Berrard, a solidly built man with a handshake of iron, arrived late to the meeting. He looked distracted, sitting quietly down at the far end of the room. Finally, he spoke up.
He explained the principle on which he and Huizenga had built Blockbuster. A videotape had an economic life of a certain duration. When rental revenues for that tape began to tail off, they would move it to a new store. Revenues would invariably blip up again--no matter how old the tape. The new location juiced sales. After moving that tape three or four times, the process would exhaust itself. Then the tape would be sold to extract whatever economic life was left in it.
In Berrard's mind, a $20,000 car was no different from an $8 videotape. It had a certain life span, and at every phase of that life, there was a way to squeeze money from it. "We want to control that asset for the duration of its economic life," he said. How that played out was that AutoNation owned new dealerships, used-car superstores, rental-car fleets, and discount-used-car lots among which the company could keep shifting its assets, depending on where in the life cycle they stood. "Seventy-three percent of Americans can't afford a new car," Berrard noted. "That provides an opportunity to go to short-term leasing. The question then becomes, How do we maintain the relationship with the customer for life?" In the future, Berrard envisioned a plan even more encompassing. "Maybe we'll build freestanding service centers near airports or train stations. You leave your car for service, and we take you to the airport. It's the convenience factor." The car store as the neighborhood dry cleaner or coffee bar.
Listening to Berrard, it's hard to tell if his master plan is the product of towering genius or equally outsize hubris. Republic's assault on the $1-trillion auto industry certainly does not suffer from a lack of ambition.
Compared with Huizenga, Ellis appears to have exercised a form of entrepreneurial judo. He has gotten his market share the easy way--and at less risk. To date, ABT has spent $50 million to establish what amounts to a nationwide dealer distribution network. Huizenga has spent more than $1 billion acquiring new-car dealerships over the last year, albeit in stock he has manufactured, and landed 122 dealer points in 10 states. "I think AutoNation has magnified the old model in terms of their cost structure," says Ellis. "We have changed it. We are an umbrella marketing program for a national dealer distribution base."
Moreover, ABT, blessed with a far lower cost structure, can undersell AutoNation. It creates a low sales price while maintaining the net margin, because it can drive down dealers' costs dramatically. Last year the typical dealer incurred $820 in personnel costs and $225 in marketing expenses for each new car sold. Ellis claims that ABT can reduce those numbers to $150 and $40, respectively.
Sherry Atamian of Atamian Honda Volkswagen, in Tewksbury, Mass., says of the ABT program: "You have to embrace it because the auto industry is changing to being customer driven. These people who come through Auto-By-Tel represent found business for us. It's delusional to think we'd get it otherwise." In a good month Atamian now sells 40% more cars because of ABT. And those sales cost 70% less than traditional sales.
Bob Bridge, owner of Bob Bridge Auto Center, in Renton, Wash., says that ABT has increased his sales volume by 25% so far this year. "There's excruciating pressure on margins due to too many cars and too many dealers. The dealer has to find a way to lower his cost of transaction."
Perhaps most striking about ABT is that the company is being built not by paying dealers-- but by having dealers pay it. It is a royalty business. Pete Ellis is diverting assorted revenue streams his way, steadily panning out his cut, one deal at a time.
Dealers pay ABT an annual fee ranging from $2,500 to $4,500 per car brand, as well as a monthly fee of $500 to $3,000. They also put their used-car inventory in ABT's used-car "cyberstore," and for that ABT receives $750 to $2,500 per month, depending on the size of the inventory for each dealer. The cyberstore expects to have 100,000 of its dealers' used cars listed--complete with digitized photos and detailed descriptions--by the end of this year. Meanwhile, for channeling business to its strategic partners in the form of car buyers looking to lease, finance, and insure the purchase, ABT receives origination fees ranging between $50 and $125 on each deal, or a small fee for each policy generated.
Ellis originally projected ABT revenues for this year of between $25 million and $30 million, up from $5 million last year; a recent deal with America Online now makes those figures look conservative. He foresees ABT's breaking even in the first quarter of 1998, three years after he started the company.
ABT gives large companies greater access to the market. "We are able to reach out and touch the consumer for a GE or a Chase," says Randy Ellspermann, ABT's senior vice-president. "We are a single-channel service. We see the customer before the dealer, the bank, and the insurance company do."
Adds Boston Consulting's Matt Ericksen: "Ellis is sitting on a database that's invaluable. He's saying to the manufacturers, 'Every month, I've got 60,000 new names of people who are within days of making a $20,000 purchase.' "
As if fattening a Christmas goose, car makers have historically force-fed the market, assuming that the more retail outlets they licensed, the more cars they would sell. That strategy worked fine in the boom years right after the war, when the number of dealer sites approached 50,000. But selling cars has become capital-intensive, owing chiefly to the high cost of carrying inventory.
