Automotive News - March 3, 2008 - (Page 38)

38 • MARCH 3, 2008 THE DEALER SPEAKS In downturn, Sonic looks beyond new cars S onic Automotive Inc., the No. 3 U.S. dealership group, is buying rather than renting real estate for its dealerships. Sonic President Scott Smith, son of company CEO and founder O. Bruton Smith, says these investments are part of a plan to sustain profitability at the Charlotte, N.C., company. At last month’s National Automobile Dealers Association convention in San Francisco, Scott Smith, 40, spoke with Staff Reporter Donna Harris about the public company’s acquisition plans and other strategies to prop up business during a sales downturn. What are you doing to prepare for slower new-car sales? We have gone to 100 percent menu selling in fixed operations. Many of our services are priced very competitively. The service advisers do walkarounds, checking the vehicle for service needs. It is a very transparent and customer-friendly process. Our service and parts operations cover most of our fixed costs. We have a 92 percent absorption rate. As our fixed operations grow, that’s really going to help us. How are you building used-vehicle sales? Used cars are like vegetables in the grocery store. Their values are not going up — they are depreciating. We try to price the vehicles close to the transaction price from Day One. We don’t mark them up from our reconditioning cost. To determine the transaction price, the dealer operator, reconditioning manager, salespeople, (finance and insurance) people and sales manager go through all the trade-ins and decide whether we will retail or wholesale them, how much reconditioning needs to be done and what price they think the car will retail for. That procedure has been around forever. The hardest part is having the discipline to do it. Our turn rate on used cars ranges from 36 to 40 days. Many people are not buying new cars. They are getting their cars fixed or buying pre-owned vehicles and trading down. They are right-sizing their budgets. We are seeing more of that. Does Sonic’s high concentration of luxury dealerships help recessionproof your business? I don’t know of any business that is completely recession-proof, but 85 percent of our revenues come from import and luxury brands. We shifted our portfolio mix several years ago, and it’s paying off for us now. We are also shifting our debt structure so that we are acquiring dealership real estate rather than leasing it. Every public auto retailer can buy its shares now at a significant discount. Why not buy your own dealership back? It’s a market opportunity. Is that a change in your strategy? The experts in the capital markets will tell you it’s foolish to tie up all your cash. When we started out as a public company, financing for real estate and buildings was really limit- How is your deferred bonus plan for dealership general managers working? This will be a record year for “Partners in Excellence.” About 30 percent of our general managers have qualified. It’s really good for the dealer operators who want to find a home. In 2007, Sonic had its lowest turnover in our history. Employee satisfaction starts at the generalmanager level. If you can stabilize your general manager, that does so much for the entire dealership. We try to promote from within. And we have our dealer academy. It’s a fabulous training program. The trainees have skin in the game. In what way? If dealer candidates don’t make it through the class, they don’t owe us anything. But if they make it through, there is a certain period of time they agree to stay with the company. If they leave us, they pay us back a prorated amount of their tuition. It’s a meaningful amount — more than a year’s tuition at one of the finest private colleges. If anything is free, it’s not valued as much. What else are you doing to cut turnover? We allow everyone who works in the organization to lay out a clear career path. We have started a process of successorship, and we identify talent. We also are developing a new training system that is getting ready to launch. We are tripling our budget to invest in our people. Every individual, from the dealer operator to the part-time porter, will be able to access training online, interactive as well as in-person training, to advance their career. This is a complete learning system. You have been on a campaign to standardize processes throughout your company. How is that going? The biggest hurdle was the dealer management system. ADP Dealer Services has been a great partner. It set us up with standardized forms, like repair orders. All the data are featured in identical fields. If you purchased cars from five of our dealerships, we can pull those transactions up. We have got our dealer management system done for our 144 dealerships. During the downturn, do you see an opportunity to acquire dealerships cheaply? We do not see a lot of transactions this year across the board. The manufacturers have put restrictions on buyouts. The framework agreements we signed with some of them to make acquisitions are restraint of trade. What if you can’t buy me out and I don’t have an heir? The biggest players in the industry can buy your store, but they’re at their limits. If I were a dealer in that circumstance, I would be upset because the value of my dealership is going nowhere but down. If any manufacturers were to ask us to sign a framework agreement today, we would say no. It’s like a really bad prenuptial. c SEAN BUSHER Some of your competitors are testing start-to-finish Internet sales. Do you plan a similar test? Yes, we will have it. I think the industry will eventually go that way, particularly with repeat customers who are already comfortable doing business with you and you have all their pertinent information. The big challenge is the financial calculations — having the ability to do the complete transaction to the penny. That’s problematic. SCOTT SMITH ed. Today, the markets are wide open for us. Where do I want this company to be in 20 years — on my land or rented land? It’s like having a mortgage or leasing your home. If it’s cheaper to buy, why wouldn’t you? We have well over $1 billion in real estate that is leased but that we are trying to acquire. It is a good longterm strategy. We bought four properties last year, and we’ll do three times that this year. We are calling our landlords and asking if they will consider selling their real estate to us. A lot of our properties are owned by former dealers who may be looking to invest in something else. Capital Automotive REIT still has over a half-billion dollars in our dealership property. Is it tough to buy back properties when the factories are pushing dealership renovation? There are factories that realize the difficulty of the market and are genuinely concerned about the dealers. But where the manufacturer is applying pressure to do capital expenditures and we can’t get it to pencil, we are not doing the project. We will either sell the dealership, or we will run the store with the existing design. Buildings don’t sell cars. People sell cars. We are not going to over-invest in facilities where it does not make sound financial sense for us and the manufacturer. We have a number of manufacturers we are working with to divest dealerships that do not pencil. Some factories hear that message better than others. Where leases run out, we try to find another property to build facilities they want. But where we’re locked into a lease, that gets rid of all the flexibility to do a lot of facility upgrades.

Table of Contents Feed for the Digital Edition of Automotive News - March 3, 2008

Bob Nardeli's new big-idea guy New Kia boss reaches out to restless dealers Scion hits a wall Lithia losses raise caution flag Detroit 3 shun talk of NAFTA do-over Lincoln names new marketing manager Mercedes to launch hybrid sedan in '09 Mazda has new top marketing exec M-B will hit the road with 50-state diesels Pontiac puts big ad bucks into traditional media for G8 Reynolds, ADP diverge on growth strategies Ford plans to cut fleet sales 10% in 2008 Mazda: New models, styling will boost its loyalty rate Run-up to axle strike adds to supplier woes Webasto's fast heater will debut by 2010 Russian plant wants to be world's biggest A Lancer is hatched Chrysler throws out purchasing rulebook Honda sets lofty hybrid goal, with Civic's help Honda: Use of ethanol limited, must be biomass Honda CEO Fukui: No recession in U.S., despite soft sales in spots 550 hp? 620 hp? Is GM crazy? Doug Fraser was a great leader How ironic: Lyons learns caution Well done, Doug Don't let Calif. impose fuel rules on the nation Blame the dealer, not the brand Cutting weight doesn't cut safety When Lutz dumps on global warming ... JM exec Czubay: A taste for hogs, pierogi Doug Fraser: A good man to have known Fraser led UAW with 'combination of substance, politics and charm' Autonet finds success at NADA with wi-fi for cars GM to sell medium-truck business, keep dealer network Web classified ad firms renew marketing to dealers, buyers Chery designs venture's vehicles China venture eyes 20,000 Fiesta hatchback sales Toyota plans crossovers in China Dongfeng, YuAn plan minicars BMW shakes up global marketing, sales ranks Delphi divestiture boosts forging supplier Is Blackhawk purchase bucking a trend? Repair company grows as Detroit 3 struggle BorgWarner unit expands German automakers seek more parts sourced in North America Hyundai picks ArvinMeritor Japan parts firm to build Miss. plant Nissan to increase spending on IT Purchase keeps Tenn. plant open Automakers hit with apartheid claims Mexico sales flat in January Ford prices '09 Flex atop crossover line Hamp rejoins Visteon board RV deliveries decline 3.4% in December Subaru lowers Forester price Personnel Bright future for LED headlight suppliers? Valeo's Morin to Pardus: Learn before you leap German automakers aren't worried about U.S. recession Porsche's Wiedeking: We must retool VW Europe's loud debate over quieter tires Noise level depends on the tires, the road Auto industry robotics spending jumps 43% in 2007 Electronic brakes struggle to get traction Big Texas dealer returns to some domestic brands AutoNation chief sees tough '08, better '09 In downturn, Sonic looks beyond new cars GM promotes service, parts leads for dealerships 10 cool dealership technologies found at NADA Dealers Kia will build transmissions at Georgia plant Gibson leaves DealerTrack board Akebono closing Kentucky plant Feds issue Ford fire warning Magna net income drops VW to use Siemens' software A tale of 2 exhaust systems EU wants CO2 in ads; battle looms Maize malaise stalls ethanol Tata to siesta during Ford's Fiesta Honda moves its American bike offshore Honda will recycle cycle plant Tom LaSorda's multimillion-dollar smile

Automotive News - March 3, 2008

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.