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Republic Learns Cars Ain't Videos


The Corporation: MANAGEMENT

REPUBLIC LEARNS CARS AIN'T VIDEOS

It's retooling its Blockbuster strategy at AutoNation

Wayne Huizenga has gotten a lot of mileage out of comparing his AutoNation USA used-car superstores to Blockbuster Entertainment Group video stores. By consolidating a fragmented industry and focusing on customer service, he vowed Republic Industries Inc. would revamp automotive retailing just as Blockbuster redefined movie rentals under his leadership. "It's not that much different when you are selling cars," he told an audience of auto dealers and industry executives recently.

But with Republic's planned announcement on Jan. 29 of a $150 million write-off to cover the costs of merging its new- and used-car operations, Huizenga and Steven R. Berrard, Republic's co-chief executives, are acknowledging that the car business is different. They're shifting gears to decentralize management at AutoNation, putting experienced local dealers instead of former Blockbuster executives behind the wheel. By tapping the dealers' expertise, Republic hopes to boost the lagging performance of its 25 AutoNation superstores and capture efficiencies from its 54 dealers and 267 franchises. For disappointed investors who are sitting on stock trading around 21, near Republic's 52-week low, the good news is, at least management is willing to try something new.

Republic's moves put it in a stronger position to weather what may be a tough year. Used-car wholesale prices remain strong while retail prices are softening, squeezing dealer margins to 10.8% from 11.1% a year ago, according to the National Association of Automobile Dealers. Auto analyst Maryann N. Keller of Furman Selz Inc. in New York doesn't expect much improvement in 1998. Flat new-car prices and attractive sales incentives will put used-car prices under even more pressure. Still, she believes Republic is buffered to some degree by its new-car, rental-car, and solid-waste divisions. And few are ready to write off Huizenga's concept yet. "It's a much more difficult business to run than three years ago when used-car prices were stable or not declining as much, but it is still possible and probable to make money in used cars," she says.

Huizenga says AutoNation will be profitable by midyear and that some older stores already are. "It's a tougher business than Blockbuster," he admits. But, he adds, "business has turned around. This is going to work."

Still, it will take a lot to persuade skeptical investors. The stock is lagging despite some recent victories. Republic resolved a very public spat with Toyota Motor Corp. that threatened to snarl its acquisition of dealers. It sold its home-security business for a hefty premium. And it has continued the blitzkrieg of acquisitions that vaulted the company from $2.3 billion in overall revenues in 1996 to $10.3 billion last year. Operating income grew nearly fivefold, to $443.7 million, in that time.

Why isn't Wall Street impressed? Largely because investors have adopted a "show me" attitude with what had been an appealing story of revolutionizing the $600 billion auto-retailing industry. Shares of used-car superstore competitor CarMax Auto Superstores and new-car dealer consolidators United Auto Group and Cross-Continent Auto Retailers have also been hammered as results fell short of expectations. AutoNation, on the other hand, is a small part of the overall empire--an estimated 6% of revenues in 1997. But it is key to Republic because it was a big part of the story the company took to Wall Street. One institutional investor who holds Republic shares says the concept has promise, but execution has been poor. "The question is, if you really have car people who can operate the business properly, can they make it work? This is the make-or-break year."

Believers such as Randall E. Haase, senior portfolio manager for Alliance Capital Management, Republic's largest institutional holder with upwards of 35 million shares, say the concept was bound to need refining. He applauds the new, decentralized strategy. And he thinks Wall Street is unfairly lumping Republic with the other newly public auto retailers that don't have the efficiencies of Republic's regional clusters of used-, new-, and rental-car operations.

The need to reap those efficiencies--and fix AutoNation--is what's driving Michael E. Maroone, president of Republic's automotive retail division, and the other veteran car dealers Republic has brought on board. With much of their net worth on the line in Republic shares, the dealers have pushed for changes.

"SOME MISTAKES." At a Republic dealer meeting in early September, many applauded high customer satisfaction ratings and top-notch facilities. But in the zeal to create a different used-car buying experience, they complained, AutoNation had not hired enough experienced auto execs and managers. That hurt, particularly with crucial aspects of used-car operations, such as the complex process of finding and stocking used cars. Inexperienced buyers, under pressure to stock and replenish lots with 700 to 1,000 cars each, were paying too much, buying high-mileage fleets ill-suited for retail sale, or cars that just didn't sell well in local markets.

Compounding the errors, cars often languished in reconditioning centers for weeks waiting on minor cosmetic fixes, all the while depreciating. Used cars are like fruit or meat, dealers say: They "spoil" rapidly, and quick inventory turns are key to keeping merchandise fresh, costs down, and buyers interested. Instead of wholesaling cars that didn't sell after 60 days--common practice among dealers--AutoNation was keeping cars on lots or shipping them to other locations. Gerald W.B. Weber, former senior vice-president for operations who helped launch AutoNation after leaving Blockbuster, says these missteps were "all part of the learning curve--we made some mistakes but we did a lot of things right." Weber retired from Republic in December.

Within weeks of the September dealer meeting, Maroone was made responsible for franchise dealers and the used-car superstores. A respected dealer, he had joined Republic when it bought his eight-franchise group in February, 1997, for $200 million. Under the new plan, superstores are now grouped with local new-car dealers. Dealer "mentors" work with individual AutoNation store general managers, while district managers have responsibility for new- and used-car operations. "The way to move quickly is to put the decision-making in the field," Maroone says.

One of Maroone's big challenges is to get as many cars as possible from Republic's dealers. A system of incentives will reward new-car dealers for taking trade-ins, even if they're eventually sold in other Republic used-car lots or at AutoNation stores. That will encourage dealers to keep inventory "in the family" and seek the best outlets. Thus, a Lexus taken in by a Republic Ford dealer will be moved to a Republic Lexus dealer or to AutoNation because buyers hunting for a used Lexus aren't likely to look at a Ford dealership.

LEANER STAFF. Much of the customer experience at AutoNation--one-price, no-haggle shopping, with extensive warranty and return policies--remains the same. But now, staffing at AutoNation stores is leaner and sales associates are paid by commission, based on volume and customer satisfaction, rather than through salary and bonus plans. The changes have spurred sales at AutoNation in recent weeks, dealers say.

Meanwhile, Huizenga and Berrard have learned a painful lesson--that customers generally aren't willing to pay a premium for a better retail experience. Indeed, AutoNation may have to work hard to overcome customer perception that it overpriced its cars. "Consumers are already viewing superstores as higher-priced used-car outlets" says a report by CNW Marketing Research of Bandon, Ore. Maroone insists AutoNation will be the "low-cost provider."

One key to bringing "big-box" retailing to cars may be finding the right-size box. CarMax has varied its store size by market. And Maroone says the average-size AutoNation now is closer to 500 cars, down from 700 to 1,000 initially, though that may increase as sales ramp up. "We don't need to fill those lots," he says. "What we need is the right merchandise at the right price."

Moreover, Republic dealers have a tremendous motivation to make the game plan work. Most sold their dealerships for stock, and some have transferred options to other family members and employees. Often ostracized by other dealers once they joined Republic, dealers have their pride at stake, too. "The more criticism that's out there, the more determined the dealer-partners are to make it work," says Bill Wallace, a Delray Beach (Fla.) dealer. Investors must now hope that with those dealers in charge, they're in for a smoother ride.By Gail DeGeorge in Fort Lauderdale, with Bill Vlasic in DetroitReturn to top


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