Ford dealers repurchase stores

Automaker's attempt to consolidate markets failed

Chronology of a failure
1997: Ford Motor Co. begins investing in and merging dealerships

1998: Ford Motor consolidates 14 franchises at 12 locations into the Salt Lake Auto Collection

1999: After financial setbacks, Ford Motor abandons Auto Collection strategy

2001: Ford Motor sells stores back to independent dealers in all consolidated markets, including Salt Lake City.

It's deja vu for Ford Motor Co. dealers in Salt Lake City.

Several dealers who sold their stores to Ford Motor to create the consolidated Salt Lake City Auto Collection are negotiating to buy back their old franchises, according to sources familiar with the deal.

The sale is the final gasp of Ford Motor's strategy to invest with dealers and consolidate retail markets nationwide. Ford is selling 10 Salt Lake Auto Collection franchises to independent dealers, including several retailers who invested in the venture, the sources said.

Mike Day is regaining the Ford dealership first purchased by his father in 1953. His store is being re-christened Henry Day Ford, the name it bore before the 1998 consolidation.

"I believe the original premise was good," said Day, who invested in and worked for the Auto Collection. "The project was a political casualty at Ford. You can't expect to be successful in three years. I learned a lot. But had I known it was going to be a three-year deal, I would never have gotten involved."

The sale of the 10 dealerships to independent entrepreneurs closes a stormy chapter in Ford Motor's relations with its dealers. In 1997, the automaker shocked the industry by saying it would invest with dealers to consolidate markets, selling and servicing Ford, Lincoln, Mercury and Mazda vehicles through centralized corporations.

Retailers criticized the strategy, fearing competition with factory-owned stores and resenting the Ford's intrusion into retailing. By December 1999, Ford abandoned the strategy. But the bad blood lingered and contributed to the ill will dealers bore Jacques Nasser, ousted as Ford Motor CEO last month.

Largest Auto Collection

Ford consolidated stores in only five U.S. markets: Salt Lake City; Rochester, N.Y.; Tulsa, Okla.; Oklahoma City; and San Diego. This year, Ford said it sold the San Diego Auto Collection to local dealer Ed Witt. The UnitedAuto Group of Detroit picked up the Tulsa operation.

Salt Lake was Ford's most ambitious and biggest Auto Collection when it began operating in November 1998. The venture started with 14 franchises at 12 locations that had independently employed 1,000 people generating $600 million in annual sales.

Returning the stores to original owners also is significant because Ford's Salt Lake consolidation did not come easily. A first attempt failed. A second attempt succeeded only after painful reflection by a dealer community bound tightly by the bonds of family history and a shared Mormon faith.

For example, Duff Willey, who became CEO of the venture, is a third-generation Utah dealer whose store had been in his family for half a century when he sold to Ford. Willey did not return phone calls seeking comment.

Hard times

The growing pains of the Salt Lake Auto Collection were severe. Faced with the threat of consolidation by large chains, Ford Motor wanted to cut costs and build car buyer's trust through no-haggle selling. But sales plummeted. More than half the sales staff fled. Losses mounted. Merging disparate operations was a nightmare.

Now, independent retailers are picking up the pieces. In Salt Lake City, dealers are negotiating to purchase six Ford Division, two Lincoln Mercury and two Mazda franchises at stand-alone locations, a source familiar with the talks said. At least three of the seven prospective purchasers originally sold their stores to Ford, according to sources.

Ford confirmed divestiture negotiations are under way in Salt Lake City, Rochester, N.Y. and Oklahoma City but declined to provide specifics.

"Discussions are occurring in all markets as the company indicated earlier we would be doing," said John Ochs, Ford spokesman.

Those involved in the purchase negotiations have signed confidentiality agreements and cannot confirm or deny possible store acquisitions, said Robert Garff, chairman of Garff Enterprises. Garff sold two stores to the Auto Collection but did not work in the venture.

"I can't say the experiment was a failure," Garff said. "Ford and the dealers learned multiple things about these kinds of operations. Ford has worked honorably at putting together arrangements that will be satisfactory and very positive for dealers in the future."

The deal

Financial terms of the deals were unavailable.

"In the beginning, I traded my franchise for cash and equity in the Auto Collection," said dealer Day. Day is regaining his store by trading in his equity in the Auto Collection for the franchise and assets, he said.

Dealership brokers suggest that Ford is taking a double hit financially.

"My guess is that dealers charged Ford a premium to put the deal together, and after it failed, dealers probably bought the stores at a discount," said John Warner, a broker with Gary Minchew Dealership Brokers.

Brady Schmidt, executive vice president of National Business Brokers, Inc., said it was a seller's market when dealers sold their stores to form the Auto Collection, and it now is becoming a buyer's market as the retailers repurchase stores.

"It was not uncommon at the time (of the consolidation) for an individual buyer to pay between three and four times pre-tax earnings for just the goodwill portion of the deal, not including fixed assets," Schmidt said. "It is reasonable to assume that Ford would have paid more than that in order to motivate the dealers to sell."

Now, dealership prices are beginning to drop, he said. "The dealers sold at the peak of the seller's market, and they are buying as we transition to a buyer's market,'' Schmidt said. "Even if Ford sold the stores at the same multiple (of earnings) today, the stores are earning less, so the net proceeds would be less."One Salt Lake dealer who invested in and worked for the Auto Collection sued Ford Oct. 18.

Gregg Middlekauff has filed a $35 million civil fraud suit alleging Ford fraudulently induced and effectively forced him to sell his franchise for $7 million, rather than a promised $12 million, said Michael Spence, the Salt Lake attorney handling the case.

A Ford spokeswoman has said the company "is confident it acted properly in the formation of the Auto Collection and in Middlekauff's separation from it."

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