Important Quotes From the Auto Retail Industry

Do or do not. . . there is no try.

Fear leads to anger. Anger leads to hate. Hate leads to suffering.

Size matters not, . . . Look at me. Judge me by size, do you?

- Yoda (thinkexist.com)

Today's piece focuses on important quotes I picked up from the conference calls (or read in some cases) over the last week or so. . .

Quote #1: Hertz Centralization of Purchasing

To capture and increase our spend visibility Hertz (HTZ) will announce shortly the implementation of a global spend management program. This will enable us to transition all procurement activity to an automated centralized system. We are currently piloting the use of various purchasing cards. These should be rolled out globally by the end of 2007.

This will help us track millions of dollars in expenses and eliminate hundreds of thousands of invoices. Further reducing our costs and streamlining our accounts payable system. We remain intensely focused on reducing our global spend and expect to achieve our target of about $85 million in savings over the next few years.

Mark P. Frissora, Chairman and CEO, Hertz

Why this is important?

When you own your own store (the entrepreneur) you have a tremendous incentive to make the store very profitable (because your livelihood depends on it). So if stores or any type of distribution system is going to give up some of the entrepreneurial fervor by making the person who runs the store send a good chunk of the profits up to corporate (and even worse have to answer to "higher ups.") There has to be a benefit (synergy) from being a part of this larger organization to offset what is loss from the entrepreneur owning and running the store.

In auto retail you see various stages of these retailers all trying to answer that very question. The "why are we here?" phenomenon I often quote Mike Jackson (AutoNation's CEO) for raising to his dealers after he took charge at the turn of the century.

There are two primary benefits that can come from being a part of a large organization. And this is across the board (to varying degrees), be it Hertz (a rental car company), a repair shop, do-it-yourself (or jobber) auto parts store, or even car dealers. The two benefits are: 1) the opportunity for greater specialization, and 2) the ability to implement best practices.

Now I could spend a week on each of these two topics (and maybe I will this summer). But I think a good example of specialization are regional buying teams of used vehicles that can focus on the merchandising/inventory management side of the equation allowing the used vehicle manager to focus on what he/she is probably best at (training and development of their people).

Or a central human resources or accounting department that removes the headaches for a store manager (of any type of auto retail establishment) so that the individuals at the store can focus on employee development and the actual customers more.

Best practices become a little more vague and trickier of a topic. But a lot of times best practices relate to customer relationship management. How employees are to approach and treat customers. Maybe how they are to greet a customer, or specific questions they are to ask the customer so they can best fill the specific need of the person who has just walked into a store. Even how store employees and managers are to handle customer complaints and problems could be a best practice.

But "how can you discover and monitor best practices and ways to specialize employee functions if they are not all talking the same language?" AutoNation's former CFO Craig Monaghan once asked me in explaining why the company was moving to a common computer system (dealer management system).

And so I give Mr. Frissora some serious props (respect, kudos) for pointing out a similar dynamic on the spending front. I am not saying every purchase is done best centrally (they are not). But how can you discover efficient spend disciplines if the expenses are not even being pushed through the same system (i.e a common purchasing or credit card?)

Not to mention how much more simplified the business can become by reducing potentially hundreds of thousands of invoices. If companies you are invested in (or running) are not similarly experimenting or already using common purchase cards, I highly encourage the discussion come up.

Quote #2: Midas tires are important to the customer relationship

Some of the statistics from the tire association says that 70% of people will get their service done from the place they buy their tires. And we have seen with our tire customers a propensity for them to come back more for subsequent service occasions. So we think the more tire business we can get, the better off we'll be.

Alan Feldman, CEO of Midas (MDS)

This is a great example of a CEO focused on what is really important. I try my best to remind investors that returns are a byproduct of finding a need and filling it. Usually the reverse problem comes up. Retailers see an opportunity to generate "incremental profits" by adding some product line and end up confusing their customer base about what the real value proposition is that they deliver to the market. With tires on the other hand, if you just run the ROI (return on investment) analysis you might not come up with an attractive ROI conclusion. Although I think if done right, gross (not percentage) ROI dollars are pretty attractive with tires.

I don't have industry studies, but I can tell you that the two biggest things I find myself turning to repair shops for are oil changes and tires. And my dealer sent me to Tire Kingdom (a tire chain down here). Although fortunately (for the dealer) my experience there was incredibly unfavorable. Every large chain will have a bad apple (store) and so I don't want you to walk away with a negative perception of Tire Kingdom because tires are their focus and they very easily (had they done it right) won my loyalty.

But I can tell you that the reason why the dealer was rather uninterested in my tire business was simply because it is not their profit center. They lucked out that I had a bad experience elsewhere as I think it is a dangerous game to play with a customer like me (whose warranty is running off) when you send them to another store where I could potentially develop a relationship with the tire store for my future repair needs.

The bottom line is that if you focus simply on the byproduct (the return) you might end up missing the primary things that cause customers to come to the repair shops in the first place. David Cosper, Sonic's Vice Chairman has a catchy slogan on the company's earnings slides that says: "spend money where you make money." And for the most part I agree. Because usually where you generate the best return, is where the greatest need is being filled.

But please don't lose sight of the fact that the return is the byproduct from filling a need. And so if you simply focus on the individual (category) return without understanding the full customer relationship and need you are trying to fill, you (or the company you are invested in) could make some serious blunders.

So I think Mr. Feldman deserves considerable credit for trying to help his franchisees develop a relationship with the customer, instead of get lost in a byproduct metric (his quote was in response to the % profitability of tires).

And I still think they should develop a "Midas certified" vehicle programs for their franchisees. You might remember, the free inspection program idea I raised with Monro's results where repair shops begin offering free 30/60 point inspections on vehicles and therefore maybe "certifying" them as having been through the inspection process (for anyone interested in buying a used vehicle from an independent dealer or even online).

If they were to begin a program like this, Midas might really find their franchisees are getting the first look at any reconditioning work and also developing a relationship with the customer right from the get go (so they can send relevant service reminders versus the junk mail and inefficient mass promotions that go on in the industry today).

Quote #3: Pep Boys a mission to provide reliable transportation

"Our job is to create an environment where everybody works together with a common purpose. Our mission is to provide reliable transportation," he said. Warming to the topic, he added, with increased fervor, "and that's a very high purpose when you consider America's reliance on transportation. You can't keep a job without a car, you cannot enjoy the great geography of our nation."

Jeff Rachor, CEO of Pep Boys. Philadelphia Inquirer. April 30, 2007

When Jeff Rachor announced he was leaving Sonic Automotive (SAH) and going to Pep Boys (PBY), I said before he could even get into developing various tactics to turn the ship, he needed to get out and size up his assets (mostly the employees/talent). And from that determine "why are we here?" In other words, he needed to figure out what talents existed within the organization, and from those talents what the company could deliver to this world.

And so I could not have been more encouraged with what I read. The article talked about how he was going out and visiting stores and giving out his business card with email address asking for employee input. Of course the best part of the article is that he appears to be developing a mission for Pep Boys. I have said with all sorts of companies a mission or purpose is critical in any turnaround. And that mission seems to be providing reliable transportation. An important mission if you ask me.

You know according to the Department of Transportation data there is something like 1.2 vehicles per licensed drivers in the United States. And more than half the vehicles on the road are likely over 8 or 9 years old (according to Polk). Now I think you are aware of my concerns with vehicle registration data. But I think we can pretty safely assume that there are more vehicles out there than licensed drivers.

However, if you listen to folks that sell 8+ year old vehicles, like America's Car-Mart conference call last quarter. They said there were two primary things that tend to cause the 20% to 30% default rates in the buy here pay here industry: 1) the consumers ability to pay for the vehicle, and 2) if it breaks down (now the customer has payments on a vehicle that doesn't work and are probably worse off than before they even owned a vehicle).

So U.S. citizens don't necessarily need more vehicles. But for the customers that own older vehicles, they probably could use ways that make their vehicle more reliable. And so I have to give Mr. Rachor credit for focusing on a value proposition to US vehicle owners versus just coming out with a 3 or 5 point turnaround plan.

The points to a turnaround plan usually are simply the tools to accomplish the mission. And it's great to see Mr. Rachor seems to understand and is focused on this idea of creating a vision for the company and its employees versus just another turnaround plan (something the shareholders of Pep Boys have seen far too many of over the years).

Quote #4: Ford's April Sales. Seek balance between price and volume

On the incentive spending outlook. I am just curious about how you would view. It looks like you're spending less as the industry is soft. From your perspective, is there sort of a deliberate strategy to go for pricing over volume? Or is the moderation more really the timing, meaning it will pick up in the future?

Rod Lache Deutsche Bank Securities

That is the $64 trillion question isn't it? Because the industry has a habit of wanting to resist whenever there has been some underlying softness. That's been the habit

What's going to happen in the future, I don't know.

As far as our strategy is concerned. I think it would be best to characterize it as one of 'balance.' It is not price over volume or volume over price. It is to try to maintain a balanced approach in the market. And as much as possible benefit from the new product introductions. So that we have lower incentives going forward as a general rule. But still I would not take our April experience as an indication that we're not interested in volume.

George Pipas, Ford (F) Industry Sales and Analysis

Why this is important?

When you hear me dismissing things like California or the Sub prime market, it is not because I am sitting in denial about certain events going on in the economy. But there are always "events" occurring in the economy that a management team can point as to why demand seems weak in a given period or region.

But what you have heard me talk about for the last several years is that something is really strange when the economy catches "a cold" and US vehicle sales did not catch "the flu" like what happened in the early 2000s. I hope you read my comments in the Pep Boys article because the bottom line is that it doesn't seem like U.S. citizens necessarily need more vehicles.

So what you have heard me talk about for years is that at some point the "demand creation" game that has taken place will eventually catch up to the industry. I don't know how long or severe this downturn in sales will be. But people that try to focus you on things going on in the economy miss the real factor influencing sales: when and how much can automakers ease off the "net price" or "incentive peddle?"

So I give Mr. Lache and Mr. Pipas props for focusing in on the real issue that seems to be causing these ebbs and flows in vehicle demand.

Quote #5: AutoNation. A quote I made about AutoNation that I was wrong in making

I think if management treated investors (and folks like me that write to investors) and employees with a little more respect, and ultimately focused our attention on how they were trying to improve store and employee productivity than point to excuses (like California and Florida housing) and energy programs that seem more political in nature, stakeholders might begin to respect and appreciate some of the really good things they are probably doing.

Jerry Marks, the Auto Retail Informer, April 30, 2007

I don't have a problem being critical of management teams. I think far too many Enron's have happened because analysts lost sight that their responsibility was to the shareholder's not trying to win the approval of some management team for banking business or so they would go on a road show with them (so their mutual fund clients will trade stock through them).

But I do have a problem when I criticize a management team incorrectly without having done my homework. Now don't get me wrong. My criticism of AutoNation's (AN) management emphasis on the California and Florida market remains. And really I am doing them (and more importantly its stakeholders) a favor by trying to focus the attention on things like store and employee productivity. In my mind, over the course of 5 - 10 years a management team can control/influence 3 things: 1) their operational performance, 2) their brand mix, and 3) their geographic location.

Sure, if you are Group 1's (GPI) management team, where you have only been there a couple years, you probably can't do too much about issues #1 or 2. But when you start getting to 5 - 10 years, you definitely can influence your geographic and brand mix. And this even came up on the AutoNation conference call and management said that they still feel that the California and Florida markets represent excellent long term growth markets.

So why a management team would want to complain about certain markets is beyond me. Because one of the things shareholders should expect from management is that they try to select store locations/markets that are growing above industry norms. And therefore if a management team begins complaining about the markets they are in, or their brand mix, they are really drawing questions about their market or brand selection. Are California and Florida really the growth markets people thought? Personally, I think they are, but hopefully you get my point.

However, where I was very wrong was when I made the statement about "energy programs that seem more political in nature." Obviously I was referring to the company's new E-Vehicle initiative where AutoNation has begun identifying vehicles that produce at least 28 miles-per-gallon or deliver 10% better fuel efficiency than the average for their vehicle class.

"Jerry, you can call it political, but I will tell you we developed this because this is what our customers want and they love it," Marc Cannon, AutoNation's head of public relations called and said to me. And even before he called I have to say that as I looked at the E-Vehicle program working in conjunction with the company's overall online search for vehicles, I have to say that it does make it easier for me to understand what I am buying. I am constantly talking about how auto retailers (of all sorts) need to focus their strategy (but especially on the web) on being a resource center for the consumer. And the E-vehicle program seems to move the company one step further in this direction.

I could care less about appeasing a management team, although I probably owe them an apology as well (I did tell Mr. Cannon I was sorry). But it is you (the reader) that really matters. And I made a blunt statement about a program that I had not taken the time to really learn about. And for that I am truly sorry. You should expect that when I provide an opinion about something that I have at least done some basic research on the issue.

Don't get me wrong. I will make mistakes. I am usually quick to make corrections when this happens. And research is a constant hypothesizing and testing process, a journey I take you on regularly. Something you should not expect to change from me. But to make a statement like I did without even checking out the program is not the standard (or even acceptable) for this publication. So I offer my sincerest apologies to you, the reader, and to AutoNation's management.