Phones went unanswered yesterday at AutoNation Inc. used-car superstores across America. Only skeleton crews showed up, and they weren't seeking customers. A recorded message at an AutoNation store in Morrow, Ga., near Atlanta, told part of the story.
"This location is closed," the message said.
And so it was, along with 22 other AutoNation outlets shuttered late Monday--the victims of rapid expansion in a used-car market that did not grow quickly enough, either in profits or unit sales, to support expensive new retail operations.
The shutdowns threw 1,800 people out of work and brought a chorus of "I told you so" commentary from traditional auto dealers who, when AutoNation opened its first used-car store in 1996, predicted that the company would fail.
But auto industry analysts warned yesterday that the tongue-clucking might be premature.
AutoNation isn't going out of business, they pointed out. The company, with nearly $20 billion in annual sales, is changing the way it does business. It's getting out of stand-alone used-car facilities and putting its money in new-car sales and related enterprises.
Closing the used-car superstores would pull $1 billion a year from AutoNation's revenue stream. And the shutdowns will result in a fourth-quarter charge of $430 million to $490 million against AutoNation's earnings.
"None of that is good news for AutoNation, but the overall strategy amounts to a prudent business move," said Walter McManus, executive director of global market forecasting in the Detroit office of J.D. Power and Associates, a market research firm.
By shifting its resources to new-car and related sales at a time of flat used-car sales and profits, AutoNation "actually could wind up putting more pressure on traditional auto dealers," McManus said.
Investors yesterday sent AutoNation shares up 31 1/4 cents, to $8.81 1/4, though that is still lower than its closing price of $9.43 3/4 on Monday, before it revealed the store closings.
AutoNation now is America's largest auto retailer, with 409 new- and used-vehicle dealerships operating in 19 states. It also operates 270 World Wide Web sites through AutoNationDirect.com, which markets new and used vehicles handled by AutoNation franchises.
Michael J. Jackson, who took over as AutoNation's chief executive in October, was ordered by the company's restive board to stop the money losses flowing from the used-car superstores--none of which is in the Washington area--and to boost the profitability of the new-vehicle operations.
"Our focus now is on improving our operating margins and on creating a unique and branded customer experience in our new-vehicle franchises, which are now AutoNation's sole focus," Jackson said.
"Branded experience" means giving AutoNation dealerships nationwide a common identity and common business practices, such as no-haggle pricing, which will remain an AutoNation feature, according to company executives and industry analysts.
In 1996, AutoNation was one of the brash new kids on the tough used-car block. It figured it could win with civility what traditional dealers were winning the old way--rock-'em, sock-'em, haggle-based bargaining.
AutoNation embraced the no-haggle, upfront pricing approach. But what AutoNation did not have was a realistic, long-term assessment of the used-car market in the United States, according to J.D. Power analysts. The company entered the market at a time of booming auto leases, when it appeared that leased vehicles could eventually account for as much as 40 percent to 45 percent of new-vehicle sales.
Because leases last an average of three years, and because cars and trucks nowadays generally have better quality and reliability, that large prospective pool of leased vehicles seemed to promise an endless supply of off-lease, used cars for companies such as AutoNation. But vehicle leasing in the United States peaked at about 30 percent of new-vehicle transactions in 1998 and is expected to account for about 25 percent in 1999, according estimates by J.D. Power and Associates.
Making matters worse for used-vehicle megastores, used-vehicle prices began dropping in 1998. And automakers began loading sales incentives and other rebates on slow-selling cars, which had been shunted aside by wealthier consumers in favor of sport-utility vehicles and other trucks.
"You had people going into places like AutoNation, writing down used-car prices, and then going over to a new-car dealer and getting a better price and better warranty on brand-new cars," McManus said.
By Monday, Jackson and his lieutenants and members of the AutoNation board decided that they had had enough. They had already begun consolidating used-car superstores earlier in the year. They also had decided to consolidate their auto rental business, also a source of used cars, and put it on the market as the Auto Rental Corp.
CAPTION: Troubled AutoNation (This graphic was not available)