Try as he might, Charles Oglesby (the company's new Chief Operating Officer) just could not get through to me the culture that they are building at Asbury. Sure, CEO's like Earl Hesterberg can throw out these great phrases like "preserving the entrepreneurial spirit while leveraging scale," that folks like me on Wall Street eat up. Of course, it is exactly what we want to hear. I even liked it when Mr. Oglesby summed it all up with four words: "speed, speed, speed, and efficiency." We love "bullet points" on Wall Street.
But after spending roughly a week immersed in the world of auto retail (at the NADA), you really start to realize that creating such a culture is far easier said than done.
In fact, when you really dig deep into the world of auto retail, the entire idea of preserving the entrepreneurial culture while leveraging scale (as catchy as the phrase is), almost seems like an oxymoron (seemingly self contradictory effect). Leveraging scale (to me) means conformity, standardization, which seems contrary to the American Heritage Dictionary's definition of an entrepreneur:
A person who organizes, operates, and assumes the risk for a business venture.
If you are organizing and assuming the risk of something, isn't that almost the opposite of adopting some standard approach, or letting someone else buy your light bulbs? So I would keep asking the same question (in all sorts of different ways), to Asbury's management how do you preserve culture, and leverage scale? Over and over again, and Ken would turn to me and say: "Jerry, that's what Charles has been trying to explain to you."
But then (toward the end of breakfast), lightning struck. In some discussion about the role of personnel, in this case the Finance and Insurance (F&I) director, I was asking if that role ever gets consolidated in with the sales person as menu screens improve? Mr. Gilman said I don't know about that, but we have changed who the F&I director is. He said it is part of a career step. In the past, the F&I director (person) could be a "career" F&I person, and some of the best F&I people could be making more than the sales manager (which in a sales driven organization seems counterintuitive).
So instead, Asbury has made it so the F&I person is a step after sales, before they can become sales manager. Mr. Gilman explained, first of all, in order to be a good sales manager, you really need to understand how to "desk" (finance) a deal. So for them, it was about creating better (and more professional) sales managers (and ultimately General Managers). But as a byproduct, obviously if the F&I person is on a career ladder, they are not "career" F&I folks making more than the sales manager, so F&I compensation goes down.
Does it mean they end up with a lower caliber F&I person? I don't think so. Because someone moving up the career ladder is far MORE likely to follow the menu and recommended sales process (i.e. like a "ten point system,") than someone who has developed their own "system" over the last 20 years. And sometimes, as I discussed yesterday, that "system" is not always in the best interest of the customer, which becomes somewhat difficult to assess (identify) when you are measuring an F&I person on F&I per vehicle.
It really goes back to what Jeff Rachor (Sonic's President) and I discussed the Friday before NADA, which is that the initiatives themselves usually are not focused on cost savings, but better productivity. And as byproduct (under Mr. Gilman's F&I example), this is how they are developing a more professional culture. True, some could say this impedes on the entrepreneur. But I don't think so. I think it is just one great example of how Asbury is putting systems in place to maximize their most important asset (the employees). You could go out and try to hire a great sales manager. Or you could create a system (like Mr. Gilman just described) to develop great managers. And that's just one example, I think of how the company gets to "the Asbury way" and Mr. Oglesby's "speed, speed, speed, and efficiency."
And it was that breakfast (and other conversations with Asbury management throughout the week and last six months) that leads me to believe Asbury may (like Group 1 did last year) be moving out of the "sleeper" category. Instead, I think 2007 may be the years Asbury wakes up Wall Street that they are going to be one of the leaders in this space. Although I still think it could be a few years before we see this "massive consolidation wave" I am calling for that really wakes up Wall Street to fully appreciate the group (of franchised auto retailers with higher P/E multiples). But Group 1's 60%+ performance last year shows that just moving out of the underdog category can bring shareholders really attractive returns.
Now I need to explain something. About 5 years ago I was one of the analysts on Wall Street that was involved in Asbury's initial public offering. I saw a "cheap" stock, with good brands, and initiated coverage (shortly after the IPO) with an "Outperform" rating (not the highest rating, but reasonably bullish). But shortly after coming public the company struggled (despite its superior brand mix) as an experimental independent "one price used vehicle concept" (almost like a CarMax) in Wal-Mart parking lots blew up in their face.
The company also had a technical default on a debt covenant (didn't time right their acquisitions and sale leasebacks). Combined with underperforming their peers (in earnings growth/declines) all of this left me wondering (as many in the industry had suggested to me) that maybe you really needed people with automotive experience running the company. Otherwise the dozen or so platform managers could basically just demand whatever budgets they wanted/needed and who was senior management to argue?
So I soured on the Asbury story (as did the rest of Wall Street). And to be honest, I don't think Wall Street has ever changed from this opinion of the company (or management).
Don't get me wrong. Asbury is still not "without issue" (as is any company). Not the least being Asbury still has one of the lowest pre-tax profit margins among the public dealers, despite having one of the best brand mixes. So you could say that some of Asbury's (earnings and same-store sales) growth over the last three years has simply been "catch up." But I think it goes a lot deeper than that.
The management team I had breakfast with Monday morning is hardly the same team that struggled its first couple years out of the gate. To be honest, I think those first couple years humbled them into not taking anything (or anyone) for granted. Yet, Ken Gilman, CFO Gordon Smith, Allen Levenson (sales), all seem to have a tremendous handle of the business and their roles. Not to mention the 4 regions (versus 13 platforms) now reporting to a highly experienced (and very passionate Charles Oglesby).
Whether it was Mr. Gilman and Mr. Smith "arguing" over a new tire balance idea for the parts and service bays, or Ken addressing some of the most difficult issues with seemingly simple answers, they really impressed me. For example, remember the "conundrum" Group 1's CEO Earl Hesterberg raised in the JD Powers dealer panel about how do you move employees/GMs around stores given different profitability levels between domestic and import stores? Mr. Gilman's answer: "only have domestic stores that can generate the same profitability as the import stores."
In our experience, 99 per cent of people who embark on a business project and fail do so for just two reasons. They either don't get started at all, or give up at the first hurdle... real or perceived.
- Lesley Lowe
How easy it would have been for Asbury's management to have given up after a rather rocky start. Instead, I think they got stronger and better. And I think Wall Street is going to wake up to these changes in the coming year.
ABG 1-yr chart: