Auto retailing is a messy business, with low margins, fragmented ownership, and a history of questionable sales practices. That’s getting an overhaul, thanks to the vision of Mike Jackson, chairman and CEO of AutoNation. Through a shrewd mixture of long-term planning, strategic investment, and patience, Jackson has transformed a once-disorderly enterprise into an industry colossus — not to mention a money machine. His decision last week to roll out a national brand could make him the Howard Schultz of auto retailing.
Jackson’s remarkable record speaks for itself. Car sales may still be recovering from a five-year recession, but AutoNation (AN) is already enjoying historic results. For the fourth quarter of 2012, it reported revenue grew 13% to $4.2 billon, while operating income went up 18% — both historic highs. Measured by profit margin, it enjoys a comfortable lead over competitors. Over the past year, AutoNation has achieved a profit margin of 1.98% compared with 1.58% for Penske Automotive Group (PAG) and 1.39% for Group 1 Automotive (GPI).
Investors have cheered Jackson’s efforts. AutoNation shares shot up nearly 7% on the announcement last week and closed the day at an all-time high of $48.47. AutoNation now commands a trailing price/earnings ratio of nearly 19. Penske, its closest competitor, has a p/e of 16. A good chunk of that premium may be due to Jackson himself. Since he took over as CEO on September 30, 1999, he has generated a total return to shareholders of a remarkable 330%.
In a call with analysts last week, Jackson explained the historic nature of his achievement. “The hardest thing to do in business is to open up a sustainable competitive advantage. I’m declaring today, we’ve done that. So we have a unique strategy that is compelling, it’s powerful, that we’re well on the way to executing.
(Full disclosure: I have known Jackson for nearly two decades and shared podiums with him at industry events. Jackson wrote the forward to my 2010 book Sixty to Zero, and I have undertaken several consulting assignments for AutoNation).
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When Jackson arrived in Ft. Lauderdale 13 years ago to take over as CEO of AutoNation, the auto retail giant was in disarray. Profits weren’t being delivered as promised, and founder Wayne Huizenga had made an unwise decision to build used-car superstores as well. His pell-mell acquisition strategy had left AutoNation with more than 300 stores spread out over 19 states, with less than 60% concentrated in its nine major markets.
The concept of a large publicly owned car dealer group run by corporate managers rather than individual entrepreneurs was still controversial. Automakers were still wedded to the traditional model of the dealer-principal who knew his local market and had skin in the game. They resisted the idea of allowing dozens of their franchises to fall into corporate hands. For their part, large public groups had little in the way of best practices to show for their greater scale.
But Jackson saw a day when AutoNation could offer improved customer service and create operating efficiencies by owning different manufacturer franchises in the same metropolitan area. That way, a customer looking for, say, a compact crossover could shop for the best deal at a Honda store or a Toyota store — both owned by AutoNation.
So Jackson began patiently assembling the pieces of an automotive retailing network in fast-growing areas, selling those points that didn’t fit his model and buying others that did. The company currently operates 221 stores in 15 states — 65% of them in its nine major markets. At the same time, he spent $3.7 billion upgrading facilities, created a high-capacity IT system, and invested in employee training. He kept building during the economic downturn, when AutoNation shares bottomed in October 2008 at $6.87.
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The payoff for 13 years of investment came when Jackson decided that AutoNation would be taking down its signs on 210 stores in 15 markets that identified them with by their former local owners and then branding them AutoNation. “Now, we have a unique product, we have the operational foundation to deliver on that day in and day out, our facilities are first class across the enterprise,” Jackson told Automotive News. “So now we’re ready to name the baby with the brand name AutoNation.”
Rebranding an auto retailer takes more than changing a few signs. Jackson had to negotiate the name changes with each of the manufacturers AutoNation represents. Thanks to his track record, he had some impressive talking points. While Huizenga constantly issued new stock to finance his acquisition spree, Jackson has been buying back AutoNation shares. He has spent about $7 billion repurchasing over 70% of Auto Nation stock at an average price of about $17 per share. His performance has won him the support of prominent investors, like hedge fund manager Edward Lampert and investment entities controlled by Bill Gates.
As the old saying goes, luck is the residue of design. The Internet will pay an unexpected dividend on the branding effort. When Jackson began rebuilding AutoNation, he couldn’t have envisioned the importance of online shopping in car buying — or the value of having a single brand name. Now, when a customer in one of his 15 metro areas types in the name of a manufacturer or a model, the AutoNation name will likely be the first that pops up. Much like turning the corner on almost any street in America will reveal the ubiquitous green logo of Starbucks (SBUX).