UnitedAuto Group is in position to lead with growth of publicly owned companies
By James V. Higgins / The Detroit News / 11-4-01
Wall Street has praised the performance of UnitedAuto Group, led by former national sports car driving champion Roger Penske. The economic downtown challenges such retailers to continue to grow.
DETROIT -- Roger S. Penske has gone racing again.
But this time the contest isn't exactly sporting. The competing machines aren't cars, but members of an aggressive new breed of automotive retailer. Rather than a checkered flag, the object is to prove to Wall Street and individual investors that a fresh retailing model is viable. The prize: a $1 trillion market in the U.S. alone.
Oh, and the driver is Penske himself.
Some believe that Penske, in his latest iteration as chairman of Detroit-based UnitedAuto Group Inc., is already up a lap.
Very quietly, UAG has worked itself into an excellent position for growth, experts say. Wall Street is praising its management, strategy and performance.
And now, with the automotive market slowing, comes the ultimate test: staying power and continued growth during a downturn.
Penske believes that several trends today -- rising operating costs at the local level, intricate new technologies, ever-higher customer expectations and a steady, long-term decline in the number of auto dealerships while overall sales climb -- argue for a public auto retailing sector similar to the general retail sector ruled by giants such as Kmart and Home Depot.
Today, he said in an interview, only about 5 percent of the $1-trillion U.S. retail auto market -- new and used -- is controlled by publicly owned companies.
"If we looked at this over the next five to 10 years, I think you could see 20 to 25 percent of the industry in the U.S. controlled by publicly traded companies," Penske said. "That means it could grow four times, and if that's the case, you're going to see some big players."
But he doesn't see a time when the traditional "Mom and Pop" individually owned car dealership disappears. "I think the entrepreneurial spirit of individual dealers is very important to the industry," Penske said.
And who would know better? Penske started out as a car dealer in 1965, and several high-performance dealerships remain in his varied stable of enterprises. Those include Longo Toyota in Los Angeles, the nation's largest Toyota dealership.
Longo has not become part of UnitedAuto -- Penske has decided not to mix his long-held dealerships with the new retail group. But it provides inspiration for the company overall.
"They retailed 2,000 Toyotas in August and almost 500 Lexus," Penske said. "They don't do it because they spend more money advertising, they do it because they've got good repeat and referral business. And if we can take that model and have that portable over to UAG across the country, we'd have a very stable long-term company."
Stability is something the public auto retailing sector needs. AutoNation, the No. 1 dealer chain by sales, is beginning to recover from a wild, fast-paced period of growth in the 1990s that produced a number of failed businesses.
It had to get rid of its national chain of used-car dealerships and its rental-car operation, and divest underperforming new car dealerships it acquired in its go-go days. It will grow at a far slower pace in the future.
Bear Stearns analyst Domenic D. Martilotti said the sector overall is choking a bit on its acquisition binge.
A new car dealership presumably is worth more than just the bare cost of its inventories and facilities. It has local brand equity, expertise in its market and other intangibles.
Paying off this "goodwill" -- the purchase price in excess of asset value -- is hurting net profitability.
"Some of these companies overpaid for a lot of the stuff they bought," Martilotti said. "But UAG has done a better job than the others. I think they are pretty good managers of the business -- quite better than some."
In 1998, UAG itself was struggling. Established in 1990 by New York entrepreneur Marshall S. Cogan as the first independent, publicly owned auto retailer, its finances and common stock values were languishing.
At that time Penske Capital, the venture capital arm of the Penske empire, was looking for a major new investment. UnitedAuto seemed to fit the mold. It was undervalued, in a familiar business with good growth prospects, and Penske could get control. He began his buyout in 1999, and today owns 65 percent of the company -- a $200 million investment -- with 25 percent in public hands.
"The timing was perfect, because they were out of capital, they had developed poor relationships with the (automakers), and they really didn't have a growth strategy," Penske said.
On the other hand, he said, UAG had many good people and some "great" stores. It needed a new mission plan based on acute knowledge of the intricacies of auto retailing.
That plan is now unfolding. Its major points:
Continued growth by two methods: More acquisitions, but equal importance is an increase in the volume of business at each dealership. "Just take Honda, for instance," Penske said. "If you go back four to five years they were selling 500,000 or 600,000 vehicles. They're going to sell with Acura over 1 million this year, and they've got the same number of dealers. So we have to understand that the manufacturer has given the retail dealer a real opportunity to expand."
Maximize opportunities for cost reduction. These abound. UAG can obtain cheaper financing than any individual dealer. It can make bulk purchases of supplies, benefit packages such as health care, tools, information systems and training. It can realize immense benefits by enforcing rapid turnover of inventories, combining advertising expenses, and, where possible, building body repair shops and parts operations that serve multiple stores.
Choose brands for growth. The company wants to be 65 percent import and 35 percent domestic, putting the majority of its revenue with the high-growth foreign brands.
Build recession-proof businesses. In a new vehicle sales downturn, rely more heavily on used vehicle sales and service. These, along with customer finance and insurance business, are much more profitable per dollar than new vehicle sales.
Pick managers who know the business. Provide career paths that help cure one of the traditional ills of car retailing: high employee turnover.
Go overseas. UAG recently partnered with Mitsui, the huge Japanese trading and financial company, which can help it expand in places like Japan or Europe. Penske hopes as much as 15 percent of revenue eventually can come from foreign markets.
Rely on local dealership brand names that have been patiently cultivated for years. The name UnitedAuto doesn't appear in any of its dealerships.
That, at least, is the plan. Can the Penske magic -- strong, long-term success in a variety of businesses -- work here as well?
As with his car racing teams, the pressure will be intense for high performance and expert execution.
"Our success has been very simple," Penske said. "It's just the people. It's human capital. You can take the best franchise in the automobile industry and put the wrong people into it and you'll get the wrong results."
You can reach James V. Higgins at (313) 222-2749 or email@example.com