Automobile Industry: Defensive Driving

Defensive Driving

(Photo by Ara Howrani)

“What am I going to do?” That was the first thought that ran through Bill Perkins’ mind upon learning he would lose the Pontiac franchise that comprised some 60% of revenues for the flagship dealership of his automotive empire. While he still maintained the GMC line and another pair of outlets that sold Chevrolets, the disappearance of Pontiac models could wreck Bill Perkins Automotive Group (No. 13 on the be auto dealers list with $111.2 million in revenues), the business he spent 20 years building.

In April 2009, General Motors, in response to its financial problems, partially due to a global recession and decreased demand for domestic automobiles, announced that its Pontiac brand would be dropped and all models would be phased out by the end of 2010. The automaker also said it would reduce the number of its dealerships by 2,600. Perkins worried that his might be among them.

It was a perfect storm of bad news in 2009 for auto dealers such as Perkins, as a dismal economy, a lack of access to the capital needed to purchase vehicles, and a CEO resignation at GM created an air of uncertainty among entrepreneurs who make their living selling cars. “I think this is something we as dealers really got blindsided with,” recalls Perkins, also president of the Detroit Auto Dealers Association. “I don’t think a lot of dealers expected it, just as I never expected to lose my franchise, but I did. And it’s the dominant franchise in this particular operation.”

How bad was it? All told, 84 of the 280 dealerships in the General Motors Minority Dealers Association network were selected to be closed due to GM’s restructuring efforts. “Last year, everything was so bad that everyone was just trying to survive,” says George Magliano, who heads U.S. auto analysis for Global Insight, a provider of financial research, forecasting, and market intelligence. “They didn’t know where the end would be.”
In this environment–described by many as the worst on record–Perkins may well be part of an endangered species: the African American auto dealer. Perkins is nevertheless cautiously optimistic about the future of his business, thanks to keeping operations lean, serious reinvestment into the business (particularly when times were flush), and perhaps a bit of luck

The auto retail business is all about moving cars and moving them quickly. Many auto dealerships are hurting because banks aren’t granting access to the levels of capital needed to purchase vehicles from the automakers. Generally, Perkins would move a vehicle in about 30 to 45 days. Today his group sells an average of 175 new and 135 used vehicles per month for roughly $7.5 million, compared with 225 new and 130 used autos per month prior to the downturn. But now, he would not have access to his best-selling product. “The only thing I could get, which was what I had on the ground, was about 100 Pontiacs. There would be no more after that,” he recalls. “I was devastated.”

So Perkins took a step back. He re-evaluated his operation. With three locations in Michigan (Taylor Chevrolet in Taylor, Jim Bradley Pontiac Buick GMC in Ann Arbor, and Merollis Chevrolet in Eastpointe), he had to figure out how his business could survive without the Pontiac lines. Fortunately, he had foresight. Instead of taking money out of the business over the years, the savvy auto dealer had continued to reinvest the profits from his operation.
As a result, Perkins owns the properties on which the three dealerships are located. “I purchased starting out with a mortgage amortized over 20 years, renewable every five years. After the first five years, GMAC, the lender, starting giving me a problem with the renewal, and rather than renew, I purchased the property with the profits made from the dealership operations,” he recalls. Another advantage to owning the property: Had an automaker owned the land, with Perkins leasing, eviction would have been a possibility.

He also carries very little debt, a rarity among black auto dealers. “That was the biggest help to me when this crisis hit,” Perkins says. He also runs the business lean even when times are flush. Even so, management was forced to reduce headcount from 163 to 150 employees. Since he had available cash, he was able to invest $200,000 into bolstering his used car inventory–increasing the number of vehicles from 30 to 45–and focus on his remaining lines.

With the weak economy, sluggish sales, rising unemployment, and nothing but bad news coming from automakers, morale for those employed within the industry quickly decelerated. Despite the depressing environment, Perkins applied his version of booster cables to his operation, jolting morale with sales contests and performance-based bonuses. “Right now there are certain sales levels that the factory wants you to hit, and as a result of hitting those, you can earn additional money,” he says. “So I have put contests in place to reward my employees over and above what they would normally earn if we were able to hit those numbers.”

In the face of lagging sales, the business came up with a sales hook: customers would get financed on a new or used vehicle (with $1,995 down), even if their credit wasn’t the best. Perkins’ team also focused on customer service and competitive pricing. “I am not the kind of dealer to use gimmicks. I was taught to stick to the basics of doing business and not chase the quick buck,” says Perkins, whose top selling model was the Chevrolet Malibu. “This has always been my strategy, and it has worked for me.”

A welcome boost came in the second half of 2009 via the Car Allowance Rebate System, also known as “Cash for Clunkers.” The federal program, designed to provide incentives for consumers to purchase a new, more fuel-efficient model while trading in a gas guzzler, resulted in a 40% sales increase at Perkins’ Jim Bradley location and some 25% to 30% at his other franchises. The program helped, but it was a temporary measure and ran out of funding. “So if you just came through the first half of the year with business in the doldrums and all of a sudden you come to July and August and you have these two real good months, and I think what it did was it put people to sleep,” Perkins surmises. “[Auto dealers] thought the market was coming back. Then September fell off a bit, and October was not a good month.”

Even with the setbacks, Perkins dealerships are among the more fortunate. “We’re going decades backward in terms of the number of minority dealerships that are still in business today and will have access to getting dealerships,” says Marjorie Staten, executive director of the General Motors Minority Dealers Association. “The instability [at the automakers] doesn’t allow us a good, clear picture yet of where we’re headed. All we know is the picture that we see and the way that everything has changed, it just doesn’t look like a very positive picture.”
Perkins, 60, is looking to keep things going and eventually pass the business on to his son, Monte, an automotive management major at Northwood University. “I’d like to hold on long enough for him to come out of school, get his feet on the ground, get some experience, and turn it over to him,” he says of the exit strategy. “That’s my ultimate goal.”

What helped Perkins Automotive through the crisis was reinvesting, something he hails as critical to success as an entrepreneur. “As minorities, we’ve gone so long without making money that when you start making money, you don’t want to give it back,” he asserts. “But you have to put it back in the business for when you hit the downside of the cycle.”

For 2010, the automotive industry is expected to continue to trend slightly upward in the U.S., as the economy slowly recovers. “Automakers will sell less because the market will not pick up enough to support [growth],” says Magliano, who expects total units sold to reach 11.2 million, compared to an estimated 10.3 million for 2009. “Volume is going up, but not a heck of a lot to make people feel good.” Margins, he says, will be pressured as manufacturers aggressively jockey for market share, slashing prices to boost volume.

Despite all the challenges at GM, Perkins feels positive about the company’s direction, saying the reduction in dealerships means the dealers left have a better chance of surviving. “I feel good about where they are trying to go. I have been affiliated with GM for 37 years, and I can honestly say they are building a much better product than they ever have in the past,” he says. “Product is what counts in the marketplace, and now we are equal to the quality of the imports and equal to or better than the imports when it comes to styling.”

For now, Perkins Automotive is hanging in there. Sales for 2009 are expected to drop nearly 20%. But profits are expected to hold steady near 2008’s levels. About the future, Perkins says, “I would say I’m cautious. The one thing I can’t control is the market itself, and the market seems very spotty.” In the meantime, he plans to watch inventory, expenses, and personnel. “This is a different time. You really have to be on top of your business.”

This article originally appeared in the February 2010 issue of Black Enterprise magazine.