MEGADEALERS : Huge Auto Agencies Bring Mass Retailing, Multiple Franchising to Field Dominated by Sole Proprietors
In Longo Toyota’s 5,000-square-foot showroom off the San Bernardino freeway in El Monte, there are no shiny new cars inside, only tables and chairs--lots of them.
It may seem incongruous that the nation’s single-largest car dealership (with 1986 sales of 18,334 vehicles) doesn’t keep any Toyotas in the showroom for customers to ogle, but this is no ordinary outlet. The new Corollas, Supras and Cressidas are relegated to the vast car lots outside because it needs the space inside to handle its customers, some of whom come from as far away as Phoenix and San Francisco.
Longo Toyota is the centerpiece of a seven-dealer, transportation-services conglomerate owned by Penske Corp. of Red Bank, N.J. Penske counts itself among a select group of so-called megadealers that are changing the way automobiles are sold. These enterprises sell upward of 10,000 cars annually, often handling a dozen different makes or more, at as many as 26 locations.
“The day is coming when the single point dealer in a metropolitan area is going to find it difficult to compete,” said Walter Czarnecki, Penske’s executive vice president. “We can bring the strengths of a large corporation . . . to the business of selling cars.”
Years after the consolidation of other industries such as fast food, gas stations and grocers, megadealers are bringing mass retailing, multiple franchise ownership and corporate discipline to a business once dominated by glad-handing sole proprietors and automobile aficionados.
Backed by computerized inventory systems, huge service shops and multimillion-dollar advertising campaigns, experts say these enterprises appeal to many consumers who find that they offer more selection and sometimes better service than their smaller neighborhood counterparts.
“The automobile business has been pretty much a slick merchandising, buyer-beware sort of thing,” said John Williamson, whose Birmingham, Ala., company controls 23 dealerships. “We figured we would operate dealerships in a (more) professional way.”
Currently, only about 275 of the nation’s 25,000 car dealers are large enough to be considered megadealers--generating roughly $150 million in annual sales each, according to J. D. Power & Associates, an automobile consulting firm in Westlake Village, Calif. Of the top 10 megadealers in the United States, as ranked by Auto Age magazine, three operate dealerships in California, and the state is a leader in multibrand dealerships.
But megadealers are growing rapidly all over the country. They made 15% of all vehicle sales in the United States last year, Power estimates, and by the year 2000 they could claim nearly one-third of all sales.
Megadealer Potamkin Co. of New York, for instance, has grown so large that even double-sized business cards are too small to list the 15 locations of the 41 dealerships owned by company President Victor Potamkin and his two sons, Robert and Alan.
Starting out in the 1950 with just three Chevrolet dealerships, the Potamkins’ auto empire now stretches from New York to Florida. To help sell more than 75,000 cars annually, Potamkin spends nearly $20 million yearly on advertising.
The growth of megadealers such as Potamkin is being fueled by the high price of dealerships as well as the entry into the United States of new makes such as Hyundai, Suzuki and Acura. By and large, U.S. franchises for these models have been awarded to established operators--often to entrepreneurs who already own four or more dealerships, experts say. “Nothing beats experience,” said Cliff Schmillen, executive vice president of American Honda Motor Co., which markets Acura. “Generally, the more franchises you have, the better off you are. We have several dealers who have 15 to 20 franchises in different locations and it’s worked out pretty well.”
Yet while many manufacturers encourage stronger and more professionally run outlets, they worry that megadealers may usurp some of their control.
“On the one hand, megadealers are high-volume operators,” said Leonard Sherman, a vice president at the New York consulting firm Booz, Allen & Hamilton Inc. “On the flip side, there is a genuine fear felt by all manufacturers that they are losing control of their dealer network.”
All Pay the Same Price
Smaller dealers also are wary. They particularly take exception to claims that megadealers can offer lower prices and better service because they are bigger and more efficient.
“That’s rubbish,” declares David Welsh, president of Metro Ford in North Hollywood. “We all buy cars (from manufacturers) at the same price and our financing costs are about the same.”
“I think it’s a little too early to tell if megadealers are the wave of the future,” said William Krause, whose Honda dealership has occupied the same busy corner on Centinela Avenue near the Los Angeles International Airport since 1970.
Krause said he hasn’t sought to gobble up additional dealerships. In fact, he recently sold his nearby motorcycle dealership.
He said that the cost efficiencies of operating a car dealership are mostly dependent on what a dealer pays for real estate. “An efficiently run dealer should be able to compete with anyone, whether it be a megadealer or anybody else,” Krause said.
Adds Pete Reynolds, president of Reynolds Buick Inc. in West Covina: “Our overhead on a per-car basis is pretty much the same. You take some megadealer that’s spending $800,000 a month on advertising. Well, that’s got to come from somewhere.”
Yet, although large selection, low prices and improved services may not be the exclusive province of multifranchise owners, many consumers say they are convinced that such enterprises--due to their immense size--are more likely to offer those advantages.
Glenn Hughes, a 33-year-old truck driver and his wife, Michele, for instance, recently drove from Los Angeles past several dealers to buy a new car at Longo Toyota.
“They have good prices, lots of models to look at and I don’t get hassled by salesmen here,” Hughes said. “One of the biggest things I hate is for a salesman to rush me into a deal.”
Indeed, a recent report by Booz Allen argues that the present dealer system “does not adequately serve the needs of the manufacturer, dealer or consumer.”
The firm calculates that $3,400, or about 27% of the $12,800 paid for the average 1987 car, is added on after it leaves the factory. The report says about $800 could be cut from the total with more efficient retailing methods.
Cecil Van Tuly, a megadealer who is president of V.T. Inc in Kansas City, Kan., estimates that multifranchise dealers can cut overall expenses anywhere from 10% to 20%, “if you can combine your body shop, parts and general office part of your business.”
Tried to Restrict Dealers
Yet until two years ago, General Motors tried to restrict dealers such as Tuly to just one line of GM cars at one site.
But General Motors changed its rules on March 1, 1985, conceding that the policy encouraged many dealers to gravitate to import brands. It now lets individuals own and manage up to five GM franchises and have substantial investments in up to 10.
Few manufacturers would have made such a concession 80 years ago when the automobile franchise system was first formed and the auto makers made unchallenged decisions on everything from car design to pricing. If cars were expensive, poorly made or designed, there was little a dealer could do.
But today, megadealers have grown so big and prosperous that some are talking about going public.
Ronald A. Glantz, an auto analyst for Montgomery Securities, said his firm is advising six megadealers interested in offering publicly traded shares in their car business. But so far, “none of the megadealers wants to pay for the legal costs” of fighting a displeased manufacturer in court, Glantz said.
Porsche Scrapped Proposal
Robert Ogden, director of dealer relations at General Motors, comments: “It would be difficult to identify owners if stock was traded on the open market. That kind of arrangement would be difficult to administer under our present system.”
Other manufacturers have been more adamant about maintaining control.
In 1984, the West German car maker Porsche infuriated its U.S. dealers when it tried to radically restructure its sales network. Instead of selling cars to dealers at a discount and then allowing dealers to sell those cars to the public as they saw fit, Porsche planned to make its dealers simple sales agents who would take orders and have only one or two demonstrator cars on hand.
But Porsche nixed the plan after its dealers sought protection based on state dealer protection laws. But experts say that eventually other auto manufacturers may try to test the waters.
“I think Porsche was 10 years ahead of its time,” said Carl Fleischer, manager of marketing strategy of BMW of North America, who nevertheless emphasized that BMW is committed to its present dealer network. That network, however, discourages multifranchise ownership.
“BMW has been pushing very hard for BMW (only) dealerships,” Fleischer said. “We cannot afford to have BMW perceived as a mass producer.”
Indeed, many manufacturers complain that megadealers’ focus on mass retailing can clash with the upscale image sought by certain makes.
Analysts say GM and Potamkin have been at odds over the way Potamkin promotes Cadillac as “everyman’s car,” saying it costs only a few dollars a month more than Buick or Oldsmobile.
Victor Potamkin denied there has been any such dispute, allowing only that dealers “should be free to sell cars as best we can.”
GM’s Ogden responds: “We like dealers to sell and service cars in a quality manner. I’m not aware that anybody here is concerned with Mr. Potamkin not operating in that manner.”
But in growing bigger, experts say, megadealers such as Potamkin run the risk of becoming as unresponsive as the big car manufacturers they find themselves at odds with today.
Shift in Power
Alan Carsrud, an associate professor of entrepreneurship at the University of Southern California, adds: “There has been a shift in power in the sense that you now have dealers that are not as dependent on any one manufacturer. . . . The tables have turned.”
“I think the biggest single pitfall of megadealers is that they may become so big that they may well forget the customer,” said Carsrud. “They may grow so computerized and so mechanized that (it could) open up some niches for (smaller) dealers who really know how to provide service and please the customer.”
