Q: Jon, how did you end up in the car business?
Jon: I went to the University of Northern Iowa on a football scholarship and was injured-that ended my career. Fortunately, I had figured the academic model out, and I had a friend in college who was selling cars. Since I was a business major, I figured that if he can do it so can I; so I started selling cars while I was in college and sold cars for 2 1/2 years until I graduated in 1971. I got my first dealership, C&L Pontiac Buick GMC, with a partner in Ft. Dodge, Iowa in October of 1971.
Q: So you sold cars part time in school?
Jon: Yes, I went in at 1:00 after morning classes and worked until 9:00 every night and all day Saturday. It was full time. I worked at two different dealerships, graduated college and became a dealer at the age of 22. I sold out to my partner in December of 1974, and he is still there.
Q: Why did you sellout to your partner after 3 years?
Jon: I had amassed what I considered to be a fortune at the time and I wanted to get a Metro point for a Chevrolet store. Remember, in 1975 Chevrolet had huge market penetration. I had never been to Madison, Wisconsin, I was born and raised in Iowa. But, there was a small dealer in Sun Prairie Wisconsin, who was designated to be the second Metro point in Madison, so I decided to buy him out. Chevrolet gave me a year to build in what they approved for a Metro location so I came here, it was a cornfield at the time, and built the Chevrolet store. I moved in November of 1976, added the Toyota store in 1979, Nissan in '83 and Lexus in '91.
Q: Jon, I first became aware of you and your story at the Automotive News World Congress a couple of years ago. You seem to see the business of running a car dealership differently than most. You break it down into processes. Tell me how you view a dealership's business.
Jon: I think what I probably saw first was process. I realized that you had to get a process in place to be able to manage. I looked at it hard, did a lot of reading and tried to understand what drove process. If a system is breaking down somewhere then you've got to determine where it breaks down. I'm not so sure any of us can really get a handle on that with a manual process. And that's really where I started to say, "wait a minute, there's got to be way to get a consistent process in place in the automobile business". Now, for example, let's look at CSI. It's a CSI measurement to say are we winning or losing. It helps you identify the things you're doing very well or very poorly. However, I'm not sure that the questions we're asking on CSI are correct today, I think some of them are very, very, self-serving. I don't know that we are measuring the right things.
Q: It's a scorecard; it's not a game plan.
Jon: Correct. It's a scorecard. But again, I'm not sure we're asking the right questions. I believe the real scorecard is how well you do things with customers. Are we retaining customers, are we keeping them throughout their buying circle? There can be a lot of reasons why we don't; maybe we have done a great job with that customer selling a car but the prices we offer in service aren't what they expected. I think retaining customers certainly tells you how well you're doing. But, we really don't determine that with CSI, do we? I think there are a lot of other drivers that we have to start to look at that are more important than just a high CSI score. I think we have to look at the fundamentals and ask ourselves what are the true indicators of succeeding with customers. With the changing attitudes of customers, are the measurements changing enough to really understand what it's going to take? I don't think we have moved that measurement scale. I mean, God knows, all of our manufacturers continue to evaluate how they do CSI. It is my belief that every process has to be driven correctly so, just as I question our CSI process, I started to ask how do other industries drive process, how do they monitor process, and how can we start to apply that to the car business. That is a huge task, particularly when you look at the legacy systems that we have in place from a computer standpoint. Our systems are in a transactional data base rather than a relational data base so until we can make some relational data bases, we are faced with some rather large handicaps in areas like data mining and things that other industries do to track their customers.
Q: So what's it going to take for that to happen?
Jon: Well, I think we are just at the beginning of that process. It's going to take some fairly bold initiatives by manufacturers. I don't think all of them will do it but some will-they are going to look at their processes and if they don't like the results-then they will look deeper. We, as an industry, have to look at our reward mechanisms, for employees, for customers, and for ourselves, and let's look at how we can change our business design. What can we correct? I think there will be multiple business models that come out of this and I think it means, that we, as dealers, are going to have to become flexible in the way that we look at the future. The business design we are in today is 70 years old. We really have not modified that business design in more than 70 years. Now we are confronted with an information explosion that we have to embrace or we are going to have real problems. And that's really the quagmire that we're caught in today. All dealers are caught in it. I have lots of friends who say "Jon, you're going around telling everybody the world is going to change, but I'm doing fine just the way I am." I don't believe that isolationism will work any better than it did in World War I for the United States. I think that sooner or later it's going to change for all of us, and there are a lot of reasons. We've got a very fat distribution system and I don't think that any manufacturer can leave that distribution system as bad as it is and expect it can work long term. We've squeezed the costs out of manufacturing over the past decade, so if we look at all the components of the automotive cycle, distribution or sales is the segment that's at the bottom. We are beginning to re-think distribution.
Q: When you were saying "we" earlier, of course, you were referring to manufacturers and dealers. But outside of waiting to see what the manufacturers come up with, what can an individual dealer do?
Jon: I have done some things right and some things wrong. We developed The Car America System, which is really a process driven technology selling system. I think we have developed some very good processes. But, developing those processes and being able to implement those processes are two different things. Probably the biggest challenge for us has been to share that vision on a limited budget. There are a lot of things we did not have the budget to do, like skill set assessment. It's expensive, 6,7, or $800,000 cost to do a full skill set assessment. Quite honestly, I don't have the budget to do that. Currently we are re-writing a report generator that is going to allow us to do a lot better job with customer data. But it took us three releases of the system to really get it to do what we want. I know of a company called Sapient that has a process they call RIP. It is actually a quad process; a system they use to implement change and change management. Now when I look at the methodology they have, I see that, yes, you can ride change, but it involves a lot bigger budget than one dealer can afford. So I think there is only a certain level that a dealership can go on its own because it is not cost effective. Very few dealers have enough stores to spread the cost. And you have still got to deal with all the management change issues. Somewhere we are going to have to get away from being a day to day transactional industry, to a long-term thinking industry. We are now still transaction-based. How many cars did you sell today, how many cars you going to sell tomorrow, how many cars do I have coming in? Let me give you a simple example I find very interesting. What do we always talk about in distribution?
Q: We talk about "turn and earn".
Jon: Well from a dealer perspective, all "turn and earn" does is get you more product. What is the missing component? It is, of course, "earn". There is formula that's been used in department stores for years. It is called gross margin return on inventory. It was developed to take floor space in a department store and say, "there is a formula we can apply to all of the different products we sell, and be able to come up with an index that allows us to determine how much floor space we should give to these products, and be able to drive the highest return". Well, if you look at the car business, and we say ok, we've got a 60 day turn in our used car business, so if we are adhering to that, we are going to get six turns a year, minimum, aren't we? Now, we all know that 23 days and under is your most profitable period of time to sell a used car, but we allow ourselves to keep our inventory for 60 days. So you're getting roughly six turns a year and you've got say, a 10% margin. It becomes very interesting when you realize the average selling price of a used car in the U.S. is $12,700. Now 10% gross profit is about $1,200. So that means you've got $11,500 in the car, you've got a $1,200 margin. Now we take this $1,200 margin and divide it by $11,500 and it says I've got a 10.43% return on investment. If I take this 10.43% multiply it by six turns, it gives me 62.58 gross margin return on inventory for the year. Now, if I can make this nine inventory turns; times that same 10.43 I've now driven somewhere in the nineties haven't I? Unfortunatley, our goal is 125, 125 is the magic number we should be getting for our investment. Now let me share another really interesting point. If you sell a car for $20,000, and you still want to make the same 1,200 bucks. What did it just do to your margin?
Q: It went way down.
Jon: Now let's talk about the new car side of our business. With this same gross margin return on inventory. What's the average selling price of a new car? Say we sell a new car for $18,000 and we're making 1,100 bucks on the car. Divided by 18,000 you've got a margin of 6.11%. About 90 days in stock, if you're lucky, on average, for a new car, isn't it? So take 6.11% times 4 turns and get a 25 GMROI. We've put interest assistance programs on the car so that we don't really look at how fast we are turning the car and what our margin is. No, we put interest assistance in as a journal entry every month. Don't get me wrong, I need to have interest assistance to be profitable so I don't give it away, but it's allowed me to mask this poor return on inventory. So when we talk about the fat in our distribution system, look at what happens. Now let me give you another example. Margin on parts is 30%. How many inventory returns do you do a year in parts? You better get 7 or 8. Why are we getting such a good number out of parts? It's real simple. We've automated our re-order process, we look at non-tracking parts, we look at all those pieces, we have re-entries, re-order points. We've automated the parts business so we've got more processes for dealing with our investment than we do with the used car lot or the new car lot. Because we've applied process to it and, actually automated it, we are getting our best return in the dealership from our parts department in terms of gross margin return on inventory. More than we get in any other department.
Q: Your 30% margin also is affecting that as well.
Jon: Exactly, the 30% is helping as well. You have a good margin here and you're getting good inventory turn. And this 30% may be a little high because actually a real rule of thumb is actually 27 - 28% on your repair orders. Now, what do we do in the wholesale world? In wholesale you might get as high as 32% also can get as low as 16%, I've seen as low as 10%. Now you start beating each other up, trying to steal each other's business. Here, because we are selling it to our customers in repairs in our service department, in general the way our accounting processes are set up, we keep our margins up. We might kill our labor but we keep our margin in place on parts, don't we? What am I trying to say by all this? What I'm saying is if we need an indicator, gross margin return on inventory appears to me to be a very good indicator. I do well in parts, I do better in used cars than I do in new cars, what about my service department? Well, one turn is going to be is going to be a 40 hour week, right? I better run two shifts then if I'm going to get two turns. It is pretty hard to get two turns. Now we get a better margin; a 65% margin in our service operations, one turn at 65. If you could get two turns for 130 it would hit our index (125). But in our present business model we have difficulty getting the people to work the second shift, so we end up building a larger service department to accomodate a single shift .
Q: But bricks and sticks costs a lot of money and it sits idle most of the time.
Jon: And now we've got the mass merchandisers coming in seven days a week, with extended hours we're losing that business to people who have a more flexible business design than we have in the service side. They aren't tied to the old way of doing business. They focus on the low tech, high margin jobs. They think like retailers, they use GMROI. We've lost a lot of the service business to after-market companies who are much more flexible in business design. I think Midas specializes in one or two areas. We don't do that. We are everything to everyone. Can I drive a better margin when I'm just focusing on brakes, struts, and exhaust? Can I get two inventory turns if I am open seven days a week? Yes I can! My margins are going to be greater, all of a sudden here I am driving a big gross margin of return on investment because I am specializing in this. We as dealers, are trying to run seven or eight independent businesses all under one roof. We are not focusing on any of them particularly well and we are getting all these other people chipping away at each one. So this is why I see this distribution change.
Q: What about process in F & I?
Jon: The biggest source of CSI problems is of course the F & I process. We all know that. Is it any wonder? You've got A,B,C,D; four tiers of credit. The customer asks "what is my payment gonna be" and we say "I don't know". " Well why don't you know? You're suppose to be able tell me". "Well, I don't know what your credit is like". "Well how long is it gonna take?" "Well, I don't know, it depends on how busy the banks are." So you send the guy out on the road and he has no idea what his payment is going to be. I'm not comfortable with this scenario. With today's technology, why can't we solve the credit turn around problem? There are barriers because while we are earning business, our finance companies are saying no, no, no. You are captive to me I am going to force you to give me all the business and I don't really care what happens to your customer. So we started to look at a lot of the barriers and ask how can we fix them. Can Jon Lancaster fix all those barriers by himself? The answer is no I can't. I can alert people to the problem, we can get it to a discussion stage, and we can try to get the pieces put together to fix it. Then, we can go forward and take better care of our customers, drive our CSI better.
Q: You said it's difficult if not impossible for a single dealer to single-handedly modify and implement processes to improve the retail automobile business. So how can it ever change?
Jon: I believe it's going to take some sort of association getting involved. Dealers don't realize that in a lot of countries, dealers will get together through an association.
Q: Like the associations of same-make dealers in Brazil?
Jon: They do it in Brazil. I had the same situation in Canada, with a Canadian Tire store. A Canadian Tire Store is kind of like a Pep Boys. We're talking about all this and one guy says "what is so big about GMROI, we use that all the time". Our association got together and we wrote a whole GMROI type program so that I can go to my computer and pull up a comparison of 5 Canadian tire stores, take an item number, plug it in, ask where is it on the shelf, what's their GMROI, what are they doing with the margin on their return. I can do a comparison on parts and ask, "how am I stacking up and what should I be doing differently"? Their association put this together and that's how they better learn how to serve the customer and make better margins. Today, you can't get 12 car dealers in a room and have them agree on where to go to lunch.
Q: Jon, you seem to have a plan for putting the automobile business into processes. Why haven't you sold to Republic and gone to work for them?
Jon: I don't know. I think Republic has only bought one store in the Midwest-in Chicago. I don't think they're looking in this geographic area.
Q: They buy stores but they need the brain power too.
Jon: I don't know, I can't answer that question. I know some of their people. And I also know a lot of things we are doing are painful. There is a lot of pain to go with all this change. But a lot of this stuff we have really works. The laboratory is right here and when it doesn't work, guess whose got to roll his sleeves up, get in the thick of it and see what's wrong? It's me. What do we have to change and why are we not coming together. I'm not isolated from it. I'm not holding anything back. Car America is my used car operation and it is working and believe me, there are times it hasn't worked. I had to go in there sometimes and say "Oh God what have we done"? Let me give you another example. You've seen the hand held appraisal device that we built. I can take that hand held appraisal device and show you how it works. It's a radio-controlled device that fills out the book value. We'll walk around the car and show what it cost to re-condition the car, based on our cost of repairs, etc. It will tell me the numbers on the last five or ten cars just like it, depending on what is in our data base, what we sold them for and what our GMROI was. Now what would happen if I were Republic Industries and for every used car that came through the door I had an immediate data appraisal. What if somebody data mining the appraisals where you could take into account the regional differences, move those cars around and come up with the real value of what those cars are worth in the market today and validate it by going to the auction? All the tools are there. Why haven't the big groups come up with a consistent way to appraise a car? I don't know. And guess what else? I put the VIN code in because its unique to the vehicle. It is a relational data base and if it went to one of my other stores it would tell me that I've already appraised the vehicle elsewhere. Now would that be a great process if I were a chain dealer?
Q: Is it refined to the point it should be?
Jon: No, but the pieces are all there. Do I have the time to work on it? Not to the extent that I should. If I had more resources like a big group I could drive that thing to where it should be. At Car America, we've taken the components and scaled them down and get people comfortable with a piece at a time. I would not recommend to do everything we have done all at once; it is just too big to bite off in one shot. Do I have all the answers? No. Have I learned from the mistakes we made? Yes. Could I change it? Yes I could.
Q: What is it that keeps dealers from changing? Is it because they are making good money today and they just hope things stay the same?
Jon: I think they are going to have to change. I think it's going to happen over time. I don't know how many dealers are going to step up and say "I want to change the way I do business". It is a major undertaking. So it all comes down to how open to change the dealers are and how the change processes are introduced.
Q: Jon, it must be excruciating to have your knowledge and vision but, as one dealer, be unable to implement and perfect your processes.
Jon: It's difficult to be a visionary at heart and run a dealership at the same time. Talk about contrast. All those nights I have laid there staring at the ceiling, I analyze and ask, "why did I do this?" Why did I get in the middle of all this? The answer is because I am impatient. A visionary is always looking for the next best way to solve his problems.
Q: Or an industry's problems?
Jon: Yes, I suppose so.