B.E. auto dealers accelerate growth through acquisitions and partnerships
FOR AFRICAN AMERICAN AUTO DEALERS, IT'S ALL ABOUT making inroads and getting over the bumps along the way. As the nation's No. 1 black auto dealer for the past several years, Mel Farr knows those bumps come with the territory at the top. But the past year was a particularly rough one for the Detroit-based businessman. Farr was forced to close three of his dealerships and rethink his strategy for selling cars and tracks. His sales dropped from $596.6 million in 1998 to $432.4 million last year, a loss of nearly 28%.
Although the Mel Farr Automotive Group is still No. 1 on the BE AUTO DEALER 100 list, "It was a tough year for us," says Farr. "We got rid of three dealerships that were not profitable. Actually, Ford Motor Co. closed the Houston and Baltimore dealerships, saying they were in urban markets and weren't performing. There were lots of credit problems. The New Jersey dealership was also closed due to a fire in the building."
Farr now believes he purchased dealerships that were too far from his Detroit headquarters, but he learned a valuable lesson. "It was difficult for management to stay on top of those dealerships. We're probably better off not running dealerships that far apart and that far away, especially in urban markets where it's hard to get good personnel. In this economic boom, and with unemployment being so low, it's hard to hire and retain good people."
In addition, Farr, who also owns the Triple M Finance Co., was embroiled in a controversy that generated negative publicity. His company placed "on-time devices" on the vehicles it financed; when payments were late, the vehicles could not be started once they were turned off. Farr says about a dozen customers filed lawsuits against him because of the devices.
"We saw significant improvements in the way of payments," he says, "but we had a number of lawsuits filed and we were unfairly targeted by the media. The negative publicity about the lawsuits really hurt our business." Traffic in his dealerships dropped off, he says, and the lawsuits are still pending.
But not all auto dealers shared the same fate as Farr last year. In fact, with the nation's booming economy, record low interest rates and strong consumer confidence, 1999 was a banner year for the auto industry as a whole. Sales of more than 17 million new vehicles shattered the previous record of a little more than 16 million set in 1997. According to research from the National Association of Automobile Dealers (NADA), the average dealer saw profits before taxes rise 20.3%.
However, it was a slightly different story for black auto dealers. Several dealerships fell on hard times and went out of business; sales slowed considerably for others. "Last year was better than the last two or three years, but not as good as it was for the majority dealers," explains Donald Tinsley, chairman of the National Association of Minority Automobile Dealers (NAMAD) and president of Centralia Ford Lincoln Mercury in Centralia, Illinois. "And it's not just 1999; it's the history of black dealerships. It could be 2010, and unless black dealers are given better locations, better points and more viable opportunities, they won't be as profitable."
Despite the challenges, the top 100 auto dealers increased their total number of employees from 10,744 in 1998 to 11,296 in 1999, up 5.14%; and expanded their total sales from $6.3 billion in 1998 to $7.3 billion last year, a jump of 15.33%.
POOLING THEIR RESOURCES
Thomas A. Moorehead, the owner of Moorehead Buick GMC in Decatur, Illinois, overcame last year's challenges. Thanks to large fleet sales to car rental companies such as Avis and Enterprise, he would have captured the top spot on the list had he not decided to sell his company back to General Motors for an undisclosed amount in January 2000.
Moorehead's latest opportunity is with BMW, which last year announced plans to appoint more African American dealerships. He's in the process of building a BMW franchise in Sterling, Virginia. "BMW did not want an off-site owner," says Moorehead, 56. "They wanted somebody to make a commitment to be there, and I did. This area is the new Internet capital of the world, the Silicon Valley of the East. I could not pass it up. Plus, BMW is now No. 1 in the marketplace."
Moorehead's new $6.5 million BMW showroom will be up and running in November 2000, and he expects to have sales of $50 million his first year in business. In about three years he plans to be in the top four or five BMW dealerships in the nation, with close to $70 million in sales.
To become more competitive and to secure more dealerships, Moorehead is capitalizing on a growing trend among African American auto dealers: forming holding companies. An example is Tony March and Ernest Hodge, who joined forces in May 1998 to create a super company, March/Hodge Holding Co. (which was named last year's BE Auto Dealer of the Year). March is based in Hartford, Connecticut, and Hodge is in Atlanta. Today the company is No. 2 on the BE AUTO DEALER 100 list with $258.4 million in sales among its 17 dealerships representing 13 manufacturers. The March/Hodge goal is to own 30 dealerships that will generate $1 billion in five years.
"Becoming a holding company has allowed us to streamline the company," says March. "We've already saved millions of dollars because we buy as a group and not just as one business. That's why we see really big companies merging every day across the nation."
And they're getting results. Case in point: Village Ford of Lewisville Inc., which was No. 40 on last year's BE AUTO DEALER 100 list, has leapfrogged to No. 5 on this year's list by forming the holding company Village Auto Group Inc.
To satisfy his urge to merge, Moorehead has created a limited liability holding company with partners Pam Rodgers, CEO of Rodgers Chevrolet in Woodhaven, Michigan (No. 42 on the BE AUTO DEALER 100 list with $60.8 million in sales), and 1998 BE Auto Dealer of the Year Richard O. Davis, president of Davis Automotive Inc. in Dallas (No. 49 on the BE AUTO DEALER 100 list with $54.2 in sales).
"The number of dealerships is being reduced," explains Moorehead. "The remaining dealerships are more costly these days. A good store 10 years ago would have cost $1 million. Today, that same dealership can cost $3 million or $4 million. We have to be a little smarter or we won't survive."
Moorehead says the holding company allows the partners to pool their resources to purchase additional dealerships. Other advantages, he says, include cheaper rates for health insurance, workmen's compensation and advertising. "Because we insure 500 employees collectively instead of 200 individually, we of course will get cheaper rates for health insurance."
Pam Rodgers is excited about the new holding company, and says it's about economies of scale. The group is now eyeing a dealership in Denver as its first joint acquisition. "One of the reasons for doing this partnership is pulling together resources, taking the best of the best and expanding," she says. "With more dealerships we can grow our people so they can have opportunities beyond one dealership. With more dealerships, it's more of an investment and it's more money."