Car dealer spreads risk by operating lots under eight different banners
On Taschereau Boulevard just east of the Champlain bridge sits a Honda dealership. Not far away are Toyota, BMW, and Audi dealers along with lots under four other banners. They are part of Complexe de l'Auto Rive-Sud.
But, unlike similar "auto malls" that have been set up throughout North America to facilitate one-stop car shopping, all of the complex dealerships are controlled by one man.
"Automobile retailing is generally a geographic business," said Norman Hébert Jr., president of Groupe Park Avenue, which operates the south shore mall. "People like to buy their cars close to where they live and work, to make it easier to get servicing."
Driven by low interest rates and a strengthening Canadian dollar, which has helped imports, Quebec's foreign car dealers have had a relatively smooth ride in recent years.
While new vehicle sales jumped about 8.8% during the past five years to 420,000 in 2003, all the growth has come from imports.
Sales of imported cars shot up 48.6 per cent to 107,000 units between 1999 and 2003 and imported truck sales have more than doubled. And that doesn't include cars made in North America by foreign controlled manufactures such as Honda and Toyota.
Hébert has done well riding those trends. Last year Groupe Park Avenue's 360 employees generated close to $250 million in sales, moving 7,000 new and used vehicles off the lots.
While to an outsider it may seem that running a foreign car dealership in these times is as easy as shooting fish in a barrel, Hébert begs to differ.
"It's true that Quebecers have a strong preference for imported cars," Hébert said. "But there is a lot of competition and more brands are available than ever."
Hébert's strategy consists of re-investing much of the cash that the company generates into upgrading dealerships, training staff and on building lifelong customers.
But it's the diversification of his dealership holdings and their geographical concentration that are his strategy's most interesting elements.
"When my father opened his first GM lot, dealers weren't allowed to operate lots from competitor manufacturers," said Hébert, who joined the family business after picking up his law degree. "But today multiple dealership holding are (increasingly) common."
Norman Hébert Sr., who founded the business in 1959 remains chairman, but his son runs day-to-day operations.
Hébert Jr. estimates that single lot owners control 120 of Quebec's 220 car dealerships. Entrepreneurs who own more than one dealership run the rest.
The multiple dealership holdings give Groupe Park Avenue numerous advantages. For one there are considerable economies of scale to be had from running several lots. These include the ability to combine administrative and back-office tasks, as well as the flexibility to move staff as needs change.
The strategy also provides Hébert negotiating leverage with manufacturers.
Single lot operators are highly vulnerable to manufacturers' whims, since they cannot stock competitor's brands. If a manufacturer has a bad design year, a work stoppage, or he jacks up his prices too high, a single dealer is highly vulnerable.
Hébert has more flexibility. If Honda models are hot one year, he can reallocate staff and capital from his slower dealerships to take full advantage of the trend. Similarly if a manufacturer's offerings are weak, he can make up for lost sales from his other lots.
According to Martin Martens, a management professor at the John Molson School of Business, diversification strategies have both advantages and disadvantages.
"Any time a business spreads risk and minimizes exposure it's a positive step," Martens said. "The question is whether that they can handle the additional challenges of carrying so many lines."
Despite his success, Hébert is not resting on his laurels.
"The car business is easy to get into. All you need is about a million dollars of invested capital, Hébert said. "Then, if you can rent or finance the building, you're in business."
Sidebar: The turnover challenge
If Norman Hébert has heard it once, he's heard it a thousand times. A potential client walks into one of his dealerships and throws out a lowball offer as a negotiating tactic. But while that buying strategy may have been useful in the past, today it's better suited for rug markets of Marrakech.
"People think that I can just knock ten per cent off the price of a BWM, but I can't. It doesn't work that way," Hébert said. "We just don't earn those kinds of mark-ups."
According to Hébert, the average dealer markup is between nine and 11 per cent of the manufacturer's suggested retail price. And that's before discounting and the salesmen's cut.
Dealers pay manufacturers cash on delivery for new vehicles. They then borrow the money either through the big auto companies' financing arms or a bank line-of-credit. All dealers pay the same price for vehicles, regardless of volumes and there are no year-end rebates.
The upshot is that the dealer has no grace period in which he can allow cars to sit on his lot. Interest, storage and depreciation costs start accruing immediately, and the pressure is on to sell the cars fast.
"Dealers typically earn pre-tax net income of between one and three per cent of sales," Hebert said. "If we want to make money we have to generate volume, because big mark-ups won't do it."
Chart: New vehicle sales in Quebec
Total motor vehicle sales 386,000 420,000
*Source, Statistics Canada. Amounts rounded by thousands
Photo caption: When Norman Hébert Jr., president of Groupe Park Avenue, started selling cars 20 years ago, operators were not allowed to own dealerships from competing manufacturers. Today he runs eight lots that sell brands such as BWM, Audi and Infiniti.
|© 2004 Peter Diekmeyer Communications Inc.|