Getting "Goofy" In Orlando
By Sheldon Sandler
This year, the NADA convention is being held in Orlando, home to Disney's Fantasyland. But there is one fantasy car dealers won't find there or anywhere else for that matter. That's the dream of going public. That dream is now in Never Never Land.
The ever capricious public investor briefly flirted with the idea of consolidating and revolutionizing car retailing. Although several public dealerships were created to meet that interest and a few have prospered, they are now out of style, at least for now, as investors have moved their attention elsewhere. Likewise, no sooner were dealers able to spell and define "REIT" than public investors quickly got bored and moved on. "Capital Automotive" (CARS) did make it into the public arena but three or four other imitators lasted about as long as a ride on Magic Mountain.
"Tomorrowland," the Internet, is the new attraction. The malaise of the public car dealer sector, in part, is due to the uncertainty of the Internet's impact on traditional auto distribution. Despite the terrific success of auto retailing in 1999 and the great results of several public dealership groups, many investors believe that the future of car retailing is going to be dictated by the Internet. The stock market bets on the future, not the past and often does so indiscriminately. For example, as this article is being prepared, Autobytel, the Internet lead generator, is valued at $287 million, although it is awash in red ink and has no certainty when if ever it will earn a profit. By contrast, Group One, which could earn as much as $1.50 per share on after tax earnings of $33 million this year, is valued at $308 million, a minuscule 8% more.
How can this be? Quite simply, investors, for one, are playing the Internet sector and Autobytel as part of the group benefits from the association. Two, Investors believe that ownership of an Internet solution to car retailing is a better bet for stock price appreciation than the proven cash generating abilities of a "bricks and mortar" dealer.
It's undeniable that the Internet moves the balance of power away from dealers. It arms customers with detailed pricing information and facilitates easy access to competing dealers in distant markets. Consumers e-mail those dealers and respond to Internet intermediaries in their search for the very lowest price. Darwinian capitalism controls as dealers attempt to attract incremental customers. The overall result is that profit margins deteriorate for all.
I'm sure others will disagree, but the Internet has probably not increased car or light truck sales by one vehicle. The Internet acts as a sponge, not as a creator of vehicle sales. Some, in their embrace of the new technology, including several manufacturers, assume that the Internet will render salespeople obsolete and will lead to the unbundling of car sales and service. Ultimately the marginalized dealer would become no more than a delivery and service operation. This proposition oversimplifies the complexities of the relationship between vehicle sales and the consumer and could actually lead to diminished overall sales.
My concern is that many, maybe millions, of additional vehicles are sold by motivated and talented salespeople, to consumers who, left to their own druthers, probably would defer their purchases and maybe never make some of them. No way can the Internet stimulate a potential buyer into the actual purchase on the spot. There are no "closers" on the Internet.
People buy cars on emotion and back it up with logic. Take the emotion out that a test drive can create, and all you have is logic. Would anybody ever buy a new car based on logic?
Moreover, buying a car can be a complicated, time-consuming transaction. The traditional system, no matter what the form of ownership, amounts to the most convenient "one stop" shopping experience for many of us. The car dealer adds value by putting a comprehensive package together according to the specific needs and resources of the consumer. He/she takes in the trade, finds the most suitable financing, executes the paperwork and delivers the vehicle, all, in most cases, in a matter of hours. Try pulling that off on the Internet. I have and I couldn't.
Despite my opening paragraph, I predict that there will be another dealership group to go public, but it will be a virtual "click and brick" dealership. It will consist of a comprehensive Internet strategy complementing the "bricks and mortar" of many dealerships nationwide. Manufacturers will cooperate since they will come to recognize the central role dealers have in creating demand. Wall Street will notice because, unlike current Internet offerings, existing dealerships have the knowledge and resources to pull this off on a scale that will dominate the future of car sales.
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. ssandler@dealeronline.com
