News Column

More Dealerships Diversifying Their Portfolios

June 2007, HISPANIC BUSINESS Magazine

Paul A. Eisenstein and Ralph Gray

Lloyd G. Chavez Sr., chairman of The Burt Automotive Network.
Lloyd G. Chavez Sr., chairman of The Burt Automotive Network.

In many respects, 2006 has been a poor year for the automotive sector, both in the HISPANIC BUSINESS 500 and the wider market. The 34 companies in our list's automotive sector combined for a year-over-year decrease off 3.8 percent in overall revenues for the first time since 2003. That follows growth of 2.9 percent in 2005 and a sterling 2004, in which revenues jumped 13.9 percent.

Productivity declined for the second straight year in the sector. Dollars per employee declined by 1.7 percent on last year's list [comparing 2005 figures with 2004], and it declined by 6.6 percent in 2006, compared to 2005, to fall to $862,686 per employee on this year's list.

In sectors developed by Dow Jones, the U.S. Automobiles Index is listed among the 10 worst, with shares in the companies that make up the index off almost 7 percent in mid-May even as the Dow Jones Industrial Average was jumping from new high to new high.

The near-death experiences of both General Motors and Ford have shaken up many in the $770 billion U.S. retail auto industry, especially dealers who have placed most of their eggs in the American-made basket. Chrysler's unbundling from its partner Daimler has yet to play out in sales, but the private equity buyer's deep pockets are generally seen as a vote of confidence from America's car lots.

The actual number of cars and trucks sold remains high the National Automobile Dealers Association reports 2006 was one of the eight best years on record but much of that was driven by incentives like rebates and low-interest financing that can't be sustained forever.

As a whole, NADA reports, dealerships lost money on new car sales last year, even as used-car sales and revenues from service increased. In fact, for the average dealership, the association says, service provided 77 percent of operating profits. Sales of new cars provided less than 10 percent of profits, even though they make up 59 percent of sales.

In an ironic turnaround, American makes such as Buick are doing well in China, where a growing middle class sees status in models Americans have often ignored. Some innovative American dealers, such as Frank Rodriguez of Orlando, Florida's Greenway Ford, have tapped this of Mr. Rodriguez's 11 dealerships, three are in Shanghai, the commercial heart of the new China.

Many of these trends are apparent in the No. 1 company in the Hispanic Business 500 auto sector, The Burt Automotive Network. With one-time microbiologist Lloyd "L.G." Chavez Jr. as its CEO, the Centennial, Colorado-based chain continues to do well, growing market share in the declining Denver market. It lands at the No. 2 spot, just behind Brightstar Corp., at the top of the entire list.

Today, the company operates nine dealerships and represents 15 different automotive franchises, including Chevrolet, Ford, Buick/Pontiac/GMC, Subaru, Honda, Mazda, Chrysler/Dodge/Jeep, and Toyota, which helped launch the family dynasty.

With 2006 revenues of $2.065 billion, it's more than three times larger than the second-place company in our list's automotive sector, Ancira Enterprises of San Antonio, Texas. But those revenues are roughly even with its 2005 figures.

Competitive pressures and consolidation are also nipping at the heels of many of America's approximately 21,500 new car dealers, especially as mega-groups operating nationally make inroads. Burt, for example, is a David against some of the corporate-owned retail giants, such as AutoNation of Fort Lauderdale, Florida.

But the Chavez family hasn't rolled over. Several other large networks, including Sonic and Group 1 Automotive, have cashed in their chips and walked away from the Denver market, in part because of the tough competition they've faced. And even king-of-the-hill AutoNation, which bought the local Denver outlets of football legend John Elway, hasn't found the going easy.

Lessons Learned

The Chavez family isn't entirely unique. Across the country, Hispanic-owned dealers are fast becoming serious contenders on the automotive retail scene. Seventh in the sector and No. 30 on the Hispanic Business 500, Irma Elder has become a force to be reckoned with right in the Motor City, racking up sales of $235 million in 2006. Her late husband opened up a Ford showroom in what was then farm country in 1967, but today the Troy Motor Mall, where the group's flagship stores are based, is a powerhouse of Detroit retailing.

Like Burt, Mrs. Elder has recognized the need to diversify, adding brands such as Jaguar and Saab. "I like the diversity," she explains. She now has nine different dealerships in Michigan and Florida.

Mrs. Elder and Mr. Chavez have both learned the lesson that has critically reshaped the retail side of the automotive business over the past two decades.

In lay terms, it's a matter of not putting all your eggs in one basket. Through the 1980s, the American auto marketplace was a relatively static place, with each manufacturer locked in a relatively fixed position. Today, the market is vibrant and also quite unpredictable. A carmaker that dominates this year may see sales and share collapse tomorrow taking retailers with it.

By spreading out into multiple franchises, dealers are better positioned to withstand the ebbs and flows. They can ride the coattails of a success story, such as Toyota, and trim back investments and thus, liabilities with a fading brand, such as Ford or Mitsubishi.

"Diversity is survival in this business," says Lou Sobh, CEO of Lou Sobh Automotive in Duluth, Georgia, whose company ranks fourth in the sector and 16th in the Hispanic Business 500. He's talking about dealers needing more than one brand in their showrooms.

"We have 15 stores. Some make money, some lose money, and we make a little," he says. "You can't have all your eggs in one basket the chickens have stopped laying."

Overall revenues are down about 25 percent, he says, to about $420 million in 2006, and spending per employee has fallen. "We're trying to keep as many employees as we can, waiting for things to turn up," Mr. Sobh says. In the industry as a whole, the number of employees has held steady to a little lower since 2001.

He adds that small SUVs, such as the new GMC Acadia, are doing well.

"Hybrids are selling well although people are not asking for them as much as I first thought. Some don't like the price and some see little difference in mileage."

Diversity in Models and Mileage

Greenway Ford's Mr. Rodriguez, who has multiple dealerships in the Southeast, sees diversification as a necessity. "You have to have diversity in brands if you're going to survive. No brand is on top forever," he says.

Revenues have been up and profits with them. Mr. Rodriguez says having diversity in markets has helped in that regard.

He has five stores in Orlando with others in Nashville, Tennessee; Huntsville, Alabama; Tampa, Florida; and three in Shanghai, China.

"We wake up every day and say, 'We're going to go sell something.' We don't listen to the bad stuff. People still have to buy cars and trucks," observes Mr. Rodriguez, whose company is No. 12 on the Hispanic Business 500 and third in the automotive sector.

Silvestre Gonzales, whose Los Angeles-area Gonzales Automotive Group is No. 20 on our elite list, says revenues are higher than last year on a year-to-date basis. In 2006, his company posted revenues of $296 million.

"I feel the public is accustomed to higher gas prices and know they need transportation," he says. "We've had to trim payrolls so productivity has increased. In order to be successful, any dealer in domestic brands has to be diversified. Better have some imports."

There's growing interest in alternative fuels like diesel and ethanol, but availability of the fuels is still a problem, Mr. Gonzales says.

What's more important is an increased awareness of what he calls "miles per gallon per person." That comes into play for minivans and three-seat SUVs because they allow more passengers per gallon of fuel consumed.

"That's the new phenomena that's helping domestics more miles per gallon per customer. That should be the domestics' creed," Mr. Gonzales advises.

Jeronimo M. Esteve, whose Miami-based Bella Automotive Group is eighth in the sector and No. 35 on the Hispanic Business 500, is a happy camper. "Fortunately, we have the Toyota brand. It's been a wonderful four months we're coming out of the best quarter ever," he says.

And 2006, with its revenues of $205 million, was better than 2005 by 12 percent while productivity remains constant.

"We do not over hire," he notes. "We're in the right place at the right time with a broad line of cars that have a lot of miles per gallon."

Hybrids are selling well but at a slower pace than last year because some tax breaks are gone. "Life is wonderful on this side of the fence," Mr. Esteve says.

With sales of $171 million, Alan Vigil is 10th in the sector and No. 43 in the Hispanic Business 500, but he's taking his time, acknowledging that two stores are enough, for the moment.

Even then, Alan Vigil Ford, based in Morrow, Georgia, is the 50th largest auto retailer in the United States and 16th in terms of parts sales. As with so many other major Hispanic dealers, he's focused on the larger community, rather than trying to focus on Hispanic consumers.

But that sense of community is still an underlying factor, as is family, having recently installed his college-grad son at the smaller showroom "to give him a shot."

That, it seems, is what Hispanic retailers want and need the most.



Source: HISPANIC BUSINESS Magazine and Hispanicbusiness.com, Copyright (c) 2007 All Rights Reserved.


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