Group 1 Automotive's Earl Hesterberg is in the market to buy import auto dealerships -- not domestics. He wants to centralize his stores' sales practices without killing his managers' entrepreneurial instincts. And someday he might buy some dealerships overseas -- but not just yet.
Over the past year, the low-key former Ford executive has given Group 1 a tuneup, and his efforts are bearing fruit. Last year, Group 1, of Houston, sold 126,108 new cars and trucks at retail, up 6.9 percent from 2004.
Hesterberg, 52, discussed plans for Group 1 with Editor David Sedgwick and Staff Reporter Donna Harris.
How long were you courted by Group 1 before you were hired last April?
I went to work for Ford (North America) on Nov. 3 (2004). My family was still in Germany. My kids were not in their new schools yet. I told my wife this was going to be our last house. In January, she came with my two boys to Michigan. That's when I got a call from a headhunter.
I said: "I can't do this. It's insane." The last thing I needed was a call for some other job. We lived in that house six weeks.
Why did you leave for Group 1?
I knew it was a great company. I knew it was a nice offer to be the CEO of a public company. The more I said no, I eventually got to the point where I couldn't refuse it. And my wife finally decided there was no life (in Detroit). I had to leave the house for work at 5:30 every morning.
I have done a lot of other things in my life. I was a CEO before, but of a private company. The pinnacle of American business is being CEO of a public company. And it's been fun so far. Group 1 is a reasonable-size company in a business I have trained in my whole life. I ran dealerships for Ford in Europe.
Group 1 is reinventing itself from a decentralized collection of dealership groups to a more streamlined, centralized operation. Was that your initiative?
The reason Group 1 hired someone like me was to become more centralized. The company was put together by people who were experienced in acquisitions and in consolidating businesses. That has not been my expertise. At this phase in the company's life, it's time to integrate Group 1's operations, achieve some synergy and efficiency, and get some costs out.
What progress has the company made since you came on board?
We went from having 15 decision makers to having five. I am asking those five to reach consensus on a lot of things, so we have standard and uniform policies in key areas. Those executives are more experienced at running retail dealerships than I am.
We are trying to leave some flexibility for local management. This is a great group of dealerships and we don't want to take autonomy away from people in the market. Can you imagine how different the Boston market is from Los Angeles?
We will not handle things like advertising from Houston. We will not do the business plans. We are leaving that to local people. We might decide the total amount they can spend, but they decide how to spend it. They know how better to make trade-offs than I do.
We will let them work with local vendors if they have done business with them a long time. I would like national contracts. But if they can get the same price on uniforms, for example, from a local vendor they have used for 25 years, they can work with that vendor. You can't take the face of the dealer out of the community.
What opportunities are there for expansion?
The fastest-growing metro markets already have been consolidated. But there are still acquisition opportunities. The tricky part is to get dealerships at a price (that yields) a quick, acceptable return on investment.
If I were a privately held operator, I could live with a 5 percent return on investment until the business grows. But working with a public company, I need a 15 percent to 20 percent return on investment or I am going to have unhappy investors. That means we need to focus on stores selling premium brands that we can improve.
What is your acquisition target for this year?
We intend to acquire enough stores to bring $300 million in additional annual revenues. The Toyota/Lexus combination we just acquired in New Hampshire gives us another $120 million a year. We would like to do more than that, and we have the ability to do more than that. We have one of the most conservative balance sheets in the sector.
What franchises are you targeting for purchase?
We are looking for import and luxury franchises almost exclusively. Sometimes you buy out an owner-operator and they have dealerships that may include some domestic brands. Depending on location and how strong they are, we wouldn't run away from a deal just because domestic brands are in there. But we don't go looking for domestic stores.
Are there any exceptions to that rule?
Chrysler is very aggressive about working with the public groups. Where they have markets that we are able to consolidate Dodge, Jeep and Chrysler -- their "Alpha" stores -- that proposition can be attractive. We still have markets where Dodge or Jeep is operated independently. Those stores are no longer interesting to us. In markets where you have a single-point Dodge or Jeep (store), it takes quite a few years to get the other (Chrysler group) owners to sell or buy their franchises.
Our Ford and Chevy stores do pretty well because they tend to be in areas like Texas and Oklahoma -- big, full-sized pickup truck markets. The bigger challenge is Lincoln-Mercury stores and sometimes Pontiac-Buick-GMC stores.
The lesser GM and Ford brands do not have the power or the traffic, yet we have to pay rent every month. That's tough. Small stores or stores requiring a lot of management attention aren't worth our while. They do not have a good return on investment. They tie up capital and you spend too much time fighting for unit sales.
What percentage of your stores are import and luxury?
Sixty percent. We would like to get that to 70 percent, but it takes a long time to move the numbers. It's not happening in a couple of years. The import stores will give us significant growth.
Would you consider overseas expansion?
Yes, we would. We could use the diversity of revenues. I ran retail chains in Europe. I operated over 80 dealerships in the U.K. There are things that give dealers greater flexibility in Europe. You can open a store anywhere you want. You don't need manufacturer approval. Stores are smaller there. Dealers there make more money in the new-car department, but less in the used-car department. And there is less finance and insurance money to be made.
The dollar is pretty weak now, so we are not actively looking. Someday there might be better opportunities overseas. That's not the case yet.
You have a cluster of dealerships in New Orleans that were hit by Hurricane Katrina. Would you consider reducing exposure in the Southeast?
No, our business has been strong in the areas affected by the hurricane. Four of the six New Orleans stores are operating and have been since two weeks after the storm. Two were in a big flood area. At one, we terminated our lease. The other, we are rebuilding.
Lithia Motors and Sonic Automotive have introduced bonus programs for their general managers to compete with private dealers who offer a minority interest in a dealership. Do you have any plans to develop a similar program?
No. The key is to make sure overall compensation levels are comparable with the market. We have very low turnover in general managers. Out of 95 general managers, only two or three left in the last year. They are able to buy Group 1 stock at a 15 percent discount. They have the opportunity to generate wealth.
You ran dealerships for Ford in Europe. What adjustments have you had to make operating dealerships in the United States?
The thing I knew -- but I am still adjusting to -- is that the American car dealer-entrepreneur is really independent. It can be a challenge to get these people to operate in a more unified manner.
You may e-mail David Sedgwick at [email protected]
You may e-mail Donna Harris at [email protected]