Sid DeBoer & Dick Heimann, Lithia Motors
Interview by Michael Roscoe
Third out of the gate, Lithia Motors has become, arguably, the top performing of the publicly-held dealership groups. Rising from the relative obscurity of southern Oregon in the Pacific Northwest, Lithia has grown from five to 40 dealerships on the efforts of two real car guys with no previous experience running a public corporation. This is their story.
Sid, how did you get in the retail automobile business?
Sid: Well, in 1964 I left college and went to work for my father, Walt, in Ashland, Oregon. He was a Dodge/Chrysler dealer. He had been in business since 1946. I had worked there part-time when I was in high school and college in virtually all of the different functions of the dealerships, but in 1964 I joined full-time as the bookkeeper. I had had some accounting background in college and my father took advantage of that. I was the bookkeeper for about two years before I took over in sales and eventually the rest of the dealership. My father discovered that you could make money in the auto business after I joined the company. His best year was maybe $5000, $6000 profit. He thought that was a fantastic amount of money. In 1966, after I took over, we made $22,000 and he thought he had died and gone to heaven. From then on I couldn't find him in the store anymore; he was out at the lake, he was having a good time, so I ran the place.
Did you sell on the floor any?
Sid: Yes, in fact the month my father was killed in an auto accident, I sold 40 cars all by myself. There was no one else in the store because he and I were the sales crew at that time, I knew how to sell automobiles. I first lined up the cars on the lot like when I was seven years old. I could actually straighten the lot out. Dad would let me do that. Those were the days. I could drive an old Jeep when I was seven years old.
How were you able to start to get ahead of things to the point that you could acquire a second dealership?
Sid: In 1969, Dick Hyman and I worked together to get a permanent franchise from Chrysler in the Medford market. When my father was killed, Chrysler had closed the point in Ashland and they gave us just a two-year term letter to operate the store until we could liquidate it, basically. So I needed another store and Dick was the factory representative for Chrysler. He and I were about the same age and we really hit it off, so shortly thereafter, after he helped me get the store, I offered him a position with the company and in May of 1970, Dick joined the company full-time as we moved to Medford and began our growth curve. Dick and I worked together in the same office for about the first two or three years and we shared my experiences in terms of selling and Dick shared his experiences in terms of the way factories looked at the automobile business and we had a truly great team. We sold so many Dodges in Medford, when we first started, we didn't know how good we were. We didn't know how to make much money yet, though, and one day a guy from Chrysler came down and spent roughly two weeks with us. His name is Dick Duncan and he's still with Chrysler. He's the fleet manager for them now, but basically he came down and gave us an education on how to make money in the car business. We applied what he taught us dead on and we became very profitable. Once you start making a little money you can save up and buy another storebuy real estate and hope that it appreciates in value, refinance that and get a little cash out of that and you can buy another store. That's how we grew to begin with.
What were some of the things the Chrysler guy had you do differently?
Sid: Basically, install a lot of the same formulas we still use today. He taught us that you should try to retain 50% of the gross profit as department net profit. Chrysler uses a bookkeeping system that puts all the expenses related to a department right directly with that department; they don't spread overhead up into all departments. We were right about 25% gross profit retention in the departments at that time and he showed us that we could do 50% in the service department and we could probably keep even 60% of it in the parts department. We had a lot of work to do because we were nowhere near those numbers.
Not to oversimplify, but once you had a target to shoot for, you could work on getting there.
Sid: Yes, and knowing that other people have done it really encourages you. Then I got into NADA 20 Groups after we had become a Toyota dealer. I thought I was a great dealer until I got in with one of those mega-20 groups. I was so humbled the first time I went to a meeting. I came out of there feeling like I didn't know what I was doing. But that was the impetus for our insatiable desire to improve.
Dick, what is your background?
Dick: I started in 1967 with Chrysler Corporation as a trainee in Denver. About eight or nine months later, they promoted me to service rep. I had Northern Colorado, all of Wyoming and Western Nebraska. One day headquarters called me and said I got a promotion and I would be going to Eugene, Oregon. I thought I was on the move with Chrysler Corporation, but when I heard Eugene, Oregon I thought I had gotten demoted.
You never knew it was the best thing that ever happened to you.
Dick: Right. My first job out here was to redo the dealer agreement for Sid after his father had gotten killed because they didn't have a dealer agreement and Chrysler Corporation wouldn't renew part of it. They would only let Sid keep the Dodge Division back when Chrysler, Plymouth and Dodge were separate divisions. So Sid ended up having only a Dodge franchise and still only had a two-year agreement for that. We tried to figure out a way to get another franchise. There was one in Medford. The dealer wasn't doing a very good job, Chrysler wasn't happy, he wasn't happy and those were tough times in '69 and '70 in this market here, a lumbering area. So Sid put a deal together with the dealer in Medford and I got the legal paperwork done with Chrysler Corporation on March 10, 1970. Within about two months, Sid talked to Chrysler Corporation to see if he could offer me a position. He and I had had a great relationship, there was great chemistry and great respect that we both had for each other. He offered me a position to run the sales division and actually be a partner almost right away if things happened right in the first year. We went on from there to go about expanding the company.
Now, Sid, when Dick was offered a position with the company, was that under the auspices that "we will be growing this" or did that just happen?
Sid: No, there were no views of us growing anything like we have. I had borrowed $60,000 from my mother, which was about the value of her business in Ashland, because she, of course, was the full inheritor of the estate when my father was killed. I had $3,000 of my own money and that was the sum total of what we had and the banks wouldn't help us. Chrysler Credit finally stepped up and loaned us enough to pay the guy off that we bought the store from. Had a term letter for five years, big paymentswe were only thinking about survival at the time.
It's my opinion, based on interviews with the most successful dealers in the country, that most of them got where they are by focusing on what's directly in front of them each day as opposed to focusing on the future. Most never dreamed of their current success.
Sid: You know praise, that's really a good summary of our view of the way the auto business has been to us. Basically we've focused on what's right in front of us and taken advantage of the opportunity that came our way, at least until we became a public company. In 1987 we had five stores here in Medford and we were really tired of leveraging ourselves and repositioning ourselves, possibly getting back in debt in order to buy another store. Bill Young, who is now on our board, who was president of Volkswagen America at one time, was working for JD Powers at the time and they had put together a seminar on public dealerships as a way to raise capital. We participated, got all excited about it, came home and told everybody we were gonna be a public company. From that point on we had a view of doing it. Of course, it wasn't until '96 that the public markets actually opened up. We were the third one to raise capital this way, we were fully prepared for it, knowing what it was going to take, knowing the systems that we needed to develop in order to grow, knowing that the story had to be one of growth and rapid growth, that Wall Street wouldn't be interested in just investing in dealerships, but they would be interested in investing in someone who could grow their business very rapidly. We developed the systems that would be portable and achievable in different markets and we structured our company with fully audited statements, very carefully planning how we would go about as a public company, and when the opportunity came, we were prepared. Maryann Keller, I don't know if you know her
She came to see us in Oregon. We were working with another securities firm here on the West Coast to try and convince them that we could become a public company and they were interested, but they were working with UAG at the time. These things are short-lived normally, in terms of the windows being opened for access to capital, so I asked Maryann if she'd come out and visit us and I'd show her our plan, and she came, spent two days here and I took her back to the airport and said, "Maryann, what do you think?" and she looked at me and she said, "You know what I think." And I responded, "If I give you the whole deal, will you guys get it done for me?" and she said, "Yes." That was that beginning of us going public. Three months later we had successfully sold two and a half million shares, we were right on the tail end of the window being closed. Bill Giluland and UAG had both gone public and particularly Giluland's stock had blossomed and then fallen back down right as we were doing our road show, so there was a lot of indecision in investors' minds as to whether this was a good program or not. Obviously, nobody on Wall Street knew much about the auto business. It was always privately handled and Wall Street people didn't have a clue about how it worked. Many of them hadn't even owned an automobile, so talking to a lot of those people was quite a challenge.
What's the biggest difference since Lithia became a public company?
Sid: Well, obviously we changed from a company that could just operate stores into a growth company that had to acquire stores and integrate them, and that's a huge change, culturally. It requires a terrific amount of planning and a tremendous amount of resources in terms of personnel, systems, all those types of things. We were prepared for it, but we went from five stores to forty-six stores today in a three-year period and we still had to hit earnings targets during all of that time. Wall Street is very specific in assigning earning targets based on investor expectations. We've always exceeded them, actually. Last quarter of last year we exceeded by seven cents; with good planning, being able to integrate the stores and cover that overhead for the additional people that it requires to acquire stores, we still maintained good profitability.
What have been the biggest challenges in running a publicly-owned dealership group?
Sid: One of the biggest challenges is getting people to listen to our story and believing in what we are doing. There's been so many trials, as it were, in this sectorAutoNation and CarMax, "the car business is broke" and "we have to do it this new way" and "we have to sell on one price" and "we have to have these great big megastores and if we just put clerks out there, everybody will just come in and buy a car and we'll make lots of money and the old system will fall apart." We are the exact opposite of that. We're a straight-line automobile dealer from the old school in terms of understanding our customers, dealing with them one-on-one in a relationship-based transaction, negotiating each transaction with the customer with the dealership, maximizing our opportunity and maximizing the benefits to our customers. That's not a new story. That's the way the automobile business has always been. We don't think it's broken. We believe our model is the best one so far. Everyone else is coming back to our model. AutoNation recently announced the closure of all those high-priced used car superstores; that venture hasn't worked and I'm glad that they finally recognized it. It makes our story much more believable. We think there is tremendous opportunity yet for consolidation in this sector. There are 22,000 auto stores in the United States; there probably still needs to be at least 20,000, owned by about fourteen or fifteen thousand people. We think maybe five or six hundred people could own all those, stores. We want to be one of those and that's the kind of consolidation that we want to be involved in. We can bring systems, we can get capital, we can unify the processes, bring order out of chaos, maximize the way business is done, both from a profit standpoint and from a customer-friendly standpoint and professionalize the car business. Over half the auto stores in this country make less than 2% on sales. Those are the stores that Lithia likes to buy. We add real value when we buy a store that's just doing an average job and make it a top performer.
You buy the underachievers.
Sid: Yes, but not the broken stores. Although we are capable of doing that, they're hard to fix, they use a lot of resources.
I've never understood the acquisition strategies of some others when they go and get these top producing stores that are clicking at about as high efficiency as they can and then give the owner a bunch of cash and expect him to improve it.
There was no real sense in that and you and I both know it. Our plan is to get that owner out of the way as soon as possible and as comfortably for everybody involved, and make the transition one where it's pretty much seamless to the employees and the customers. That's taking place on a regular basis. Of all the stores we bought, I think there's only one dealer principle left and he's still operating within the process of our organization. That was the intention, it's Doug Moreland in Colorado. Doug is a fellow, a lot like myself, a very market-driven younger person who was interested in staying in the car business, but wanted to be able to expand without risking his own capital forever. We're changing Doug from an independent entrepreneur to a corporate warrior and he's making the transition very successfully. And we think that's one dealer that will probably still be with us for a long time. He's joined our board and been an active part, but we don't look for that to happen very often. We're building a group of dealers, one at a time, and they will all be singing out of the same book. That's the goal of Lithia Motors; to build a strong group of dealerships across the country, beginning in the West, adding them one at a time, two at a time, maybe one or two platforms very carefully and growing those dealerships into a common culture. We can only grow as fast as we can integrate.
So, instead of the success of your individual stores depending on the skills of the dealer, you just need somebody who can run your system at that place?
Sid: Yes, and generally that's one of the things we really look for. Many dealers, and I don't fault them, they're leaders but they've pretty well transferred the day-to-day responsibility of the operation to other people.
If they're good.
Sid: And that's great. Those are the stores that are just doing average that we love to buy. Take it, turn lose the controls, point it in the right direction, maximize some of the areas that the dealer might not have maximized and make those very profitable, very successful stores using the existing personnel. We've bought some stores in Redding, California about two years ago and they were just an ideal model of what we were looking for. They had a great general manager who was held back by a private operator who was very wealthy and was not going to release information, was not going to let those people take any risks with his dollars. They welcomed us with open arms. Within a month they integrated most of our processes, packed everything we could give them and took off. Now they're one of the most successful Chevy stores on the West Coast and making the kind of returns we love.
What's the name of the store, Sid?
Sid: It's Lithia Chevrolet in Redding and Lithia Toyota of Redding.
What else can you tell me that you look for in an acquisition prospect?
Sid: Well, Mike, first of all there has to be a need to sell. We don't want to try to buy somebody that really doesn't want to sell because we'd have to pay too much. We want somebody who's realistic about what they'll take for their store. Secondly, it has to be in a market we're interested in and with a franchise that we're interested in dealing with.
What are those markets and what are those franchises?
Sid: Honda, Toyota, Nissan-we're including at this point, and even Volkswagen. Certainly all the Chrysler products, Ford and General Motors, but we have to be careful there because a lot of those stores are in markets that are over-dealered. The second thing that we look for is the market itself. We prefer a single point market or markets that aren't over-dealered. There are an awful lot of markets in the United States that are basically middle markets. We love cities like Spokane, Boise, Eugene, Redding, Fresno, Bakersfield. Those are all areas we've currently expanded into. Ft. Collins, Colorado Springs, those are ideal cities for us. Our prime acquisition target is a store in a market we're already in. That's the store we can probably do the very best with.
What geographic areas are you most interested in?
Sid: Well, we'd like to stay as close to home as possible, knowing that we can only grow so fast anyway. There's no reason to leap across the country. We'll creep across the country. We've turned down many, many deals in the Northeast and the Southeast. We're looking at the Midwest now, we think we can tackle that at some point using Denver as our base. Ideally, building a base in Denver allows us to expand all through the mountain area and into the Midwest. There are so many midsize cities that fit our model. We estimate there are over 300 cities in the United States that are just perfect for us. There are cities that are around 250,000 to 300,000 people. Most of them only have one franchise for each make, so they're ideal.
What is your pace of acquisition currently?
Sid: Our goal is to acquire 25% of our base each year. We have 40 stores, we'd like to buy 10 this year. If we have 50 stores, we need to buy 12. It won't come uniformly because we don't go out and force a market. We need to buy existing stores, so we have to find stores that are for sale. We might buy more than that in one year and less in another, but we'll average that as our goal. So when we get to 100 stores, we've got to add 25 each year.
What are your thoughts regarding the Internet?
Sid: Great tool, wonderful low-cost marketing tool, communication tool, business tool to help us cut costs, help us achieve better synergies with our customers, with our employees, with our business partners. We're really investing in it as much as we can afford to. I'd love to pour 20 or 30 million dollars into it, but maybe it's better if we just grow at it. Remember, we need to hit earnings targets, but we're investing as much as we can without damaging our ability to earn money. I don't think anyone is making any money selling cars over the internet yet in the United States of America. We're achieving a certain number of sales, but more than that we're building the infrastructure to do business through the internet. We've partnered with a company called Navadaq in Denver, a national firm that's listed on the Nasdaq and they've got the resources. They're an e-commerce supplier and they're committed to the auto sector. We're partnering with them in every way we can. They've developed a product called Driveoff.com that they are marketing on their own, and we're going to integrate some of those features and hopefully be able to sell a car directly through the internet. We're not experimenting, we know where it's going. We want every customer and every salesperson we have to be able to use the computer as part of the transaction, to be able to use the internet to find information, to consummate a deal, to make it more streamlined, to make it easier, and then we can use that as a marketing tool. It's much more direct to our customer than anything we've ever been able to do through phones or through media and we think that's going to be the real side benefit: to cut costs and be able to sell cars at a lower price. Right now, cars through the internet generally are being sold based on price and not based on the benefits. We don't sell everybody a car that we'd like to on the internet. Sometimes we can't meet the price because we feel we need to make money. If carsdirect wants to sell a BMW M5 for invoice, let them. We will not meet that price. I can only get two of those this whole year. I have to maximize my profit opportunity on a vehicle like that. You get into those other gray areas, there's a lot of cars that fall into that category. So as time goes on, internet prices will crawl up, dealer prices will crawl down and they'll meet at some point, and when that happens you better be prepared to do most of your business on the Internet. That's where Lithia will be. We will have the infrastructure to deliver cars anywhere in this country through the internet and we won't be partnering with anybody to do that. We'll do it ourselves.
So you have a consistent internet strategy in each store?
Sid: That's right, every store. It varies with the brand and the clientele that we deal with. A luxury store actually has a much higher integration of internet information available than somebody that's selling Hyundai's.
Who are some of the companies who have "partnered" with Lithia and have been instrumental to your growth?
Sid: The partnership with ADP is important to us. I think we have the largest single dealer user site that they have and we're taking out other people's systems whenever we buy stores. No one's doing that, but we want a common culture. We want one common system so our people can go fix it. When you go to a store in Denver, it's going to be the same as the store in Medford as far as how it all works. No one's doing that. We're doing it, because we know that's where the savings are going to come from. We've got a national oil contract with Pennzoil, we use their top quality oil; we don't sell the real low-priced oil. First Extended Service Corporation, we have a real good contract on our service contracts. We sell a lifetime oil change through them, which is one of the most modern and best things we've ever done. We're selling about 30 to 35% of our customers a lifetime oil change when they purchase a vehicle from us. They're all coming back for their oil changes and that means they usually get the rest of the services done; great opportunity for our service departments to keep customers coming back here. Enterprise Rent-A-Car, we have a national contract with them, closed all of our own rental agencies. We recently entered into an agreement with BBCN.com to do all of our purchasing online. This will allow us to standardize purchasing and bid our purchases online.
Paint me a picture of how you see the retail automobile business five years from now.
Sid: You know, five years is not very long. If somebody would have asked me five years ago what the automobile business would be like, I'd have said, "Well, it won't be a whole lot different. The franchise system will still be intact, maybe even stronger than it is." I see no trend towards that breaking up, so the independent franchised auto dealer still has a great opportunity if he can manage on his own. If he wants to sell, he'll probably sell to a larger public group or to a group that's still acquiring stores in the private world. The private capital groups, they still have capital available to certainly compete with us, particularly with the multiples down in our sector, but basically I think there will be maybe 12,000 dealer-owners instead of 14,000 five years from now. That count will drop by about that amount. There will still be over 20,000 dealerships, maybe even more. Factories don't like duals, we don't like duals. We think it's best for a store to be single product. I think the stores can do much better, and the trend actually is going more toward single-point stores. Honda wants them, Toyota wants them, Ford wants them, Chrysler wants the Jeep and the Chrysler together now. General Motors has a very firm plan about how they want their stores lined out. There will be some drop in dealer count with General Motors and Ford and Chrysler as they consolidate those networks which are over-dealered. You'll see a few more Toyota and Honda dealers, there will be some open points. But five years is not going to change anything dramatically. The internet will be there. By then, I think, prices on the Internet won't be any cheaper than they are in the stores and most dealers will be using the Internet in conjunction with their manufacturer in a real way to market cars and with their finance sources. I think that business will all stay with the dealer. I don't think any of these Internet companies will take it over, and groups like ourselves will be maximizing that. We'll have advantages in terms of cost-to-capital and in terms of cost of doing the business over a small independent operator. There's no question of that, because we do get economies of scale. Having a common culture and having a common supplier can lower costs, and those will be advantages for us, as well as the access to public equity markets and being able to borrow and lower rates means a significant savings. So I think a public dealer group that's run right with our plan can be very successful. Five years from now hopefully we'll have multiples in a lot higher stock price.
Anything else you'd like to share with America's dealers before we wrap up here?
Sid: Don't let anybody take you out...you're doing great. Dealers are not going away. If you want to keep your store, just run it right and you can do just fine. But if you get tired, call me.