U.S. distributors gave Toyota a toehold in a mysterious new market

Former race car driver Carroll Shelby reckons he could be a billionaire today if he had taken Toyota up on its offer to distribute cars for the upstart company back in the 1960s.

Instead Shelby, now 84, turned his good racer buddy, Tom Friedkin, on to the deal. And it was Friedkin who in 1969 acquired Gulf States Toyota Inc., an independent distributor that has annual revenue of more than $4 billion and is getting stronger each year.

Says Shelby: "I turned it down because I went to Lee Iacocca, and he told me not to take it because the domestic makers were going to push the Japanese back into the ocean. But I'm happy for my friend. At least a friend made the money."

Shelby says that financially, he regrets not taking the Toyota deal. "But," he says, "with a billion dollars, I'd probably be in a casket by now."

Instead, he's still making Shelby Cobras and their 427-cubic-inch engines. He's also a distributor for Good- year racing tires.

Gulf States, of Houston, and Southeast Toyota Distributors Inc., founded by Jim Moran in Deerfield Beach, Fla., now are Toyota's only U.S. distributors. It has been a win-win situation for both the distributors and for Toyota.

Gulf States and Southeast Toyota have made billions from Toyota. In return, the automaker has learned how to sell and market to U.S. consumers.

"Jim Moran taught us about Toyotathon and the finance business," said Jim Press, who was Toyota's top U.S. executive until his recent departure for Chrysler. "Gulf States is teaching us truck sales today, so we still have an outside influence to avoid 'big company' disease."

In 1966, the year Toyota set up its first distributorship, Toyota sold only 20,908 vehicles in this country.

That first distributorship was Mid-Southern Toyota Distributors Inc., a subsidiary of Amco Industries Inc., which already was distributing Jaguar and Triumph cars.

Mid-Southern Toyota was established Jan. 1, 1966, in Chicago. It was owned by Irv Schwartzberg and serviced 14 Midwest states.

Toyota was handling distribution itself in areas such as the West, where customers were receptive to its cars. But the Detroit 3 had almost a monopoly in the Midwest, East and South.

In January 1969, Southeast Toyota Distributors Inc. came on board, followed that August by Gulf States Toyota.

Toyota decided to manage New York by itself. In April 1970 it appointed Mid-Atlantic Toyota Distributors Inc. in Baltimore for other East Coast markets. New England Toyota Distributors Inc. in Boston was formed in January 1971 for the New England market.

The concept worked. By the end of 1971, Toyota and its five distributors had 887 dealers and sold 232,045 units.

"We wanted to get distributors up and running as fast as they could go," says John Turmell, who crafted Toyota's franchise and distributor agreements. Turmell, now 65 and retired, says that in the early days, Volkswagen was the business model.

"Seeing what VW had done, Toyota thought that's a model we should look at," Turmell said. "VW was selling 500,000-plus cars and trucks a year in the late 1960s, and Toyota wondered what it would be like to be at that altitude.

"So Toyota picked heavily populated areas for distributors, then let the distributor identify the dealers."

Back in those days, it took only a $25,000 startup fee and $1,500 in parts to get a Toyota franchise.

Yale Gieszl joined Toyota in the finance department in 1970 and ran the company as executive vice president from 1993 to 1999. Gieszl had been Toyota's accountant at Price Waterhouse for several years before joining Toyota. When he left Price Waterhouse, his boss laughed as Gieszl declared that someday this upstart automaker would have $1 billion in sales in the United States.

"My boss looked at me and said NEVER," Gieszl says. "I was very confident. In 1969 Toyota sold 124,000 units, at $1,500 average. That's less than $200 million in revenue. But long before the end of the '70s, we did $1 billion."

He says Toyota had no intention of adding more distributors, because the company started paying competitive salaries to get qualified talent. And there was the realization that Toyota could handle its own distribution.

"I know there was talk of a Denver distributor, but Toyota wanted to maintain the West Coast directly," says Gieszl, who is 65 and a consultant to Toyota.

In 1973, Toyota sold 324,533 vehicles here. But in 1974, the bubble burst.

That year, the company experienced its first year-to-year sales decline since Schwartzberg, the first distributor, came on board in 1966. And Schwartzberg, who also was in the wine business, decided he wanted out of Toyota.

"He came to us in late 1974," Gieszl says. "We had a 13-month supply of vehicles, and business was tough.

"Irv basically said that he had found an organization called Great Midwest Corp. in Kansas City that he wanted to sell to. So Norm Lean, the service guy, and I and two other execs visited Great Midwest, and they had these huge limestone caves they were going to use for parts storage.

"And we thought: 'We cannot let this happen.'

"I never worked so hard in my entire life doing analysis for (Isao) Makino (then head of Toyota Motor Sales U.S.A.) to convince him that we should buy Irv's distributorship, because (the price of) $10 million was a lot of money in those days," Gieszl says. "That was a big decision.

"We paid Schwartzberg just under $10 million for what was the Kansas City, Cincinnati and Chicago regions at net asset value. Goldman Sachs had to help us get $5 million, and we celebrated with champagne."

The Schwartzberg buyout happened at the end of 1975, and in 1979 Toyota terminated the franchise agreement with George Butler and New England Distributors.

Butler, a Chevrolet dealer in Massachusetts, won his distributorship partly because of his political connection with the Kennedys. Butler was a big contributor to their political campaigns, and Toyota executives thought that a distributor who was tight with a powerful family could help the company with trade issues. But Butler was booted out because of unsavory practices such as loading customers' cars with accessories they did not want. Butler fought Toyota in court but lost.

New England was "bullying dealers and pocketing too much," says Makino, now 85. "The Toyota dealer association asked us why we were putting up with New England Distributors and asked me to look into it. So we terminated the relationship in 1979. The dealers were really happy."

In the early 1980s, Toyota paid $285 million, plus $200 per vehicle sold for two years, to buy out Mid-Atlantic Toyota.

Mid-Atlantic Toyota was owned by Frederick Weisman, who had become president of Hunt Foods at age 31. Weisman was regarded as one of the top 200 art collectors in the world before his death in 1994.

Toyota exercised a three-year option of a five-year contract to buy out Weisman's distributorship.

"It wasn't as bad as people think," Gieszl says. "It was a public debate between business partners who were separating."

But Jack Thompson, who owns two Toyota stores near Philadelphia, was happy to see Weisman go.

"Toyota is much better organized. It's much better run," Thompson says. "Mid-Atlantic was run by a guy who did not know the auto business. Mid-Atlantic set our pricing, and back then, our pricing was much higher than in the rest of the country.

"Weisman was just there to make money. Toyota knows the people business; that's why they're so successful. Weisman wasn't into people. He just wanted us to sell the cars."

Then there was Jim Moran.

Moran, who died in April 2007 at age 88, had been the largest Hudson, Ford and Pontiac dealer in the country before retiring to Florida from Chicago after two operations to remove skin cancers.

But Toyota talked him out of retirement, intrigued by his marketing genius and ability to understand customers' needs and wants.

Moran decided to join the Toyota family after just one test drive in a Corona coupe.

"We talked about Moran's distributorship proposal on his yacht," Turmell says. "This was not a formal proposal. It was a scrapbook of Jim pictured with movie stars and athletes and celebrities."

Turmell recalls that Moran told him that they were people "I know and do business with, who trust me with their money. These are people I can get to associate with Toyota."

Showing the pictures instead of a spreadsheet of charts and graphs was much more compelling to Toyota's Japanese staff.

"A picture tells a thousand words," Turmell says, "and the Japanese were able to understand it."

Besides creating Toyotathon, the annual fall clearance sale by all Toyota dealers, Moran showed the automaker how to set up and run dealer advertising associations, how to sell extended warranties, how to operate a port option facility, how to establish a captive finance company and how to sell certified used cars.

"We made Jim wealthy, but he also taught us a lot," Turmell says. "It made sense to leave Gulf States alone because they had done a lot of things, too."

Southeast Toyota is the world's largest independent distributor of Toyota vehicles. Its 170 dealers in Florida, Georgia, Alabama and North and South Carolina sold 415,645 vehicles in 2006, which was 20 percent of the total U.S. volume for the Toyota brand.

Ken Czubay has been with Southeast Toyota for 18 years and has been its president since 2000. Czubay, 59, a native of Hamtramck, Mich., says his task is twofold: "At the end of the day, we help them sell and market in five states. And we have to innovate."

The numbers indicate the distributorship is selling. As for innovation, Czubay says Southeast Toyota dealers were among the first with Internet marketing when the company introduced www.buyatoyota.com in 1998. The site allows customers to order, purchase, lease and finance vehicles online.

The company introduced retail tire programs to its dealers about eight years ago. Czubay says the dealers will sell about 400,000 tires to consumers in 2007. "Eight years ago, we sold no tires," he says.

Southeast Toyota has its own captive finance companies.

"SET has everything dealers need — even individual loans so dealers don't have to go to the bank for anything if they don't want to," says Mike Perrin, owner of two Toyota dealerships in Georgia. Perrin got his first store with Southeast Toyota in 1991 under a dealer development program.

"The thing that SET had was Jim Moran," Perrin says. "That's like having Michael Jordan. He made things happen; he's a superstar.

"Moran had a complete understanding of what consumers want. He was an innovator."

Perrin says the biggest difference between Southeast Toyota and Toyota Motor Sales is that Southeast Toyota managers can make decisions much more quickly.

"It takes about three seconds to make a decision at SET," he says. "Moran empowered his people.

"At Toyota," Perrin explains, "a field job generally is a midmanagement job, leading to bigger jobs at headquarters. At SET, it's just the opposite; the most experienced people are in the field."

Over at Gulf States, the company is making a huge effort to help Toyota sell its redesigned full-sized Tundra pickup, which went on sale this year.

Toby Hynes, Gulf States president since 1999, says the distributor and its 150 dealers started a training program five years before the truck arrived. He says dealers added new positions called "truck champions" — employees devoted specifically to selling the truck.

Toyota Motor Sales has adopted Gulf States' program for its dealerships nationwide.

Hynes says Gulf States has two teams of five, including a truck manager, dedicated to grass-roots marketing and working with the dealers. "We call them street teams," Hynes says. "They're on the road every day to give the vehicles exposure, like at football games, fairs, etcetera — where the truck people are."

He says 135 of Gulf States' dealers have committed to renovating their stores; 40 have already done so. Gulf States has devoted 50 percent of its Tier 2 marketing budget to the Tundra. He would not give a precise spending number.

"We used to do 16 percent of Toyota's truck business; now it's 20 percent," says Hynes, who came to Gulf States after 30 years at Ford Motor Co. in sales, marketing and finance.

"This is the first time that Toyota has had a really competitive full-sized truck. We're doing very well with the new truck. Our dealers understand the truck market."

Gulf States represents 150 dealers in Texas, Oklahoma, Louisiana, Arkansas and Mississippi.

Hynes expects sales of about 250,000 units in 2007, up about 8 percent from 2006. He said 2006 sales were up 17 percent over 2005.

So 41 years after Toyota established its first independent distributor, Toyota Division sales have soared — from 20,908 in 1966 to 2,047,057 in 2006. Together, Gulf States and Southeast Toyota accounted for nearly one-third of the brand's 2006 sales.

Does Toyota plan to buy out its last two distributors? Not a chance, say top executives — and it has little to do with the astronomical cost to buy them out. "Toyota would have to have a burning reason to buy back Gulf States and Southeast," Turmell says. "They are doing pretty well."