Des Moines Business Record
07-07-07
The Road Ahead
BY SARAH BZDEGA Bob Brown Automotive is in its third generation of Brown
family leadership since the dealership opened in 1961, and the owners are not
planning to change the family-run-business model anytime soon. But that
dealership may become the exception in Greater Des Moines.
"I think (the national dealers) probably have approached all dealers in the
communities they have come into," said Ron Brown, president of Bob Brown and
a second-generation leader, "but we currently have no interest in that."
Meanwhile, Stew Hansen, owner of Stew Hansen Auto Group, was ready to
retire last year at age 78. "One of the major problems was the amount of money
involved," he said. "It would have been hard for one person to get involved."
So last June, he sold his company to Utah-based Ken Garff Automotive Group,
which owns about 40 dealerships in seven states.
An economic downturn and owners eager to sell their businesses have led to
consolidation among Greater Des Moines' automobile dealerships and the
appearance of two national companies over the past year.
These changes could cause increased competition among dealerships in Greater
Des Moines and more mergers in the future.
When a national company enters a market, said Paul Taylor, chief economist for
the National Automobile Dealers Association, "it fires up the dealerships that
compete with the new arrivals. People simply find ways to sell more cars.
Nobody likes competition, but it's healthy for commercial enterprises."
"Actually the number of mergers that are going on will continue to go on, we
anticipate, across the state," said Gary Thomas, president of the Iowa
Automobile Dealers Association. "There is a trend to consolidate and control
costs."
Last year, Iowa had 387 new-car dealerships, compared with 394 in 2005,
according to data released by the NADA. Nationally, the number of new-car
dealerships declined by nearly 300, double the shrinkage seen in 2005, when the
number decreased by 145. Most of the decline happened in dealerships with 400
new-unit sales per year or less, while the number of large dealerships increased.
Dealerships are consolidating across the nation in part because some stores are
closing in regions that are declining in population, Taylor said, and also because
of slow economic growth, especially in the last half of 2006 and into the first
quarter of 2007.
In Iowa, several local dealership owners nearing retirement either have family
members wanting to take over the business or are looking to sell for a significant
price. Whereas Rich Willis, owner of Betts Auto Campus, was able to purchase
his dealership in the 1990s, he said "it is becoming more difficult for individuals
(to purchase dealerships) and it has given an opportunity for these publicly held
companies to come on board."
Willis' sons, Jason and Mathew, both in their 20s, plan to take over the company,
he said, which has led him to ignore interest from national companies. "The
phone has rung at various times," Willis said, "and I don't answer."
Yet Willis predicts more acquisitions could occur in Greater Des Moines, and
national companies have expressed their intent to expand.
"The industry itself is in a consolidation mode," said Robert Garff, CEO of Ken
Garff Automotive, a family-run company that started 75 years ago. In addition to
Stew Hansen, the company also purchased Bud Mulcahy's Jeep dealership and
moved it to the Stew Hansen location early this year.
Garff expects the buying spree to continue. "We now sell about 35,000 cars a
year and are approaching a billion dollars in sales," he said. "We're hoping to
expand our footprint in other places and even in Des Moines to double that size."
Garff isn't the only automobile group interested in Des Moines' dealerships.
Lithia Motors Inc. has rapidly entered the Iowa marketplace, purchasing
European Motorcars, Jordan Motors and other major franchises. It now manages
seven dealerships in Greater Des Moines.
The Oregon-based company went public in 1996 to gain the capital it needed to
expand from five dealerships to more than 100 in 15 states today, said Robert
Sacks, director of community relations, making it the eighth-largest automotive
dealership group in the country.
"The acquisition team is always looking for suitable markets and suitable stores,"
he said. "Whenever an opportunity presents itself, we're eager to jump in."
"I think Des Moines is a hot spot for outsiders to invest in," Willis said, citing
population growth and quality-of-life amenities as key attractions.
Experts in the automotive industry believe the entry of national dealers will not
dramatically change Greater Des Moines' marketplace, because these dealers
are purchasing existing dealerships rather than adding new locations. Many have
also kept most of the employees on staff.
"Generally what you find is some efforts to improve the management of that
franchise," Taylor said, "but generally they're buying a franchise that was already
in a good location with strong brands for the marketplace."
However, Iowa State University economist David Swenson said although a
significant portion of a company's revenues goes towards payroll, a community
loses some money when a national company buys out a local business - the
money that a local owner and top-level managers typically reinvest in economic
development in the community.
"It ends up being returns to shareholders external to the local economy as
opposed to people that have a highly vested interest in maintaining the health of
the region," Swenson said.
Lithia receives approximately $245 million in annual revenues from its Iowa
dealerships. And although new-vehicles sales have decreased nationally, Lithia's
revenues increased 9 percent to a record $800 million in the first quarter of this
year.
Total dealership sales in Iowa fell to $5.9 billion in 2006, compared with $6.3
billion in 2005. Nationally, sales at new-car dealerships fell 3 percent in 2006,
following a 2 percent decrease in 2005. Meanwhile, used-vehicle sales in the
U.S. rose 4 percent last year.
Though sales are down for domestic vehicles at his locations, Brown believes it
is because of economic conditions rather than national dealers gaining market
share. He believes sales could soon rebound as his stores carry more E85 and
fuel-efficient vehicles than most dealers in the area, creating "a better product
lineup than we've ever had in the past."
"The product is much better across the board, so I think it's going to get more
competitive and the domestics will gain market share primarily because of
product," he said.
Pressured by General Motors Corp. to consolidate, Bob Brown is one of two
dealers that now own Buick, Pontiac and GMC truck franchises in Greater Des
Moines, compared with five dealers that owned one or two of the three franchises
a year ago. Brown's company purchased Pontiac and Buick franchises from
other dealers in Greater Des Moines, and Ramsey Auto Center purchased the
GMC franchise from Holmes Automotive Group in Urbandale and added a Buick
franchise.
Such consolidation could help the locally owned dealerships compete with the
national companies. "There's a better selection of inventories," Brown said, "and
we're reaching more of a customer base. ... We've sold more (vehicles) with
fewer dealerships."
Lithia has made several changes to its Greater Des Moines locations to make
them operate more efficiently. Whenever it acquires a new dealership, Sacks
said the company sends a team of experienced Lithia employees to work with
new team members for two weeks. Then about a week to two later, the team
returns to offer a quick refresher course. The company also installs a new
computer system that all its dealerships use.
Garff has taken a hands-off approach, with Stew Hansen remaining on staff as
general manager of and consultant to his former dealership. "We're still doing
about the same amount of business," Hansen said. "We have the same people
managing the place. ... I've seen Garff maybe twice since he bought us. We're
basically running the dealership from here."
The only noticeable change, Garff said, is that the company has enhanced
employees' fringe benefits packages.
Analysts predict that if the pace of economic growth picks up in the second half
of the year as forecast, it could slow dealership consolidation.
However, that may not stop dealerships from looking at possibilities for future
expansion. "We all want to improve what we have," Brown said, "and if there's an
opportunity to grow, we certainly look at any and all opportunities."