Earl J. Hesterberg, President and CEO
Group 1 Automotive, Inc.
“Maximizing Human Capital Through Technology”
Automotive News World Congress Speech
January 17, 2006
Slide 1: Title
It is always a pleasure to support these great Automotive News World
Congress events put on by Ed, Keith, Peter and their team, especially when
they hold them in these resort locations at such a lovely time of the year.
After 30 years with Ford, Toyota, and Nissan in North America and Europe,
last April I became the CEO of Group 1 Automotive in Houston, Texas.
I want to begin by giving you a little background on Group 1 so you will
understand the framework for some of my comments here this morning.
Slide 2: Group 1
Group 1 went public in late 1997 and we’re currently number 361 on the
Fortune 500 list. The company consists of 94 automotive retail dealerships
across the United States with a revenue run rate of $6.1 billion. In 2005, we
anticipate selling approximately 200,000 new and used retail vehicles and
servicing 1.6 million vehicles.
Slide 3: Brand Diversity
Our brand mix is approximately 60% import and 40% domestic brands with
29% of our unit sales coming from Toyota and Lexus and 19% derived from
Ford Motor Company brands.
Slide 4: Revenue Growth History
As Group1 1 has grown into a $6 billion company, it has become
increasingly difficult to continue to operate with a variety of operating
philosophies and procedures. While our extensive level of automotive
experience and local market knowledge are indeed competitive advantages,
a $6 billion company needs to drive significant operating and cost
efficiencies and to aggressively leverage its size.
Slide 5: Prior Platforms
Our company has historically been very decentralized which has generally
resulted in us retaining both the management and employees enlisted by the
owners selling their businesses to Group 1.
Slide 6: Regionalization
We have begun the process of streamlining our operations at Group 1
Automotive as we are transitioning from 12 local Platform Presidents to a
management structure that will be driven by 5 Regional Vice Presidents.
These 5 Regional Vice Presidents have more than 150 years of automotive
experience which is impressive by anyone’s standard.
Slide 7: Industry Evolution
About 8 years ago when public automobile retailers were emerging in the
United States, or approximately 10 years before that in the United Kingdom,
many industry observers believed that highly experienced automotive retail
people would cease to be a critical part of the auto retailing business.
There were visions of large chains of national automotive retailers that
would sell all brands of cars and trucks side by side in a manner similar to a
‘Big Box’ retailer with a buying process as simple as renting a video tape or
DVD from your local video rental outlet. Oh yes, and these largest retailers
would be purchasing large quantities of uniquely specified vehicles from
manufacturers at deep discounts compared to privately owned smaller or
individual dealers.
Slide 8: Progress
While clearly some progress has been made on cost efficiencies and the
standardization of processes, I am still trying to find that dealership where I
can easily browse through all of the major brands and complete my
automobile purchase in a matter of minutes. And, I continue to wait for my
large shipment of Group 1 Limited Edition Toyota Camry’s at a special
discount from Toyota Motor Sales, USA.
I can assure you that we have a long way to go as an industry to realize that
one-stop shopping vision, but the industry is taking steps to become more
efficient and reduce the marketing and distribution costs of vehicles that
total more than 30% of the retail price of a vehicle.
Slide 9: Differentiator
You can assume that I am not receiving specially priced large shipments of
Toyota vehicles from the factory, so what is it that would differentiate our
Group 1 Automotive Toyota dealerships from those of the other public auto
retailers or privately owned Toyota stores? We all buy the same vehicles at
the same prices, our locations are generally specified by the manufacturers
and virtually all of our buildings are built to the auto manufacturer’s
specifications. So clearly the differentiator today is people.
Slide 10: The Right Tools
Now the people factor is only part of what the investment community wants
to hear, but they are also looking for an automotive retailing operation that is
as standardized and predictable as purchasing milk, a CD or a washing
machine from a ‘Big Box’ retailer. Of course, people don’t trade-in old
milk, finance CD’s with 72 monthly payments, or crash their washing
machines into other people’s washing machines – so our type of retailing is a
bit more complex
Slide 11: Technology Empowerment
Much of what we are doing at Group 1 today is working to retain our
talented, experienced management and operating employees by keeping
them engaged and empowered while streamlining our processes to be more
effective and efficient. As you might expect, this quickly brings into play
the technology factor.
There is clearly more technology than any business can make effective use
of today, so our goal is to focus on how and what technology we can use to
support our processes, control our assets, and make our empowered decision
makers more objective and cost effective.
Slide 12: UV Inventory
And, our business model works best with same store revenue growth, so we
want to use technology to grow revenue, as well as drive out costs.
There are a couple of examples I can give without revealing significant
competitive information. The first area we decided to bolster with more
advanced technology support is the area of used vehicle sales. At any given
time we have over $100 million dollars of used vehicle inventory which
supports our annual sales of more than 100,000 used cars and trucks per
year. The traditional dealership used car department has not historically
been inundated with statistical analysis or reams of data.
Slide 13: UV – Management Tools
This is the department that makes it difficult for automobile dealerships to
operate like a mass retailer. The only relevant statistical data used by most
used vehicle managers has been how old a given used vehicle is at any point
in time. This is the part of our business that has historically been run by gut
feel, instinct and the experience the manager has acquired over time.
Many used vehicle department managers are completely averse to being
confronted with things such as data, statistics, or historical analysis.
Unfortunately, few of these highly experienced used vehicle managers knew
that full size sport utility vehicles could drop as much as $5,000 in value in
one month following the fuel price increases in the wake of Hurricane
Katrina this past summer. The used vehicle business is a real time business.
One thing computers can provide today is real time data. They can also
provide historical data and data far beyond a single dealership.
Slide 14: UV - CMS
There are several used vehicle computer management systems available on
the market and we have elected to install American Auto Exchange
computer software in all of our dealerships. Our goal with this effort is to
not only increase the transparency and control of this potentially
depreciating asset, but also organize and leverage the decision making
process for our highly-experienced local market decision makers.
Slide 15: UV Transactions
On a daily basis we sell several hundred new vehicles and appraise 700 800 used vehicles. We estimate that we appraise at least one car every
minute of every 12 hour day. This means we have a non-stop purchasing
organization at work that can either represent a great business opportunity or
business risk.
Slide 16: AAX
This new computer software enables us to increase the transparency and
control of this purchasing function. It also provides us with the ability to:
 Monitor our real time used vehicle inventory value versus latest guide
book or auction prices
 Monitor used vehicle appraisal closing rates
 Identify vehicles with a high probability of retail sale at the time of
trade-in appraisal
 Adjust used vehicle stocking practices to reflect local market
historical demand
 Sell from an expanded number of dealership used vehicle inventories
across 5 geographic regions
Without getting into too much detail, you should be able to get a feel for the
changing landscape in the used vehicle world as the used car manager’s
world opens up to a higher level of transparency, data, analysis, and
statistically driven recommendations.
The major point here is that we are using this type of technology to
standardize our processes, to leverage higher levels of performance and
professionalism from our key operational people in the market, and to give
us the ability to hold those people accountable for their performance. But,
make no mistake – our goal is to sell more used vehicles! This process and
control enhancement is strictly an enabler to selling more with less risk.
Slide 17: P&S
Growing parts and service sales is also fundamental to our strategy and you
can see how this revenue has grown at Group 1. You’ll note that we’re
steadily increasing our stall count capacity in our dealerships. This is one of
our most profitable areas, and therefore, extremely important to our growth.
However, there is always room for improvement, particularly with the right
tools.
Slide 18: Service Marketing
Another good example of where we are using the latest technology to
leverage our field management and revenue generating personnel is in the
service department. Traditionally, service marketing has lagged vehicle
marketing in terms of sophistication. The traditional mechanism for service
marketing and merchandising has been direct mail campaigns. In recent
years email and other electronic media have grown in prominence as
“CRM”, or customer relationship management software, has become the
”buzz word” in the automotive retail industry.
Again, what we are doing is not rocket science and is not something
available only to large dealer groups. However, our size does enable us to
realize substantial acquisition cost and operational benefits from these latest
tools.
Slide 19: Auto Revenue
First is the use of “Auto Revenue,” an industry specialist in electronic
databases and electronic marketing. Although we continue with a base level
of traditional direct mail advertising, we are now able to become much more
precise with the targeting, timing, and promotional offers sent to a high
percentage of our customer base. Auto Revenue consolidates and cleanses
our customer email database which we aggressively cultivate from our new
and used vehicle operations, as well as from within our service departments.
Rather than rely on monthly massive mail drops with approximate 2%
response rates, we can stage weekly and daily email marketing reminders
and special offers. Further, we can send custom offers to our customers on a
daily basis. These daily email blasts can be used to more effectively load
our repair shops by advertising the availability of specific services that have
open capacity. A manager can simply send an instant email special out to
customers for a front-end alignment when the front-end alignment machine
has open capacity. This type of daily email advertising can be so effective
that managers have actually learned to limit the number of offers as to not
over load the shop with cut-rate priced jobs during peak business periods.
Slide 20: Emails Collected
By using Auto Revenue as a core marketing tool, we are now capturing over
20,000 new email addresses per month, a substantial increase from when we
started the program. We expect that we will triple our collected amounts in
2006.
In our first year we saved over $1 million in postage cost compared to our
previous year’s spending. We are now sending over 200,000 service
marketing emails per month with a response rate of 4 to 5 times that of what
we normally achieve with direct mail.
These email communications have driven as much as $3.4 million in parts
and service revenues in a single month. That’s grown 300% from the start
of 2005.
Slide 21: Service Drive Technology
Additionally, when these customers visit our service departments, they will
find some of our service advisors equipped with the latest in technology,
such as wireless, write-up PC tablets that enable them to sell additional
services from a prescribed menu as they walk around the actual vehicle
itself. Again, we are using technology to leverage our human assets to
become more professional and greater revenue generators.
Slide 22: F&I Technology
One final example of technology we’re incorporating to increase
administrative efficiencies and improve cash flow is in our Finance &
Insurance department. Through our close partnership with financial
institutions we were exposed very early to a variety of productivity and
gross profit enhancing tools in the F&I world. With tools like Route One
and DealerTrack all dealers can make use of technology in the F&I
departments. These tools allow dealers to improve transaction speed and
accuracy. In addition the ability to transmit contract information
electronically to financing sources reduces paperwork and errors, improves
productivity and speeds the funding of our contracts in transit. In some
cases we can actually receive funding for contracts on the same day that they
are written and approved.
Technology in the F&I departments also contributes to consistent practices
and compliance issues. When the DMS, credit process, and menu selling
system all cross populate information between the steps of the sale,
consistent processes can be developed. For example, the use of electronic
menus in the finance department gives the customers fully transparent
disclosure of a variety of finance and after-market products while actually
improving sales and moving them through the F&I process more
expediently.
Slide 23: Summary
Today, I have given only a few examples of how technology can continue to
benefit auto retailers like Group 1, but by now I’m sure you have the point.
We believe that we have only scratched the surface of what we are able to do
by leveraging our human assets with technology. Too often, technology is
perceived as a means strictly for eliminating personnel. I will admit that
increasing efficiencies and reducing overhead is on our list of priorities, but
we are more focused on growing our business by generating more revenue
and improving customer satisfaction through the talented people we have
interfacing with the people that visit our dealerships on a daily basis.
Again, there is nothing available to Group 1 Automotive that is not available
to other retail groups or individual dealers, but by leveraging our size to
acquire this technology and to improve our field management decision
making, performance measurement and accountability, we believe we can
create a competitive advantage. Additionally, by aligning our operating
processes to mesh with this technology, we can derive a higher level of
uniformity in our practices. This uniformity will generate cost efficiencies
that will improve our bottom line, which is what every business, including
Group 1, is looking for.
Slide 24: End