NEW YORK -- Factory expectations about how big auto dealerships should be are out of date and need to be reduced, one of the country's biggest retail executives says.
"One of the things our business model hasn't adjusted to is the Internet activity," says Earl Hesterberg, CEO of publicly traded Group 1 Automotive Inc. "You just don't need as big of a physical site if you're going to have a lot of your shopping activity occur electronically."
Speaking to an audience of auto dealers and industry executives here yesterday, Hesterberg complained that manufacturers have fallen behind the times on what they require from franchised dealers in showroom space and store acreage.
"The manufacturing space guys have not adapted to this new reality at all," Hesterberg said in a presentation at the National Automobile Dealers Association/IHS Global Insight Automotive Forum on the eve of the New York auto show.
"If you look at some of the domestic brand dealerships, they're built for a time when 2.5 million full-sized trucks were sold. Not too many years ago, Ford sold 900,000 F-series trucks.
"We don't see all those trucks and SUVs anymore. We just don't need the space. But we're still paying for the space."
Hesterberg is scheduled to give a Group 1 presentation today in New York to Wall Street analysts who follow the dealership group's stock. With 100 stores in the United States and the United Kingdom, Group 1 posted net income of $32.8 million on revenues of $4.56 billion in 2009, compared with a $48.0 million loss on revenues of $5.65 billion in 2008.
"We have some big Ford dealerships that are profitable, but they're sitting on 15 acres. We don't need 15 acres anymore," Hesterberg said. "It looks like we're out of business even when we put our employees' vehicles out front."
Hesterberg said retailers must cope with rising costs for land, utilities and property insurance at a time when sales are down and per-dealership sales are falling for many brands.
Rather than build larger stores and service shops, he said, it would be better to offer expanded store hours and night shifts of service technicians.
"The thing that drives you crazy is all this pressure to keep building more service bays," he said. "All we have to do is put on a second shift to double the capacity. We don't need to build more buildings."
Hesterberg said the steep decline in commercial interest rates over the past year is masking real estate costs for some retailers.
"These low interest rates have somewhat saved our bacon," he said. "But they will go back up. We're in a very dangerous point right now."