Burning Down the House

Revolutionaries

A failed car dealer has launched an on-line start-up that's doing what even Web stars like Amazon.com can't: blowing up, and then remaking, an industry--in this case, the $1-trillion auto business

Andy Gill had no intention of hooking up with someone like Pete Ellis. Gill was a lone-wolf entrepreneur; he had always made it on his own. Gill had hit it big in insurance before cashing out, 11 years ago, and plunging into the car business. Today he's a successful dealer in metro Atlanta.

So Gill wasn't searching for fresh answers last February when he walked into a meeting at the annual National Automobile Dealers Association (NADA) convention and found himself in the midst of what amounted to a gripe session. Dodge dealers were hammering Chrysler's national sales manager about losing business to competitors selling through the Internet. "The dealers were all over the guy," Gill recalls. "Finally, he says, 'Look, I've been telling you people for four or five years now that you'd better get ready for this revolution. I can't tell you how high it's gonna go, but this is the wave of the future.' " Then the executive mentioned a company named Auto-By-Tel Corp. (ABT) as this new wave's major force.

"Auto-By-Tel," Gill repeated to himself. Hadn't he heard that name half a dozen times already around the convention? He bird-dogged the man from Chrysler out of the room. "What's this Auto-By-Tel deal you're talking about?"

The executive, lowering his voice, said, "Look, I'm not really supposed to be telling you this, but if I were you, I'd run, not walk, down to their booth."

Gill ran. At the booth he ended up talking to Pete Ellis, ABT's founder. "I said to him, 'Show me,' " says Gill. The two spoke for an hour, during which time Gill mentally debated--"Am I getting reeled in on this thing?" --whether the silken-voiced Ellis was the Second Coming personified or the slickest pitchman this side of P.T. Barnum.

Gill told Ellis that he was a Chrylser, Plymouth, Dodge, Jeep, and Eagle dealer in Atlanta. Ellis replied that it just so happened that ABT was looking for someone in Atlanta. "Yeah, sure," Gill thought. This guy was good.

But so, too, was his idea.

ABT, as Ellis explained to Gill, sold cars over the Internet, funneling would-be car buyers to a national network of some 2,000 dealers with whom it had signed exclusive contracts. Just two years old, ABT was already getting 3 million Web-site hits and, at that time, passing along 40,000 electronically generated "purchase requests" (serious, detailed inquiries from buyers looking for a specific make and model of car) to its participating dealers each month. Buyers got exactly the car they wanted, for a low fixed price without haggling. Dealers got more sales (in some cases a 30% boost) and lower transaction costs--as much as 75% lower than the cost of a traditional "walk-in" sale.

Pete Ellis wasn't the only pitchman on the Atlanta midway. Everywhere Gill turned, he saw evidence of an industry in transition, if not turmoil. CarMax, Circuit City Inc.'s foray into used-car superstores, was at the convention, as was Driver's Mart Worldwide, a similar concept that envisioned 100 used-car superstores by the year 2000, along with a sales site on the Internet. Then there were "dealer groups," such as Cross-Continent Auto Retailers, United Auto Group Inc., and Lithia Motors Inc., which had formed megadealer combines and floated public stock--a move previously unheard-of in the industry. And then, of course, there was the big guy, H. Wayne Huizenga. He had waded into the car business last fall, paying unimaginable sums for premier dealerships in hypergrowth markets. His empire--Republic Industries Inc. and its AutoNation USA subsidiary--ran the gamut from new and used cars to rental fleets; he owned Alamo and National. Last November, Huizenga's new-car sales were nil. By March he had acquired his way to being the largest new-car retailer in the United States.

Wayne, change, and pain were the talk of the NADA convention last February--for good reason. "This industry's cost structure is under tremendous assault," observes Jeremy Anwyl, president of Marketec Systems Inc., a Santa Ana, Calif., analyst for a number of car makers. "The pot's been bubbling for a long time, and now the lid has finally blown off."

Andy Gill felt the heat as he absorbed Pete Ellis's pitch. An inner voice told him he couldn't just stand there and do nothing. Maybe, he thought, ABT offered a salvation of sorts. "Am I getting had on this?" he asked his wife. She shook her head. "No."

Gill said he wanted to think about it overnight. Ellis replied that there would be no overnight. "The territory will be gone by dark," he said.

Gill said he didn't have a check on him. Ellis said he took credit cards.

Gill looked at his wife again. Again she nodded. "They hit my American Express card for $12,500 right there. I kept thinking to myself, 'I've never been hammered like this before.' "

All Gill could do now was hope for a feeling that would hurt so good.

It wasn't so long ago that people abruptly stopped throwing money at Pete Ellis. The owner of 16 auto dealerships and related businesses in California and Arizona, Ellis had enjoyed a great run in the 1980s. In 1988 he operated the largest Jeep, Eagle, Chrysler dealership in the United States. But then came the quasi depression of 1990, which put a hard tarnish on the Golden State, where most of his dealerships were located. As car sales crashed Ellis began closing his stores or selling them off to cover his debts. At his flagship store, near Los Angeles, Ellis made one final stand. But that location, too, was failing. "I went from selling 500 cars a month to 200," he recalls. "I owed $5.6 million on a piece of property that was worth $3.6 million. I decided to kill myself." Metaphorically speaking, that is.