|| Print ||
|Saturday, April 01, 2006|
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 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.”
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.
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.
Monday, November 02, 2015
BY LINDA BAKER
The hollowing out of the American city is now a bona fide cultural meme. Newspapers, magazines and digital media sites are publishing story after story about the morphing of urban grit and diversity into bastions of wealth and commodity culture.
Wednesday, November 11, 2015
BY LINDA BAKER
“What we’ve seen traditionally over the past few decades is a reduction of short line railroads. This is a rare opportunity to see a line being opened.”
Friday, November 20, 2015
BY JASON NORRIS AND MARY FAULKNER
It’s been a volatile year in equities and heading into the holiday season, it doesn’t look like these market extremes will dissipate.
Friday, October 30, 2015
BY JACOB PALMER | DIGITAL NEWS EDITOR
Worldwide Leader in Sports struggles to cope with new media landscape, forcing us to adjust our behavior as consumers.
Wednesday, October 28, 2015
BY LINDA BAKER
Vigor’s values don’t stop at truth. Walk into a company office, conference room or on any shipyard site and you’ll most likely see a poster inscribed with the words “Truth. Responsibility. Evolution. Love.” Otherwise known as TREL, Vigor’s culture code and the prominence it is accorded can be a bit surprising to the unsuspecting shipyard visitor.
Wednesday, September 30, 2015
Oregon Business magazine has named the seventh annual 100 Best Nonprofits to Work for in Oregon. The rankings were revealed Wednesday night during an awards dinner at the Sentinel Hotel in Portland.
Friday, October 30, 2015
BY LINDA BAKER
This is a story about a small plastics company in wine country now exporting more than one million feet — 260 miles worth — of tubing to China every month.
|The Love Boat|
|The Food Pod Grows Up|
|The High Road|
|Tinker, Tailor, Portland Maker|
|The Shift to Community Health Care|
|The Harder They Fall|
|Costco chicken salad linked to E. coli case in Washington|
|Nestle comes clean about benefitting from slave labor|
|Enormous drugmaker emerges from Pfizer, Allergan deal|
|Startups joining lobbying game|
|Merchants complain as Square goes public|
|Solutions sought for unpaid child support|
|FDA OKs GMO salmon|
Economic diversity has proven a smart strategy for the Port of Hood River. How can other Oregon communities replicate the model?
Phone, Internet needs of small community school districts earn attention of top-five telecom provider.
Farmland LP grows its vision for organic farming in Oregon.
The Salem Convention Center has capped its tenth anniversary year by earning the prestigious “Best of the Best 2015” award from NW Meetings & Events magazine. Selected as the Best Convention/Conference Venue in Oregon by meeting and event planners from Alaska, British Columbia, Idaho, Oregon and Washington, the Salem Convention Center ranked above the Oregon Convention Center and the Portland Art Museum.
The Oregon Cooperative Hall of Fame honors individuals for their outstanding contributions to the successful building and operation of Oregon agricultural cooperatives.
Health insurer reports $10.2 million in net income after taxes through the first nine months of 2015.