This is not your kinder, gentler Saturn style "one price." This is not your uncle Ross's idea of "no haggle." This is market-driven take-no-prisoners, in-your-face, dare-you-to-compete, match-this-at-your-own-risk one price, no haggle. Of course I'm referring to AutoNation's "Mile High" initiative in Denver.
Republic's seventeen Denver area stores have been single-branded John Elway-AutoNation USA. It has been rumored that Republic shrewdly arranged the Bronco's Super Bowl victory to help launch their "men in plaid" marketing blitz. Ron Zarella should be jealous. They want to capture "customers for life," offer money-back, no-questions-asked guarantees, and other innovative customer perks.
My friend Jim Ziegler predicted in the January edition of this esteemed publication that one-price will fail and Republic will implode altogether. He may be right if Republic sticks to the industry's conventional business plan. However, that is not their intention. They ain't going to follow the established rules. While others are focused on refining the steam engine, Republic is hard at work inventing the diesel locomotive. Republic is alone in attempting to truly revolutionize the business.
Their strategy makes sense. If they chose to follow the established model there is a good chance that Republic would not gain a whole lot of competitive advantages over traditional dealers and, more importantly, would not add shareholder value. It's like Mark McGwire trying to hit more singles. He probably could shorten up on the bat, cut down his swing, and maybe hit a respectable .300. His greatness, though (and why he makes the big bucks), is in using his awesome power to hit 70 home runs. Republic, if it is to succeed, needs to play to its strengths, too. The consolidator must do more than just aggregate stores. It must use its scale and muscle to change the traditional distribution system down to its core.
The problem that all consolidators face is the need to add value to their acquisitions. In the early stages it's easy to make acquisitions and meet Wall Street's expectation of 20% growth. But as mass is accumulated, it takes more and bigger deals to keep the pace. Inevitably, that can't be sustained and earnings growth slows, resulting in precipitous declines in stock price. The answer is to find the formula to grow internally.
Of course there is nothing revolutionary about giving cars away or grabbing market share by cannibalizing other dealers' customers. The trick is to make money while doing it. Republic proposes to do it by not only recasting the model for retailing and servicing cars and trucks, but also by simultaneously becoming the low-cost provider. I haven't had a peek at their playbook but I can speculate on what's in there.
First let's look at what their sales strategy will probably be like. It starts with corporate branding first in Denver and then nationally. They have and will continue to poor millions into very slick and high-production-value advertising that attacks the public's perception of the Neanderthal car salesman. No girls in bikinis and colorful balloons here. Republic wants to convince the customer that the best value equation and buying experience will be found at AutoNation.
It appears that Republic is willing to sacrifice high gross margin per vehicle in order to drive, if you will excuse the pun, many more transactions. The idea is more overall gross per store, not per new and used car sold. This, in a nutshell, is big box retailing. The more cars sold the better the opportunity to make back end profits in F&I and parts and service. It should also feed their appetite for used cars.
"One-price" is actually a market-determined floating price, which is adjusted periodically depending on the response of the competition and demand for specific models. Competition will be closely monitored through both conventional and technological means. It's akin to sophisticated espionage. I don't know if they use U2 spy planes to count and evaluate other dealers' sales and inventory, but don't be surprised at anything.
The Internet consumer will play a significant role in Republic's plans. Since every customer gets the same price, the source of the transaction doesn't make a difference. For those so disposed, the vehicle could be ordered and financed through the interactive web page. Delivery could be arranged either at the showroom or delivered directly to the consumer. I'm sure our friends at AutoByTel would agree that this could potentially be the lowest cost way to sell cars.
To become the low-cost provider and to manage a far-flung empire efficiently, procedures must become standardized. Corporate processes will be emphasized over personality-driven entrepreneurship. Imagine trying to rationalize a chain of over 50 geographically dispersed dealerships where each one is run by the style and peccadilloes of a different leader, where each sale is an ad hoc independently negotiated transaction. If there are any synergies in size they will not be found that way. Uniformly applied operational processes will be employed using training and technology to structure and control activities. For example, instead of highly compensated F&I managers, computers will offer customers a menu of financing options all centrally devised and controlled.
With the volume-driven, technologically oriented "one-price" sales strategy, the highly compensated traditional car salesperson will either be replaced or required to sell many more cars. Ultimately, the sales floor could be dominated by recent college grads who appreciate that this is their entry to a bigger job in the corporate organization. The top jobs will be earned, not inherited. This is Darwinian capitalism at work here.
Clustering 15 to 25 car stores in a market and streamlining their operations should lead to substantial savings. Many redundant functions will be eliminated, mechanized, or consolidated into regional headquarters. Advertising will drop to maybe $50 per car sold or even less. Used car inventory will be huge but shared by computer with all the other new car stores and an integrated AutoNation used car superstore. That should result in reduced inventory and interest cost per store.
Republic intends to be the "category killer" of the retail automotive distribution, but its success is by no means assured. There are many obstacles and challenges ahead for Republic's "Mile High" strategy. What about the manufacturer's acceptance/cooperation, availability of product, state franchise laws, the actual execution of all the radical changes, the ability to manage the transition, and consumer acceptance of the strategy? Without the ability to negotiate the cost of new car purchases, can tertiary costs be reduced enough to add to profitability? What happens if the next recession hits before systems are properly installed and proven?
Two final questions need to be asked: Will Republic's new diesel make it to Grand Central Station or will it go off the tracks first? If it crashes, how many innocent bystanders will it take with it?
Sheldon Sandler is CEO and a founding partner of Bel Air Partners. Bel Air advises its clients on capital market transactions including Initial Public Offerings, REITs, franchise loans, private placements, and mergers and acquisitions If you have specific questions or require more information about this subject, please check the appropriate box on the reader response form on page 3.# ssandler@dealeronline.com