Investing: Automotive Retail Industry

In a time where more automotive retail dealerships have changed hands in the last decade than ever before, we are amidst a divergent business model for majority of these stores.

The new model coins the phrase “lean management”. This is a loose take on the Toyota theory and is a commonly mistaken ideology adopted from the lean six sigma theory. The dealers’ term for the phrase and what it stands for are contradictory to what it means.

Smaller stores once owned by families are selling to larger auto groups who can provide more cash flow and financially leverage better interest rates on floor plans, benefits for employees and vendor pricing. This leaves single owners of one to two stores at a slight disadvantage. When you have an auto group, you can make up for losses with better performing stores. Thing is, you don’t have to have underperforming stores. Period.

Some of these smaller dealers are starting to buy more stores to build an auto group. They look for underperforming stores with little to no blue-sky value, ultimately buying on book value with a five-year return investment in mind.

The downside of this. They are buying underperforming stores and hoping they can push enough advertising and marketing dollars into selling cars. When you buy something underperforming, you must analyze beyond low sales volume of why. You need to look at why customers were not coming to that store and totally change it. Just a name doesn’t do it. I can think of a few things and places that if they changed their name, I still wouldn’t care.

Some of these dealers watched too many “business rescue” shows and think they can flip a store. Doesn’t always work out that way. It’s not about putting lipstick on a pig and then passing it off.

Their investment into the real estate and infrastructure is minimal and more into getting the name out for an instant impact. Focus is based on getting as many cars on the lot that a factory will allocate you and a floor plan will allow with the lowest interest rate. Floor plan fees can eat a dealer alive if you don’t sell cars or have the wrong breadth of inventory.

This seems to be the standard investment ideology of most I have worked for and consulted with. These smaller auto groups lack the talent, infrastructure, and organization to build to keep up with the competition. This ideology can work in terms of real estate but not in organization and staff.

Keeping up to date is real estate simple, but it needs to be of this decade, inviting and clean. I have seen stores run out of old department stores and much worse. Some dealers see investing in their infrastructure as wasted dollars and a non-essential expense. I am positive these same dealers don’t buy their groceries from a run-down supermarket.  I just can’t understand why “investment” is not in their vocabulary.

They turn their heads to putting money in their property, people and blast away money by the tons into attempting to move metal.  Makes sense with floor plan fees. Right?

Service and parts are left with the same antiquated technology and equipment that the previous ownership never upgraded. Focus will go into the showroom and front end, but where most people visit in a dealership and spend most of their time is in the back.  Therefore, they set themselves up for failure for customer retention by selling them a car in the new updated showroom, then send them to the dungeon for the maintenance and service of their vehicle. Service being your most profitable department. Explain the thought process in this?

Organizational structure of majority of the smaller dealers is devoid of the safety net of what larger companies have. That is a structured organization. No definite human resources in place, employees wearing more hats than needed that can cause legal issues and lack overall talent due to their “lean” ideology they have adopted. Accounting is run by a someone they found with a CPA and some hourly workers that hate their job and make it known. The sales department is a revolving door costing the dealer thousands monthly in numerous expenses to hire, onboard and train constantly.

Employee retention is dismal as training is a crash course in survival of the fittest. Management tends to be insecure as they are in their position due to low compensation and they lasted a year in the dealership Hunger Games. They don’t know how to train and coach or just plain refuse to as it might cost them their job if someone knows more than them. I have been seen dealers who have “trusted” individuals handle their operations. These individuals were salespeople who ended up desk managers then into the role of overseeing a dealer’s total operations. That’s scary considering they climbed their way up non-ethically.

Ladies and gentlemen, this is most dealership environments. Not all, but most. These are the cultures that give way to the mainstream stereotypes of dealerships and its employees. Professionals who are different are still looked at as this type of person. Period. As a professional, you can’t shake the dirty perception of the industry. It hurts.

Bottom line to running a successful dealership and auto group, you must have leadership, structure and values. Their needs to be a paradigm shift in philosophy on ownership. Having a dealership staff that consist of professionals in all aspects are golden and only bring profit. The leaders you acquire, have or train are the most valuable assets to your organization. They further your value and profits by properly training and guiding your staff in their career paths. I can tell you how to do all this and even make it happen…but I would have to charge you.

If you want to venture into dealership ownership and invest in doing such, I will be your managing partner. It is a profitable business. Understanding what the future holds and how to capitalize on that is my specialty. I only know this as I have learned from seeing failure after failure but also seeing success and what works. The most successful small auto group I personally know have a handful of Ford stores and a VW store. Very profitable group.

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