out of there in an hour,” said Burgard, a 49-year-old former teacher who runs her own business. “It was just pain-free.”

Welcome to ground zero in an upheaval that promises to civilize and modernize the cumbersome process of buying cars and trucks.

The auto dealership is a lasting, but tarnished, symbol of Main Street, U.S.A. And as dealers meet in Las Vegas this week for their 79th annual convention, they are under siege as never before. Consumers--and even some dealers and manufacturers themselves--increasingly see the old selling network as a relic long overdue for overhaul.

“There is going to be an auto retailing revolution,” said Robert Eaton, Chrysler Corp. chairman and chief executive officer. “The business is going to change drastically. We just don’t know exactly how yet.”

In response to foreign competition in the 1980s, the U.S. auto industry painfully restructured its manufacturing, product development and supply operations. Now manufacturers are turning their attention--belatedly--to the way they sell the cars.

Already, the auto landscape has far fewer, but much larger, dealerships. The traditional local owner and pillar of the community is giving way to the big operator who owns dozens of dealerships across the country. Under prodding from Detroit, dealers have been experimenting: the no-haggle price, the low-pressure sales force. Salespeople are going to charm school.

Now, a different breed of megadealer is arriving on the scene. Schooled in retailing rather than autos, they are open to new ways of selling cars. Some are publicly owned and are expanding nationwide. Eventually they could rival auto makers in financial clout.

Ultimately, what could emerge are Wal-Mart-like vehicle super-centers where all the new makes and models--Fords, Hondas, Chevys--are displayed next to each other like TVs at an electronics outlet. Consumers will find showrooms to be high-tech showcases where buying will arguably be easier, faster and more pleasant.

That would be a sharp contrast to an entrenched system that has made car-buying an ordeal for many. “People detest the old process,” admitted Jim DeWolfe, co-owner of Midpark Jeep Eagle in suburban Dallas.

Not only does the traditional approach alienate customers, but auto experts say that inefficient sales, marketing and distribution systems account for up to 30% of a vehicle’s price--a fat target for cost-cutters as manufacturers struggle to keep the cost of buying a new car from spiraling completely out of control.

“The race is on to create a lean distribution system,” said Donald Keithley, a partner with J.D. Power and Associates.

Outside the cloistered auto sales network, general retailing has been radically transformed. It moved from the dominance of sole proprietorships in the 1920s to department stores in the 1950s to specialty, discount and superstore outlets today. But auto retailing, protected by strong state franchise laws, resisted these trends.

Tracing Roots

Dealers trace their roots to independent businesses that sold buggies and wagons at the turn of the century. When autos arrived, manufacturers used these same networks for distribution. This allowed them to control how vehicles were sold without expending huge sums for retail networks.

In the post-World War II boom, Detroit dazzled buyers with big cars with showy fins. Dealers promoted a “blow-and-glow” style--generating excitement in a circus atmosphere replete with balloons, disc jockeys and canned-ham giveaways. The metal moved fast: Volume was king, not the customer.

But salesmen’s high-pressure tactics earned them a reputation as obnoxious hucksters. The ugly caricature persists of the “full Cleveland” salesman decked out in a plaid sports coat, white shoes and sunglasses, greeting women as “honey” and making undecipherable, take-it-or-leave-it offers.

The stereotype pervades the culture: The fact that Seattle Seahawks owner Ken Behring is a former used-car dealer is cited by some as reason not to trust his plan to move the football team to Southern California.

Today, auto salespeople are being trained by the firms that train employees at Disneyland. They are taught to be helpful and not confrontational. They are called “consultants” and dress casually. Still, surveys show that car salesmen are about as popular as the IRS.

Meanwhile, dealership ranks have been shrinking for decades, reflecting higher operating costs and intense competition. Today, there are about 22,400 dealerships--25% fewer than in 1970. Most are still owned by individuals.

The consolidation is accelerating as U.S. auto makers seek to close those with poor locations, financial performances and customer satisfaction ratings. General Motors plans to reduce its 8,500 U.S. dealerships by 20% to 30% in the next few years.

“There is nothing they would like more than to eliminate the middleman so they can sell directly to the consumers,” complained Mike Constopoulous, who owns Chevrolet, Oldsmobile and GMC Truck franchises in Chicago.

The auto makers say they are not out to dismantle the dealer networks but to make them more efficient. “Obviously, the closer we can get the consumer to our assembly plant, the lower his cost will be,” said Tom Pappert, Chrysler’s vice president of sales.

Auto Makers Blamed

It is little wonder that dealers are not a happy lot. Many complain that the auto makers have squeezed their profit margins by requiring them to pay a greater share of warranty, training and other costs.

“For many dealers, it’s no longer a fun business,” said Jon Peterson, a GM dealer in Bloomington, Minn., and incoming president of the National Automotive Dealers Assn.

Soaring car prices, consumer discontent with the buying process and the system’s inefficiencies have combined to attract deep-pocket outsiders who have streamlined other businesses and are looking for areas for growth.

So it is with Richmond-based Circuit City, which has 375 super-stores nationwide. With its core business of selling electronics and appliances maturing, it saw new opportunity in used cars.

Here was a $300-billion-a-year business--the figure doubles to $600 billion if the new car business is added--with no dominant players, a good supply, growing demand and lousy management. Circuit City figured it could improve the process with its expertise in high-volume, low-margin businesses.

In October 1993, Circuit City opened its first CarMax superstore in Richmond. It has since opened an outlet in Charlotte, N.C., and two in Atlanta.

CarMax has borrowed ideas from others, most notably Saturn Corp., GM’s highly touted small-car division. Since 1990, when it was launched as an all-new enterprise with handpicked dealers, Saturn has won plaudits for its low-pressure sales atmosphere, including a no-haggle pricing policy.

While established dealers have found it difficult to adopt the popular Saturn style, CarMax’s fresh start has enabled it to take the concept further. Most notably, it offers customers a state-of-the-art, touch-screen computer system that allows them to search its huge inventory by price, make and other parameters, allowing them to compare brands side by side.

Just as important, it offers a large selection--500 to 1,000 vehicles, or up to 10 times the number carried by other dealers.

“This is what consumers want in the buying process,” said W. Austin Ligon, CarMax president.

CarMax does not negotiate price. It mostly carries vehicles less than 5 years old with fewer than 70,000 miles. All cars are inspected and given a 30-day warranty. Buyers also can obtain financing and insurance quickly.

One analyst estimates the Richmond store sold 4,000 vehicles the first year--compared to an industry average of 660 per dealer. And in independent surveys, CarMax gets remarkably high customer satisfaction ratings.

Jake Whitlow, an 18-year-old college student, bought a 1992 Honda Accord for $11,500 at CarMax. He raves about the large selection and relaxed sales environment.

Shifting to New Cars

Now, CarMax wants to try new cars. In December, Chrysler granted a new-car franchise to CarMax for its Norcross, Ga., store outside Atlanta. It is the first dealership awarded by a major U.S. auto maker to a giant, publicly owned retailer.

One of the most talked-about new superstore entrants, because of its ambitious plans and the track record of its wealthy principals, is AutoNation USA. It soon will open stores in Florida and Texas and is looking for possible expansion into the nation’s 25 top metro areas.

AutoNation’s chief backers are two wealthy entrepreneurs: H. Wayne Huizenga, the Florida pro-sports magnate who built Blockbuster Entertainment, and Jim Moran, the nation’s largest Toyota distributor. Forbes magazine estimates each man is worth more than $800 million.

None of the used-car superstore chains have yet ventured into California. This is blamed largely on the high cost of real estate, the state’s proliferation of huge auto malls that provide a broad selection to consumers and the financial clout of dealers.

Driver’s Mart, however, will be opening an outlet in Los Angeles to be operated by Bert Boeckmann, owner of Galpin Ford in Los Angeles, the nation’s No. 1 retail dealership by volume.

“California is a tough and competitive market,” Boeckmann said. “There are probably places of greater opportunity, given the cost of entry here.”

There is other new blood as well. In the last two years, investment bankers and venture capitalists have been buying up traditional dealership chains, putting together even larger chains with the efficiencies and consumer-services bent of Wal-Mart.

Eventually these national and regional powerhouses plan to go public, tapping Wall Street for the capital necessary to fund expansion, training and the upgrading of staff and facilities.

One is United Auto Group Inc., a New York company headed by Carl Spielvogel, former chief of the Bates Worldwide advertising agency. United Auto has quickly become one of the nation’s largest dealership operators. It now owns 41 dealerships and has annual revenues of more than $1 billion.

United Auto’s backers include the likes of Marshall Cogan, a financier who owns New York’s “21” Club; Harvard University’s investment arm; Apollo Advisers, a limited partnership whose principals include buyout expert Leon Black, and investment banker J.P. Morgan & Co.

Competitors of this caliber can raise funds that smaller dealers can’t. They also can lower operating costs through economies of scale, such as buying ads in bulk.

These megadealer groups also expect to gain greater sway with manufacturers, winning better access to both new and used vehicles. This worries individual dealers, who fear they will be underpriced, and auto makers, who fear they will lose control over how their vehicles are marketed.

Yet to Be Tested

Dealers and auto executives--many of whom have survived hard times in the 1980s--argue that the new entrants have yet to be tested in an economic downturn. They also say consumers may find the superstores are impersonal and do not necessarily have lower prices, the best used cars or a lock on the latest technology.

But change is inevitable, and experiments are wide-ranging.

Michigan Lincoln dealer Joe Falzon sets up appointments to show cars at some customers’ homes or businesses. He says about 15% of his cars are sold this way. Last week, Saab announced a similar program.

Some foreign auto makers are exploring new distribution channels. Rather than build a dealer network in England, South Korea’s Daewoo is selling cars directly to consumers through existing bicycle shops. This model could be adopted when Daewoo enters the U.S. market in a few years.

Auto-by-Tel, a Newport Beach auto information service, has lined up a nationwide network of dealers willing to quote prices and sell cars on the Internet. Dealers have fielded 50,000 requests in nine months, completing a sale 70% of the time, said Peter Ellis, Auto-by-Tel president and a former dealer in Orange County.

Said Ellis: “We are learning there is a tremendous market waiting for a more efficient way to buy a car.”