Wall St. and Business Wednesdays: Start-up Costs And Competition Are Often Barriers For Auto Dealers by Yvette Armendariz
In fast-growing metro Phoenix, where other retailers quickly set up shop to capture sales opportunities, new auto dealers are a rare breed.
Automakers award few new dealerships in an era when many U.S. companies are pushing to close what many in the industry say is a glut of showrooms. This in order to shore up sales and, subsequently, pump up dealer profits.
When dealerships are awarded, generally in high-growth markets, they're highly coveted by longtime dealers and aspiring owners with deep pockets. advertisement
Investments often are upward of $10 million, making it difficult for aspiring entrepreneurs with dreams of selling shiny new cars to catch a break. Even minority dealer-development programs aren't a sure deal for aspiring owners, as most deals to break into the business these days are done privately.
In addition, publicly held groups such as United Auto Group and AutoNation have grown to dominate the Valley auto scene.
"It's very tough (to break in) whether it's Phoenix or another metro market," said Knox Ramsey, president of the Arizona Automobile Dealers Association. "Barriers to entry are high."
Among the barriers are skyrocketing land costs, amenities demanded by consumers and inventory.
"It takes significant investment. A lot of people don't have those kinds of resources," he said.
Even experienced auto dealers, such as Dan Grubb, need financial partners.
Grubb recently re-entered the business, buying two Ford dealerships from conglomerate United Auto Group.
Quest of 3 years
Chris Guerrero, who built a career managing Valley dealerships, is getting his first shot to own a Ford franchise set to open later this year in Gilbert.
He began his quest three years ago. Most opportunities he found involved taking over dealerships in small towns, often in the Midwest.
"I didn't want to buy myself a job," he said. He wanted a new franchise close to home.
"You get a little impatient, you get a lot of noes in the process," said Guerrero, who also sought dealerships with Nissan, General Motors, Toyota and Honda. "I (also) didn't want to jump too quick and sign on the first deal I came across that I was approved on."
Ford helped him find an investment partner to help with the $25 million in capital needed to open the franchise once cars, furniture, land and building are factored in. Guerrero is getting 51 percent ownership, but he declined to provide details about the financing.
"A good part of the process is who you know," said Guerrero, who also is Ford's only Hispanic dealer in Arizona. "Bottom line is, it's fiercely competitive to get those (new dealerships)."
Steve Lyons, a retired executive with Ford, is among the few who will open a new dealership in the Valley. Plans call for a dealership in northwest Phoenix to open next year. It's been reported he's investing as much as $15 million of his own assets in the deal.
New vs. existing stores
Dealers often will sell when they want to shed some franchises or if they hope to retire and family members don't want to take over.
Eric Hill, a former linebacker with the Arizona Cardinals, is general manager for a Valley auto dealer. He said that he finally is getting a dealership of his own, but not a new one, as he hoped.
"They're using open points (new dealerships) to take care of their existing dealers," said Hill, who is African-American.
So he searched. He's mum about details of his new shop until the deal closes.
"I didn't get into the business to be a general manager forever," he said. "I used my time there to learn the (car) lines, . . . get good experience opening stores, so when the opportunity came up, I'd be ready."
Hill is discouraged by efforts so far to bring in minorities, saying most are not in major markets.
Nationally, just 4.8 percent of auto franchises are owned by minorities, the largest share by African-Americans, followed by Hispanics, according to data from the National Association of Minority Automobile Dealers.
The numbers fall well below the group's goal of 15 percent ownership by minorities.
Tough to break in
Non-minorities not in the business also find difficulty breaking in.
Dan Grubb, who recently purchased Pioneer Ford and Pioneer Ford West, has been a longtime player in the market. But once his father, Lou Grubb, sold his original dealerships nine years ago to AutoNation, everything changed. Returning to the market wasn't quick or easy.
"It's a tough business, period," Dan Grubb said. "Capital requirements are more intensive, more so today than years ago. . . . There's (new dealerships), but not in the quantities of the past, and it's competitive."
The younger Grubb left the auto business three years ago. Since then, publicly held groups have added more dealerships. Just a few of the local entrepreneurs, such as Tex Earnhardt, have more than two stores.
"It's not an easy thing (buying a dealership). It takes a lot of work trying to find someone willing to sell," Grubb said.
He pulled in partners Mitch Pierce, Steve Knappenberger and Jack Grimley, all with dealership ties, to buy his two stores, one of which now bears the Grubb name again.
Manufacturers have pulled back on dealerships, particularly in areas losing population. From 25 to 50 dealerships nationally will disappear after counting the few new ones awarded annually, said Paul Taylor, chief economist for the National Automobile Dealers Association.
In all, about 21,000 new car dealerships operate today nationally, down from 48,000 in 1947, he said.
The business remains lucrative. The average dealership nationally has grown sales for three years running, with sales of $33 million in 2004. In Arizona, annual sales per dealership averaged $69.9 million, according to data from the national association.
At the same time, profits are down. These days, they average 1.7 percent of total sales nationally, compared with 2 percent in 2000.
To build sales, dealers have focused on an image makeover. The first step was creating more amenities for shoppers, from offering play areas for children to coffee bars to make for a more comfortable shopping experience. That's led some existing dealers to abandon old showrooms to set up in posh locations in the fast-growing outskirts of the Valley.
Existing dealers' priority
The new centers and auto malls are creating new opportunities, as automakers watch where the population is headed. Still, automakers, looking to shore up sales, are searching for a dealer partner who can sell lots of cars.
"So what they try to do is find an operator that's been successful," said Taylor, the economist. The reasoning is, "if they're successful in north Scottsdale, then they're likely to be successful in south Scottsdale."
That's not to say they aren't trying to grow new dealers.
The W.P. Carey School of Business at Arizona State University has a certificate program for auto entrepreneurs open to anyone, but it has a goal of developing minority dealers. Also, manufacturers have long-established programs.
"We're looking for minorities, but we are also looking for the best operator for the point (new dealership)," said Judith Moss, manager of minority dealer operations for Ford.
With so many deals going private, that leaves Ford out of its push for minorities, Moss said. "We can't reasonably hold their opportunity," she said.
Toyota Motor Sales USA doesn't have a minority dealer development program.
"We have a dealer development program, and many minorities take advantage of the dealer development program," said Xavier Dominicis, company spokesman.
So far, minority dealers for Toyota and sister division Lexus has climbed to 86, according to the association of minority dealers. That's up from 63 in 2002. Toyota has about 1,200 franchises and Lexus an additional 200.
This article appears in The Arizona Republic.
Wednesday, March 29, 2006