AutoNation's Accelerator

Walking past a display of new cars in the lobby of his Fort Lauderdale headquarters, Mike Jackson, a self-described student of human nature, explains a disconnect in consumer behavior. Sixty out of 100 people who come into his company’s car dealerships say they’re interested in hybrids. Only two out of 100 fork over the money for them.

FUEL INJECTION: Europe, says AutoNation Chairman Mike Jackson, has no fuel economy standards but the equivalent of $6 a gallon gas. The result: Vehicles there have better mileage than those in America. [Photo: Jeffrey Salter]

Green hypocrisy?

Not at all, Jackson says. It’s economics. With gas at $3 per gallon, the payback on a hybrid takes 10 years. Aside from those passionate enough and well enough off to make a statement by buying a hybrid, “People say, ‘Show me something else.’ It’s not a mass-market product,” Jackson says.

The thing to do about America’s gas dependence, argues the chairman of the nation’s largest auto retailer, is to raise the federal gas tax by $1 per gallon over 10 years.

Jackson’s stand in the tax pulpit coincides with his stature as one of the most powerful players in the auto industry. He emerged first as a crusader against Detroit’s overproduction, now as advocate for a higher tax. He — and automakers — support a new federal law requiring automakers to raise fuel economy to a fleet average of 35 mpg by 2020 for cars and trucks. But he opposes efforts by California and other states to impose their own individual gas mileage regulations, which he sees as detrimental to sales.

Vehicle sales, after all, are his business. Lately, it’s been a tough sell. U.S. new-vehicle sales began to slide in 2006 and fell to 16.5 million last year, down from a peak of 17.3 million in 2000. Jackson predicts sales will fall to the mid-15 million level this year. AutoNation has suffered accordingly. With half its new-vehicle sales coming from California and Florida where the housing slump has hit hard, AutoNation’s 2007 profit fell 12% to $279 million, its worst yearly performance since 2001. Revenue slid 5% to $17.7 billion, its worst revenue year since 2003.

“They (Europeans) have no fuel economy standards. They got to 36 miles a gallon versus 21 through the price of gasoline. I’m not saying we need to get America to $6 a gallon and get America to that product mix, but I’m just saying the price of fuel is the key equation here.” — Mike Jackson CHART: In Europe, taxes account for 66% to 75% of the price of gas, and 40% of cars run on diesel. [Chart: Matt Dean]

Above, AutoNation's new Lexus dealership in West Palm Beach. [Photo: Matt Dean] Before Mike Jackson was hired in 1999, 60% of AutoNation franchises were volume domestic brands. Today, only 30% are domestic, and Jackson wants to get that figure down to the mid-20% range.

Jackson came to AutoNation in 1999 at the behest of Fort Lauderdale billionaire and former major AutoNation shareholder H. Wayne Huizenga, the deal maker behind Waste Management, Blockbuster and the Miami Dolphins. AutoNation — Huizenga’s amalgamation of used-car superstores, new-car dealers and rental car companies National and Alamo — was supposed to be a revolutionary, synergistic wonder. But Huizenga got himself in over his operational head. By 1999, AutoNation was running a $31.5-million loss on its auto sales business, and the stock had fallen from a peak of $44 to $7.50 per share.

Huizenga needed a car guy. And if ever there was one, it was Jackson. After graduating with a political science degree in 1971 from St. Joseph’s in his native Philadelphia, Jackson had an eye for law school. But while he was still a newlywed, his old Mercedes 190 SL broke down and, in exchange for repairs, Jackson took a job in a dealer service department. He fell for the business — and went on to become a factory field technical representative, marketer, partner in a Maryland Mercedes dealership, head of Mercedes’ national dealers council and ultimately president of Mercedes-Benz USA, the first non-German to hold the post. He is widely credited with turning around Mercedes’ U.S. sales by ditching stodgy advertising, cutting dealer markups and persuading Germany to make vehicles that appealed to younger U.S. consumers, such as the SLK Roadster and M-Class SUV. He established a reputation for brainpower. “Incredibly smart,” says Art Spinella, president of CNW Marketing Research in Oregon. “He’s an information vacuum cleaner. He collects information and can process it very quickly.”

Jackson lost little time at AutoNation. Huizenga already was spinning off the rental car operations. Jackson shut down the money-losing, used-car superstore chain, putting 1,800 employees from the stores and 200 at headquarters out of work just before Christmas 1999. His resume soothed automakers and investors. At his first AutoNation annual meeting, held at a Fort Lauderdale theater in May 2000, the Huizenga team spoke from behind the podium and teleprompter. Jackson, by contrast, roamed the stage, speaking without notes. He owned the room.

With President and Chief Operating Officer Mike Maroone, a Broward dealer whose operations Huizenga had bought, Jackson spent the next five years on the retail details — inventory control, integrating systems, finding and standardizing best practices, buying stores that helped him reach critical mass in certain markets and unloading low-volume, low-return franchises in others. (AutoNation now has 322 franchises, 78 fewer than at year-end 1999.) Today, reports JP Morgan analyst Edward Yruma, AutoNation has the best-in-class operating margin at 4.1%, a half a percentage point ahead of its closest competitor.

High-end Hopes: AutoNation’s new Lexus dealership in West Palm Beach offers customers high-end touches. Mike Jackson is hoping the company’s continued move into higher-margin imports will make investors more comfortable too. [Photos: Matt Dean]

Speaking his mind

Forever scrutinizing inventory levels, Jackson didn’t like what he was seeing from Detroit. The Big Three were production-push oriented, churning out vehicles that consumers would buy only if bribed with incentives and discounts. After largely fruitless private talks with Detroit, Jackson went public in 2004. He foresaw an “awful day of reckoning.” He criticized manufacturers by name, publicly disputed their estimates of unsold inventory at dealers, prodded them to consolidate dealerships and rebuked them for rebates and discounts. “He can get press when he wants,” says Burbank, Calif., dealer consultant Mark Rikess. “He’s got some clout.”

The AutoNation Empire
2007 cars sold (61 cars every hour)	535,000
2007 revenue	$17.7 billion
New vehicles	$10.2 billion
Used vehicles	$4.2 billion
Parts and service	$2.6 billion
Finance and insurance	$594 million
2007 gross profit	$2.8 billion
New vehicles ($2,189 per vehicle)	$720 million
Used vehicles ($1,741 per vehicle)	$359 million
Parts and service	$1.1 billion
Finance and insurance ($1,110 per vehicle)	$594 million
2007 profit	$279 million
2007 total employment	25,000
2007 Florida employment	7,300
Major Florida brands: Maroone, AutoWay, Courtesy, Mike Shad
Source: AutoNation

Automakers bristled but had to take it. David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., says even though other big dealers haven’t spoken up, Jackson’s heft as a retailer has insulated him from retaliation. “Maybe if he were a little dealer in Timbuktu that might be the case, but he’s Mike Jackson. I think what everybody appreciates in Mike is he represents the feelings of a great many dealers.”

Jackson today says he was just bringing a consumer’s viewpoint to an industry that historically lacked a channel to receive it. “Look at Wal-Mart. I don’t see manufacturers dictating to Wal-Mart. Wal-Mart’s the retailer. Wal-Mart’s dealing with the customer — they have a good feel on things. The value of our input is seen today where it wasn’t exactly appreciated five years ago,” he says.

The good news, says Jackson, is that he doesn’t have to be as critical anymore. The Big Three have changed and cut production. Ford and Chrysler hired executives attuned to market-pull rather than production-push.

The bad news: Detroit’s improvement is obscured by the auto sales recession. “I’ll make a prediction,” Jackson says. “When the cycle turns, people are going to be amazed at the kind of numbers that they’re able to put up.”

Jackson sees that turn coming in 2009, perhaps even in the second half of this year. We’re 24 months into what’s typically a 30- to 40-month down cycle, he says. Jackson’s brightening outlook is significant, coming as it does from someone who has been a “fairly vocal pessimist” and “persistently bearish,” JP Morgan’s Yruma wrote in a research report last year.

Until the slump ends, Jackson has to concentrate on cutting expenses, keeping inventories low and experimenting with approaches. He also will continue to move AutoNation away from domestic brands. When he was hired, 60% of the company’s stores were volume domestic brands, with the rest being volume imports and higher-margin luxury brands. Today, only 30% are from Detroit’s Big Three, and Jackson wants the company to reduce its volume domestic brand segment to the mid-20% range. Investors would welcome anything to improve margins. While the stock has gotten as high as $23 over the last five years, it’s essentially gone sideways for buy-and-hold investors over that period.

The value of $6 gas

2007 Auto Sales (estimated; change from 2006)
North America	19 million	-2%
Europe and Japan	27 million	+3.8%
China	8 million	+19%
The rest of the world	15 million	+5%
Total	69 million	+4%

Jackson, 59, isn’t letting up on the tax and fuel efficiency issue. He argued for the tax increase in a speech at the auto show in Detroit in January. He included a slide showing consumers rated sound systems and cup holders ahead of fuel economy as factors in their car-purchasing decisions. He demonstrated how Europe, with no fuel economy standards but the equivalent of $6 a gallon gas, has vehicles with better mileage than those in America. The federal gas tax, at 18.4 cents per gallon, hasn’t increased since 1993, though a federal transportation panel has recommended raising the tax by 25 to 40 cents a year for five years to pay for highway, bridge and infrastructure improvements.

Jackson says research shows consumers would support higher gas taxes to reduce dependence on imported oil. Consumers also believe importing petroleum means funding both sides of the war on terror, according to the research. He says regulations now proposed in California will jack up the price of cars $5,000 to $10,000 per vehicle over a decade. Consumers won’t pay that premium with gas at $3 per gallon, he says. Instead, they’ll hang on to older vehicles and buy used, which will do nothing to cut carbon dioxide emissions or improve fuel economy.

Says Jackson: “If you want to change a behavior, you’ve got to disadvantage what you want them to use less of and advantage the direction you want them to go.”

Links: Click for an interactive map showing truck vs. car sales statewide.