Customers are clamoring for cars and trucks, and the number of dealerships that can serve them plummeted by 15 percent nationally since 2008. Automakers are revving up for what has got to be their biggest splash of fresh models and new vehicles in years. And there’s room to expand into territories left open during the shakeout that can bring those beautiful economies of scale.
But you had better have your checkbook handy: The ante to stay in the game just went up.
Local dealerships report that automakers are expecting survivors to step up to the plate with flashy technology, renovated showroom space and standardized signage and exteriors. One example: the General Motors Essential Brand Elements (EBE) program that aims to upgrade the company’s image costs between $600,000 and $800,000 for small dealerships and perhaps double those amounts for larger ones, according to industry sources.
“If I had to start my career all over again, I’d build signs,” said Blair Sharpe, general manager of Grand Rapids-based The Sharpe Collection that sells Jaguar, Land Rover, BMW and Mini. The company recently renovated its separate Land Rover and Jaguar showrooms in Grand Rapids to meet the expectations of those automakers. “One third of my budget was in signs,” he said.
Renovations can disorient customers for up to two years, and dealerships and automakers sometimes clash over the strict mandates in the re-imaging programs, such as using only approved suppliers for everything from exterior treatments to carpet and furniture.
But at the end of the day, major local dealerships say the time is ripe to launch new nameplate stores or buy out smaller franchisees who fear they can’t make the necessary investments to meet the automakers’ higher expectations.
It’s not your father’s car dealership
Inside his headquarters in Kalamazoo, Aaron Zeigler glances at a 70-inch monitor with real-time information pouring in from the Zeigler Auto Group’s 15 dealerships spread throughout Michigan, Indiana and Illinois. During the past eight years, Zeigler has built 14 new dealership facilities after acquiring other dealers or picking up smaller franchises that wanted to get out of the business or that just couldn’t compete with the networked dealer groups.
“I can take a thinner margin if I share costs (across the company) and do higher volume,” Zeigler said. “For the single-point mom and pops, it’s going to be difficult for them to compete going forward.”
Using his information retrieval system, Zeigler doesn’t have to be in Schaumburg, Ill. to know how the company’s store there is performing or what issues may have come up. A single-point store could never afford to develop that level of sophisticated technology, he said.
“You have to have the technology if you want to compete and leverage that (cost) over multiple dealerships,” Zeigler said. “All our dealerships pool our marketing funds. … We do all centralized paperwork and accounting and IT. And we share in a lot of those costs. If we lower our cost structure, we can sell product at a lower cost.”
As part of a new Honda store that it built in Kalamazoo, Zeigler Auto Group included a new 100-seat training center that it uses to train all 250 of its sales consultants from dealerships in Michigan, Indiana and Illinois via video conferencing. The technology allows the company to focus on its internal culture as well as train sales professionals in new models and new technology. Zeigler employs a full-time director of training to ensure the sales team can function at the top of its game, he said.
“There’s a lot of education with the new products coming out,” Zeigler said.
Forward thinking has paid off for the largest car and truck dealership in West Michigan. The group posted total revenues of nearly $490.6 million last year, up from $402.2 million the previous year, with sales coming from 40 brand franchises spread over 15 stores.
The company just celebrated a grand opening at its new Honda facility in Kalamazoo for a franchise that it acquired in 2010, and it’s currently building a new Fiat dealership in Grandville near the group’s Chrysler, Dodge and Jeep store.
Grand Rapids-based Fox Motors, the region’s second largest dealership organization, is also building a new store in Traverse City to house a new Fiat franchise, said Dan DeVos, president and CEO of DP Fox Ventures LLC, the parent company of Fox Motors.
DeVos said his company has planned major renovations at a host of properties around West Michigan.
In 2011, Fox Motors had total revenues of $489.4 million, up from nearly $445.3 million the previous year, from 20 locations and 40 brands in Michigan. The company is also testing the waters on what could become part of its future expansion strategy by working with Ford to enter the urban Chicago market. (See “Fox Motors plans TC, Chicago expansions”)
“It gets hard to compete on a small basis,” said DeVos, whose last name translates from Dutch into English as “the fox,” hence the company’s name. “We get to share resources with multiple stores. Without synergies and multiple stores, you don’t get that backroom efficiency and your cars get expensive. It’s hard unless you have a large group to help spread those costs.”
While both West Michigan companies are adding stores right now, neither DeVos nor Zeigler expect many new franchises to come online over the next few years. The executives said dealership activity will come from acquisitions, and both said their companies have an eye out for the right opportunities.
Zeigler said his company remains open to acquisitions with dealerships selling any of the Tier 1 brands. The company often looks for transactions in the markets where it already has a presence, but it is open to leveraging its technology to look outside those markets.
“We’re looking for people maybe at the end of their careers who don’t want to invest in something they’ll never see a return on,” he said, referring to manufacturer-required facilities investments. “They’ll never see the return. It might be better to sell and let the next owner deal with it.”
Plaid jackets not allowed
Dealers are adopting new technology and a new attitude on the customer side as well. The days of free hot dogs and roving clowns are over. There’s much more emphasis on educating customers — particularly when new cars and trucks have so many new sophisticated features.
In Sharpe’s BMW showroom in Grand Rapids, the dealer is installing a “Genius Bar” to help customers understand how to get the most out of the dozens of advanced technical features in their vehicles. Sharpe said it won’t be long until salespeople will be walking around a car with an iPad at the ready to show prospective customers how those different features work.
DeVos describes the march of technologically enhanced sales tools as putting the right information at the people’s fingertips, rather than tying them down to desktops. Fox Motors has an internal “innovation group” that studies what technology could help its dealerships provide better, more efficient customer services and sell more vehicles.
“All of the manufacturers are building really good products, and there’s not a lot of difference between a lot of the models coming out,” Zeigler said. “In my mind, it really comes down to what the experience is when you come in to buy a car. We had to spend time to make sure we had the right culture in our organization, the right processes set up to exceed customer expectations.”
The tightened, highly competitive market also reinforced customer-focused efforts at Fox Motors, starting with hiring the right people, DeVos said.
“People buy from people,” he said. “You can’t have turnover, otherwise your relationships are blown. For us, it’s very important to get the right people who will be around.”
He said the company does a good job of communicating with its customers throughout their experiences at the dealerships, whether buying a vehicle or getting a vehicle serviced, but there’s always room to improve.
“We’re very big on how to communicate with the customer: How much information do they want, when do they want to receive it and how do they want to receive it? Those things are really evolving and we’re trying to make sure we have systems in place to meet customers’ specific needs,” he said.
The Sharpe Collection plans to redo part of its BMW showroom to reflect the dealership’s new BMW M performance division certification, which it shares with only a handful of dealers nationwide, Sharpe said. The certification signals to performance-minded customers that the sales and service representatives at the dealerships can speak their language. They’ve all been trained on BMW’s M models and have spent time on the track with the company’s driving instructors.
“It’s a showroom within a showroom … that’s really designed for the client,” he said.
Bricks and mortar
Local construction companies and contractors have benefitted over the past few years from West Michigan auto dealers that invested in their businesses during the economic downturn.
“It’s been a blessing for us to have this (GM Essential Brand Elements program) out there,” said Mike Housman, president of Grand Rapids-based Wolverine Building Group Inc.’s North America division.
Over the past two and a half years, GM projects have translated into $8 million worth of business for Wolverine Building Group, while Triangle Associates Inc. billed $15 million in dealership projects just in 2011. Pioneer Construction Inc. of Grand Rapids has worked on nearly $12.4 million in dealership projects — not just for GM brands — since 2009.
Wolverine has been involved with a dozen renovation projects that are in-progress or have been completed, starting with the Todd Wenzel Automotive dealerships in Hudsonville and Grand Rapids. Another four or five projects are on the drawing board, Housman said.
Sources familiar with the program said the Essential Brand Elements program gives dealers a quarterly payment based on the number of vehicles they sell to help pay for the construction project. The dealers must hit target dates in the process to keep the payments coming.
Mercedes-Benz’s Autohaus program from the late 2000s also paid dealers on a per-vehicle basis to renovate their facilities. A current Toyota program does not offer the payments, according to sources.
Walker-based Triangle Associates worked extensively with Fox Motors on several dealership renovation projects over the years, but first got involved with the GM program at Kool Chevrolet in Plainfield Township. Since then, Triangle Senior Project Manager Casey Peters has been shopping the contractor’s services around the state’s Lower Peninsula. What he’s found is that the smaller, rural dealerships have a lot of questions about the EBE program, and many struggle with justifying the expense.
“We work at getting them into compliance for the least possible cost,” Peters said. “It begins at a cash flow analysis, an initial calculation to see if it’s even feasible.”
Mitchell Watt, president of Triangle Associates, said the company functions as a one-stop operation that manages the design and construction process for the dealers. One key to getting dealers’ business is keeping an open book throughout the process, Watt said.
While Watt said it makes sense that improved facilities will create better customer experiences, calculating the return on investment for those facilities projects is a tough sell for the smaller dealers, whose manufacturer incentive payments likely won’t cover the cost of the projects.
Fox Motors’ DeVos said the company is in the planning stages for facilities projects at both of the stores it successfully fought to keep open when GM announced dealership consolidations in 2009.
The Fox Motors Alpine Township Buick GMC dealership will add showroom space and bring the facility up to GM’s brand standards if the project secures local approvals. However, the company’s Charlevoix store is trickier to navigate because the location sells a mix of GM and Chrysler products from the same facility, he said.
“We’re trying to get a really good understanding of what it means to meet (GM’s) requirements for EBE without having to build a whole separate Chrysler store and a whole separate GM store,” DeVos said. “We’re trying to get those type of understandings from GM about what it is that they really require.”
No cookie-cutter stores
Sharpe said his showrooms needed to be updated, but acknowledged some struggles with manufacturers’ strict guidance on interior furnishings.
“It depends on the manufacturer. There is some negotiation there,” he said. “We’re not afraid to invest in facilities, but we want to not have to change it every three years.”
DeVos said he certainly thinks facilities and appearances help sell cars. He pointed to the former Duthler Ford dealership on 28th Street in Grand Rapids as an example of a facilities project that worked to turn a dealership around. When Fox bought the store, it opened up the front end of the building and tore down two restaurants in outlots on 28th Street that blocked the view of the dealership from the main thoroughfare.
“We know that our changes made a difference. When we first bought the store, people couldn’t even find the place,” he said. “(The changes were) pretty dramatic, but that saved that store.”
But he’s not sold on the idea that manufacturers should have “cookie-cutter” stores or that all of the branding elements are necessary.
“I just don’t think that the carpet you have is going to make a difference, that the tile you have is going to make a difference, that the furniture you have is going to make a difference. They want uniformity, and that’s of course why they’re pushing it,” he said. “Stores have their personalities. Not only by brand and by location, but by people. (Mandating a universal image) really takes some of the personality out of the store.”
Another concern for DeVos: The construction projects displace customers for almost two years — for about a year while crews are actually working on the project and another year afterward as customers return to their old habits. What’s worked for Fox Motors is to be hyper communicative with customers about construction plans, show them renderings of the new facilities and have good signage in place for when they do come back.
“Go above and beyond to overcome the unpleasantness they may face with the dust and the dirt that are unavoidable and the waiting rooms that may be temporary. There’s only so much you can do by telling and showing them (that) once we get through this, it must be better,” he said.
Better times ahead
Dealers are operating in a period of dramatic change for the auto industry. In North America, automakers will be launching 137 new vehicles between 2012 and 2015, a rate of activity not seen in years, according to statistics from IHS Automotive, an industry analyst group with offices in Grand Rapids and Detroit.
Most analysts expect sales in North America to range from 14 million units to 14.4 million units in 2012. By comparison, North American unit sales were 12.8 million in 2011 and bottomed out at 10.4 million units in 2009.
But as sales bounce back, many automakers now face new capacity constraints after years of cuts trimmed plants from their portfolios and as suppliers shrunk their operations to the market conditions of the past few years.
National Automobile Dealers Association Chief Economist Paul Taylor, speaking in August at the Center for Automotive Research Management Briefing Seminars, said inventory remains a concern for some dealers affected by shortages related to natural disasters in 2011.
“Everyone should have almost enough of everything” through the second half of this year, Taylor said.
However, dealers of import luxury brands said they still struggle to get cars for inventory and to fill customers’ orders within a reasonable time — sometimes customers have to wait more than six weeks. Customers looking for other limited-production models — one of the high-horsepower muscle cars like the Ford Mustang Shelby GT500 or the Chevrolet Camaro ZL1 — have even slimmer pickings. Even Hyundai-Kia has been running into constraints as its sales rose more than 36 percent in 2011, taxing its production capacity.
Some foreign automakers, including Audi and BMW, announced plans to bring on new capacity in North America to serve the U.S. market. Analysts at IHS Automotive forecast 2 million new units of production will come online near the U.S.-Mexico border in the next few years.
Photo of Aaron Zeigler by John Lacko.