Art of the
deal
How Lithia Motors bought its way across the West and became the
nation’s eighth-largest car retailer.
By Oakley Brooks
The strategy came to Sid DeBoer as far back as the late
1980s. He would buy mediocre car dealerships and pump up
their sales. From his base of five dealerships in Medford, he
would spread north into Washington and south into California
and then head for the Mississippi. He would use money from
public equity, not debt. He would grow to 100 dealerships and
$3 billion in revenue in a decade. And he would pull it off
because he knew how to sell cars, and why couldn’t he
teach others to do the same?
Wall Street had never heard of Sid DeBoer when he arrived with
this plan in 1996.
“He was like the 500th-largest car dealer,” says
Sheldon Sandler, who worked on Wall Street at the time and now
runs Bel Air Partners, a mergers and acquisitions adviser to
the auto industry.
But DeBoer has that unwavering confidence that could easily
sell you a set of mud flaps with your Dodge pickup or, in this
case, a $25 million public offering.
“There wasn’t any question that what we set out to
do could be done,” says DeBoer, now a wiry, energetic
63-year-old. “We’d achieved it in a limited way in
our little town of Medford. It was only a matter of
having capital so we didn’t have to do it with
debt.”
His guile and a no-nonsense strategy garnered the support of
influential auto industry analyst Maryann Keller, then at Wall
Street investment banking firm Furman Selz, and the group
agreed to underwrite Lithia’s offering.
“Nobody could have seen what she saw,” Sandler
says.
Ten years, 94 car dealerships and 13 states later,
DeBoer’s acquisition strategy has Lithia on the verge of
being the $3 billion company he promised. Lithia employs 5,692
people full time and is now the eighth-largest car dealer in
the country. Its growth has vaulted it into the top strata of
Oregon’s public companies and, not surprisingly, has made
it a fixture on Oregon
Business’ annual Big Deals list. In 2005, the
company bought eight dealerships and several more franchises
that brought in new revenues worth $396 million. Profits
companywide topped $51 million.
Auto sales across the country may have been flat over the last
four years and retailers may have suffered through a rough end
to 2005, but Lithia’s chairman and CEO predicts the
company will hit 350 dealerships and $11 billion by 2014.
“I don’t see anything handicapping us,” he
says.
No industry observer appears to dispute that.
That’s because DeBoer commands heavy respect across the
country now, even if a lot of Oregon suits couldn’t pick
him out of a crowd. One industry analyst, Rick Nelson of
Steven’s in Chicago, rates DeBoer as one of the two most
respected men in the car business — alongside racing
great-cum-auto retailer Roger Penske. Says Nelson’s
colleague Joe Franger, “I learn something every time I
talk to him.”
Lithia’s financials are also sound: Its low debt
stands in contrast to many other auto conglomerates, including
Wayne Huzienga’s AutoNation and Penske’s UnitedAuto
Group, which grew fast alongside Lithia but became highly
leveraged in order to buy up pricey metropolitan dealerships.
While focusing on lower-profile dealers, DeBoer’s company
has kept in check the amount of goodwill it pays to sellers
over and above the value of hard assets. According to the
company, its goodwill is about 18% of total assets, as compared
to United Auto’s 35% and AutoNation’s 32%.
The strength of the DeBoer growth machine, though, is that it
draws on the company’s roots in the car business: He has
been running Lithia since 1968, when his father, Walt, died
suddenly with Sid just 25 years old. He and his team know what
to look for on the ground at a dealership being offered for
sale. Sifting through offers from the nation’s myriad
aging independent car dealers looking for a golden parachute,
the acquisition team can discern why a dealership’s
profits are middling and how they can be boosted.
DeBoer and Lithia may have assembled a multibillion-dollar
enterprise, but at its core it is one car dealer sniffing out
another.
THE TOPOGRAHIC MAP OF THE UNITED STATES on Lithia president
and COO Bryan DeBoer’s office wall in Medford is a modern
version of Manifest Destiny. Lithia’s footprint, reduced
to red, yellow and blue dots, stretches across the
country — blue for current markets, red for primary
targets, and yellow standing for secondary targets once Lithia
has a foothold in a key area.
The acquisition strategy, written by Sid DeBoer and Lithia
executive and former Chrysler exec Dick Heimann, began to
harden in 1998 and 1999, as Lithia topped 30 dealerships.
“We realized what we were good at,” says Bryan
DeBoer, an earnest, goateed 39-year-old who teamed with
longtime Lithia employee and VP Brad Gray to buy the vast
majority of Lithia’s dealerships. “Small to medium
markets with agricultural or rural ties were it — kind of
what Medford was like 15 years ago.”
Now and then Lithia will spring for a luxury brand in a big
city — a BMW store in Seattle, for instance — but
company locations overwhelmingly skew toward rural communities
and third-tier cities: Kennewick, Caldwell, Pocatello, Sparks,
Sioux Falls, Grapevine, Billings, Broken Arrow.
More recently, the company has set its sights on 100 markets
across the Mississippi, with Sid DeBoer predicting in February
that Lithia would move into the eastern half of the country
this year.
The acquisition team, now led by VP Brian Evans, homes in on
dealerships whose reported profit margins are in the breakeven
to 3% range. Roughly 16,500 independent dealers fall in that
slim-margin category. The team uses info gleaned from vehicle
registration records and population data to determine the sales
potential for dealerships. Lithia also looks for the dominant
or even exclusive franchise owned in a particular area. Right
now, the target list stands at 3,100 dealerships.
As word comes of particular dealerships for sale —
through brokers, Sid’s old friends in the auto industry
or even cold calls from dealers — Evans, Bryan DeBoer or
another Lithia exec will make a site visit. They focus on
what’s ailing a particular dealership — poor
management practices or physical limitations at the store.
Walking around anonymously, DeBoer, who started out in one of
his dad’s Medford dealerships, says he can usually sense
what’s going on.
“Are the sales people outside smoking cigarettes? Is the
manager yelling across the showroom floor?” DeBoer says.
“You can tell just from the professionalism of a place.
If it’s a leadership issue, and it usually is, we can fix
that.
“Then you’re looking for natural traffic into the
dealership, places customers can pull into the dealership. We
grew up in the business and we can get down to the microscopic
level.”
LITHIA WAS LOOKING TO BREAK OUT of the Intermountain West in
mid-2000 when Bryan DeBoer got a call from a Texas auto broker
named Jappy Dickson. In his polite voice with a hint of drawl,
Dickson said he had a Dodge dealer in Odessa who wanted to
sell. DeBoer had already been to West Texas and stamped the
small oil cities there prime Lithia country, but Denver was the
nearest Lithia outpost at that point. He needed a critical mass
of dealers in the area — at least 10% market share in a
given city — to leap into West Texas. He told Dickson to
search for another dealership, and then flew out to inspect
Bill Barth’s Premier Dodge store. Dickson, a 74-year-old
body builder, guided the driving tour. “He nearly got us
killed six times,” DeBoer says, laughing. Sales at
Barth’s store were going badly and the store wasn’t
functioning well. But DeBoer saw some potential there:
“It was perfect for us.”
Barth, however, asked way too much for his dealership. DeBoer
bided his time.
By March 2001, Dickson had Barth down to a reasonable price,
and he had sale offers from another Dodge store and two Chevy
stores in Mid-land and Odessa. Then DeBoer found a gold
mine in Len Alexander’s San Angelo dealerships, about 115
miles east of Midland and Odessa. Alexander’s staff was
top rate and DeBoer felt he could use those dealerships as hubs
to train salespeople and spread Lithia’s systems and
style throughout West Texas. “It was really a coup how
all these things came together,” DeBoer says. He closed
the deal with Alexander in January 2002. The other stores,
including Barth’s, all followed within months.
Barth’s general sales manager at the time, Darren Dortch,
remembers Barth shutting the store on a Saturday night in early
2002. On Sunday, the Lithia transition team began switching out
computers to connect to a centralized intranet in Medford. Then
first thing Monday morning, Don Jones, a Lithia vice president
at the time, gathered Dortch and his colleagues and told them
each was welcome in the new company.
But there would also be a revolution in the way the dealership
operated — a Lithiazation, as company officials call it.
A key to Lithia’s success is the way it brings practices
in new stores into line with existing dealerships, and new
employees have to adjust to the way Lithia sells vehicles
— changing promotions every two weeks to keep salespeople
motivated, low starting prices nicknamed “promo
prices,” and scrupulous daily expense tracking for store
managers.
On the Monday of the turnover, Dortch endured 10 hours of
questioning and in-depth explanations of Lithia processes with
Jones and regional manager Duke Owens (a former employee of Len
Alexander in San Angelo). Lithia’s acquisition team
already sensed that it had a future leader in Dortch, who had
tripled revenue in a few months in late 2001 as Bill
Barth’s new sales manager. As Barth and Lithia
negotiated, Bryan DeBoer called Dortch and encouraged him to
stay, telling the then 29-year-old sales manager about all the
opportunities in Lithia’s growing world.
“Before they came in, we were all wondering, ‘What
are these people like?’” says Dortch, who stayed
with Lithia and now manages seven stores in West Texas.
“But these are car people. They said ‘Let’s
go kick some butt.’ They are extremely competitive and
they want to win, and they understand about taking care of
people.”
In four years, West Texas has become a huge profit center,
earning Lithia about $500 million a year in revenue. Texas as a
whole now earns the company as much as Oregon.
WHILE LITHIA ATTEMPTS TO TRIPLE its size over the next eight
years through acquisition, Sid DeBoer is thinking about more
than buying.
To be sure, there have been strains on Lithia as it’s
grown. The company has unloaded five stores that didn’t
live up to sales expectations. DeBoer would also like to
increase the import mix in his overall car sales — four
out of every 10 cars Lithia sells right now are Chrysler.
Meanwhile, Lithia recently settled an ethnic slur lawsuit
involving an Iranian-American at its Oregon City dealership.
Lithia also is the target of a suit by former customers
alleging that employees falsified credit applications.
But DeBoer remains focused on two new ventures. Lithia now
sells about 5% of its cars over the Internet, taking customers
from the initial browsing right up to the close of paperwork
via computer. In 10 years (the guy plans like Mao), DeBoer
would like the company to do half of its sales over the
Internet. The strategy is typically deliberate. “We
don’t want to create an Amazon overnight here,” he
says. “We’re slowly putting the infrastructure into
place to do it, without disturbing our core business.”
Lithia’s other venture, hinted at in the company’s
earnings call in February, is a parallel chain of used car
stores to go along with the current new-car line. DeBoer wants
to re-brand Lithia’s used cars, backing them with a
60-day warranty and a three-day, no-questions-asked return
policy. When that’s in place, used sales will shift to
separate stores. As the plan comes together —
“We’re not ready to go public with it yet,”
DeBoer says — it will have its own 10-year timeline.
Wall Street perked up at DeBoer’s suggestion of a used
line. New car sales were down late last year, causing Morgan
Stanley auto analyst Jonathan Steinmetz to adjust down his
two-year projection on Lithia. But he also wrote, “We
could become more positive amid signs of a comprehensive growth
plan focused on used vehicles.”
There’s still plenty of room left for consolidation of
the franchised dealerships that Lithia has traditionally sought
— more than three-quarters of the nation’s stores
are still owned by independent operators or small chains. And
for Lithia, there’s still an entire half of the country
to penetrate.
But Lithia execs say franchises in the more dense eastern
United States offer less value because cities and other
franchises creep together. Building used stores outside of the
franchise structure will allow Lithia to trade on its name and
grow further without paying for franchises or the goodwill that
is rolled up in the cost of existing dealerships. At the
same time, domestic car brands struggle to regain their footing
and deliver new cars that grab consumers. DeBoer admits that
new car sales probably won’t grow from their current
annual rate. Used may be the future.
“It’s wide open,” Bryan DeBoer says.
“There’s one big competitor [CarMax] but
they’re in L.A. and Chicago and they have less than 1% of
the market. We’re really trying to develop this
ourselves.”
Sound familiar? In the ever-expanding world of the DeBoers, it
may be time for a bigger map and a new set of colored dots.
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