'The timing was perfect' for VW store investment

Dealer Steve Germain is deeply invested in Volkswagen. He likes it that way.

In March, Germain opened Volkswagen of Ann Arbor. He spent $7.2 million building the Michigan dealership and a separate facility for his Audi and Porsche franchises. He acquired all three from another dealer in 2012.

Some might think his timing could not have been worse.

VW is embroiled in a diesel-emissions cheating scandal that erupted in September, weighing heavily on the value of its U.S. dealerships. Dealership buy-sell experts say Volkswagen's sagging sales -- which have fallen 13 percent through May, in part due to a sales freeze on new diesel models -- have dragged down dealerships' earnings and their blue-sky values.

Blue sky is the intangible value of a store beyond its physical assets and can vary enormously depending on an individual store's circumstances.

In fact, AutoNation Inc., the nation's largest dealership group, took a $9.6 million charge against fourth-quarter earnings to reflect the eroding value of some of the six VW stores it owned. It currently has four VW stores.

But Germain is upbeat about his just-opened stores. "The timing was perfect," he said. "That story hasn't ended yet. Those franchises were worth the investment, and the market can support that."

Germain is the CEO of Germain Motor Co., which has 18 dealerships across Michigan, Ohio and Florida, representing 17 brands. The Columbus, Ohio, dealership group ranks No. 70 on Automotive News' list of the top 150 dealership groups based in the U.S., with retail sales of 13,313 new vehicles in 2015.

Germain is a third-generation dealer. His children are also in the business. For that reason, VW's troubles and the ding to its values don't worry him.

"If I was in the market to sell, in the short term, I'd have a different outlook," Germain said. "Our plan is to transfer that business into the next generation of owners. When you look at it from a long-term perspective, the difference in the blue sky today and the long term is meaningless."

Germain dismisses low estimates for VW blue-sky multiples. "We don't operate our business on multiples. All we're looking at is market share, customer retention and the customer experience," he said. 

Investing in the brand made sense when Germain bought Howard Cooper's VW-Audi and Porsche dealerships in September 2012. VW's sales were soaring. The VW brand sold 438,133 new vehicles that year, up 35 percent and well ahead of the industry's 13 percent sales gain. 

The two stores shared an 8-acre site in Ann Arbor, about 40 miles west of Detroit. 

Germain said it made more sense to him to put luxury brands Porsche and Audi together under one roof and give VW its own facility. The facilities were old and cramped, with VW and Audi occupying about 24,500 square feet together. So in 2013, construction began on two new facilities. 

"It was a significant investment, but one we feel makes sense to improve the customer experience and the market share," Germain said. 

He said it is working. The new VW store has 18,400 square feet all to itself. VW had only about five service lifts before; now it has about a dozen. Germain hired eight more staffers over the past five months to help spur business. 

Last year, Germain's VW brand business sold around 440 new and used vehicles. He expects to sell about 500 this year. 

"We brought everything up to today's standards," Germain said. "Sales for new cars year-to-date are up 5 percent, and used-car volume is up 44 percent." 

The fixed operations are flat with the year-ago period, but Germain said his investment in the brand gives his dealership the chance to reconnect with customers who have been servicing their cars elsewhere. He believes they will choose to come to his modern facility for service including recall repairs related to the diesel-emissions scandal. 

The VW, Audi and Porsche franchises in Michigan are the only VW Group franchises he holds. But he would buy more in markets where he already operates, despite the company's difficulties. 

"Where do you think Volkswagen will be 20 years from now? It's not going to be where it is today. Those valuations are based on current earnings. Earnings go up and down," Germain said. "We may not have seen the bottom of it yet, but in the long term, Volkswagen will be back up."