The Loaded Sticker Price.

When it comes to import cars, black dealers still find themselves stranded by the side of the road

In the ever-evolving auto industry, bigger is better--especially now. The effort to gain both global market share and entree into niche sectors has compelled the domestic Big Three automakers (Ford, General Motors and DaimlerChrysler) to merge or form strategic alliances with their import competitors. But while this consolidation may create opportunities for some minority operators, smaller dealerships--black and white--are being closed or streamlined to support larger car volumes. Consequently, existing small minority operators may find themselves squeezed out of the industry altogether. In such a David vs. Goliath atmosphere, will African American dealers continue to hold their own?

At least for now the top 100 black automobile dealers in the country arc benefiting from the record sales the Big Three enjoyed in 1998, with $6.3 billion in total sales, up 13.19% from $5.6 billion last year. Unfortunately, not everyone was able to enjoy the fruits of their labor--10 dealers fell off the list from last year while 13 newcomers were added.

For the first time in over a decade, a BE auto dealer tops both the INDUSTRIAL/SERVICE 100 and AUTO DEALER 100 lists as the largest black-owned business in the nation. The Mel Farr Automotive Group, with nearly $600 million in sales, reigns over an automotive empire that spans four states and includes a financing company that Farr plans to take public later this year. Unlike Farr, however, the majority of the Top 100 dealers carry domestic brands and by and large have been unable to tap into the elusive, yet lucrative import franchises. In fact, only 28 of the BE AUTO DEALER 100 currently carry import lines.

According to J.D. Power and Associates, an Agoura Hills, California-based research firm, last year import car makers such as Mercedes-Benz, BMW, Jaguar, Saab, Audi, Volvo, Toyota, Volkswagen and Honda commanded a 36% share of the $1.1 trillion U.S. auto market. Of that, nearly half (46%) represented purchases by African American buyers, who bought luxury models in particular.

The National Association of Minority Automobile Dealers (NAMAD), an industry member organization in Lanham, Maryland, found that in 1995 alone, minorities spent over $40 billion on new and used cars. In spite of the effect African American consumers are having on automakers' bottom lines, their loyalty has not been reciprocated with any real opportunities for African American car dealers.

"The manufacturers need to recognize that it's no longer just enough to let us come into their dealerships and buy their cars," says Sheila Vaden-Williams, NAMAD's executive director. "We want to have our fair share of opportunity in every aspect of the auto industry."

Although Farr now boasts a complex of six import and two domestic franchises, the import manufacturers didn't initially welcome him with open arms. When he approached Toyota in 1983 for a dealership opportunity, it took intense lobbying, including trade missions to Japan, before he could land his franchise in Bloomfield Hills, Michigan, in 1989. All this in spite of his track record in the industry and capital resources to invest in the dealership.

"I had a hard time because the [imports] were not interested in putting any African American dealers in business, and they're still not interested," says Farr. "None of the foreign auto companies have any kind of [Minority Dealer Development] program that even comes close to the domestics."

THE WAY THEY WERE

During the late 1960s, in the wake of the civil rights legislation that swept the country, the Big Three formally began their Minority Dealer Development (MDD) programs to "assist qualified minority candidates" in receiving dealerships. (Most of the dealers on our BE AUTO DEALER 100 list are graduates of these two-year programs, which combine both classroom instruction and on-the-job training.) Once a dealership became available, manufacturers provided financing for applicants who needed it.

Though far from perfect, these programs raised the number of domestic African American dealers from around 30 at the end of the 1970s to 480 at the end of 1998 (see "Running on Empty," Newspoints, November 1998).

In the meantime, import car makers were slowly setting up sales divisions and factories in the U.S. Until 1973, however, American consumers were still devoted to the Big Three. Then the country was hit by an oil embargo, and the shortage created a demand for smaller, more fuel-efficient Japanese cars. The U.S. was hit by another oil shortage in 1979. By 1982, the Japanese captured about 20% of the U.S. automotive industry.

By the 1980s, with oil supplies replenished, a bustling economy and a burgeoning Buppie and Yuppie middle class, came an increased demand for luxury car brands. Nameplates like Mercedes-Benz and BMW became the status symbols of choice. But it was easier for an African American to buy a luxury car than to own a luxury car dealership.

Chandler B. Lee of Classic Pontiac-Buick-GMC in Hicksville, New York (No. 88 on the BE AUTO DEALER 100 list with $25.5 million in gross sales), discovered that firsthand when, in 1986, he took over a domestic dealership with two imports--Mercedes-Benz and Toyota--in Southern Pines, North Carolina.

"Toyota exercised their right of first refusal, while Mercedes-Benz told me they wanted to discontinue my service contract," says the now 46-year-old dealer, who then had over 10 years' experience in the auto industry as an engineer for GM.

Car companies usually screen their dealer candidates on the basis of four criteria: sufficient capital, extensive experience managing a dealership, commitment to customer satisfaction and a willingness to invest long term in the community where the dealership is located. If a candidate is not up to snuff, the company can exercise its "right of first refusal" and deny the applicant a dealership. Conversely, it can give them the green light and issue a letter of intent to purchase a dealer-owned store.

Despite the service contract Lee had with Mercedes-Benz at the time, and the more than $150,000 he'd invested to purchase the assets and equipment to carry Toyota's lineup at the location, ultimately both deals fell through.

"The Southern Pines location did not provide sufficient market potential to justify a sales outlet for Mercedes-Benz products," explains Donna Boland, public relations department manager for Mercedes-Benz of North America, based in Montvale, New Jersey. "Any reluctance to issue Mr. Lee a dealership agreement was because the market was too small to support a dealership at that time," she says.

Today the Japanese and German car makers deny that race played a role, although Lee doesn't agree. "It wasn't education, training or money; it was strictly color," claims Lee. In 1992, he testified about his dealings with Toyota during a congressional hearing convened by Michigan Reps. John Conyers and Barbara Rose Collins that brought national attention to imports and their allegedly discriminatory practices against minority auto dealers.

In fact, NAMAD presented documents at those hearings to show that between 1982 and 1992, 140 black auto dealers were denied dealerships. Of the 7,626 Asian car dealerships in the U.S. at that time, only 23 were owned by African Americans (11 of them Toyota dealerships). But the hearings were just the beginning of the outcry. In the early 1990s, groups such as NAMAD, the Rainbow/PUSH Coalition and the National Urban League demanded that imports diversify their dealer body.

The imports emerged from that tumultuous time "with the realization that diversity leads to profits," according to Randi Payton, publisher of African Americans on Wheels, a Washington, D.C.-based quarterly automotive magazine. "To have your company reflect your customer base makes good business sense."

THE DIVERSITY MANTRA

Imports like BMW and Jaguar are now seeking to create their own dealer diversity initiatives. Last February, BMW announced its plan to appoint at least 10 African American dealers within the next 12 months. By this summer, the company expects to be just shy of its goal, with negotiations already under way with seven African American candidates and another three letters of intent in the pipeline. Eventually these dealerships will be added to the 341 it already has.

One of the more high-profile dealer selections is baseball great Hank Aaron, who, in spite of his lack of automotive training, so impressed BMW that plans are under way to build a brand-new dealership in southern Atlanta (see "Hank Aaron Goes to Bat for BMW," Newspoints, May 1999). "If it takes 15 months to reach our target instead of 12 months, then so be it," says Victor Doolan, president of BMW North America Inc. "What is important is that we have the right quality of candidates, and in time the quantity of diversity candidates [that] reflect the marketplace," he explains.

When seeking candidates for dealerships, manufacturers can either work closely with NAMAD and its pool of 500 qualified minority auto dealers or create their own stable of prospects. BMW, for example, uses the one-year training program at the National Automobile Dealers Association (NADA) in McLean, Virginia. BMW's first African American graduate of the program is Gailon McGowen, who worked for two years at BMW Manhattan in New York City after completing his NADA training.

"I think they were looking for someone who had a professional background who could bring something different to the table in how to operate a dealership," says the 39-year-old former attorney. McGowen had no automotive experience prior to his acceptance into the program.

What McGowen did not lack, however, was the nearly 30% capital investment that BMW requires of all its dealer candidates. Since January, he's been the general manager of Hunterdon BMW, a dealership in affluent Hunterdon County, New Jersey.

Despite the dealership's potential, the previous owner--Fort Lauderdale, Florida-based AutoNation Inc. (formerly Republic Industries), the largest publicly traded auto group in the country--had signed a letter of intent with BMW to sell the location in February 1998. According to industry insiders, AutoNation felt the dealership was no longer viable and had decided to let it go. The deal was closed in late December, and McGowen eagerly awaits the day when the dealership will be completely his.

"I'm not the owner yet; we've been making some adjustments to the financial statements," says McGowen, who hopes to finalize the deal by the summer. "BMW doesn't really have a formal minority training program," he asserts, "so it's sort of by trial and error."

To give its dealer diversity plan an added boost, earlier this year BMW approached Weldon H. Latham, a senior partner at the law firm of Shaw Pittman Potts & Trowbridge of Washington, D.C., to evaluate its initiative and make suggestions. Latham, who last year spear-headed the review of GM's own MDD program (see "Driving Uphill," Newspoints, November 1998), sees the move as a positive step, pointing out that "if they weren't serious about diversity, they wouldn't hire us."

Another car maker that has done an about-face is British importer Jaguar Cars. It formed an 11-member advisory council in 1997 to help improve both its corporate and dealer diversity efforts. Late last year, it tapped David Stephens, 47, dealer/principal and CEO of Falls Lincoln-Mercury in Wichita Falls, Texas, to be the first African American to own a Jaguar dealership.

"David has high customer satisfaction [at his dealership] and has spent a number of years living in Piano, [Texas], so he knew the market quite well," says Steve Odell, vice president of marketing and sales for Jaguar North America in Mahwah, New Jersey.

Stephens' 21 years of experience in building his luxury Lincoln-Mercury dealership didn't hurt either (see "Foreign Automakers Tap Minority Dealers," Newspoints, January 1999). The new dealership, Millennium Motor Cars, scheduled to be launched later this year in Piano, has a planning volume of 1.5% of Jaguar's U.S. sales.

"I believe Jaguar was ready to give an African American an opportunity in a location they considered to be a good market and where the chances of success would be greater," says Stephens. There are plans to add at least 44 new minority-owned dealerships over the next four to five years. At present, Jaguar has 134 dealers overall.

Sim Fryson of Sim Fryson Motor Co. (No. 70 on the BE AUTO DEALER 100 list with $30.4 million in gross sales) says he encountered a "kinder, gentler" Mercedes-Benz in 1994 when he opened Sim Fryson Motor Co. in Ashland, Kentucky. "The first time I applied for a dealership with Mercedes-Benz, I got it," says Fryson, who purchased the dealership from an individual owner but still had to get final approval from Mercedes-Benz. He also carries Honda and Nissan lines, making him the first African American to exclusively carry import cars.

Among Asian auto manufacturers, Honda has in the past year appointed 10 new minority-owned dealerships--at least half of which are African American-owned--to its current total of 1,200 Honda and Acura dealers. Of the current total, 32 are ethnic minorities. At Toyota, of its 1,195 dealers, 47 are ethnic minorities, including 16 African Americans. Four of Toyota's 174 luxury line Lexus dealerships are owned by ethnic minorities; two of them are African American.

Nissan, which has 1,070 dealerships--13 owned by African Americans--promises to increase its minority-owned dealerships by 25% (including double its current number of African American-owned dealerships) by the year 2002. To further improve the odds that this will happen, the company has even linked salary/bonus incentives to regional executives' performance in matching qualified minority candidates with dealership appointments.

One reason why so few minority applicants land actual dealerships is not lack of experience but lack of capital. And unlike the domestics, few of the imports offer financial assistance. Honda Motors, however, is an exception. Through its Dealer Investment Program--an owner-ship-from-profits program--Honda helps with the purchase and establishment of dealerships for qualified applicants.

"The dealer makes an initial 15% or $100,000 investment, whichever is greater, and Honda finances the rest," explains Barbara Ponce, manager of corporate diversity. "After five and a half years, the dealer can build up enough profits to fully own the dealership," she adds.

Lee, however, remains unimpressed by all the diversity fervor and has sworn off the idea of ever owning an import dealership. Instead, he prefers the tried-and-true domestic brands. "I'm all-American when it comes to selling automobiles."

THE SHRINKING MILLENNIUM

While these changes are bright spots on the horizon, will this new commitment to diversity by import manufacturers continue in light of the consolidation that's gripping the industry? There are skeptics.

To increase revenue potential and profit, automakers are now paring back the number of dealers--creating a leaner, meaner selling force. Analysts predict that over the next decade, the Big Three will reduce their dealerships by nearly 25%, from 18,000 to fewer than 14,000.

Taking their cue from AutoNation CEO H. Wayne Huizenga, the domestic automakers have created their own variation on the "auto mall" theme. Under GM's Project 2000 initiative, for example, the company's Pontiac, Buick and GMC lines can all be offered by a single dealer. At one time, it was commonplace to have two or three dealerships carrying the same brands in a particular city, all vying for the same customers.

Imports like Volvo, based in Rockleigh, New Jersey, have taken the opposite approach. They are encouraging their larger operators to carry only the company's lines. One such exclusive dealer is Dyer and Dyer, owned by Sonic Automotive in Chamblee, Georgia, which is Volvo's fifth top-selling store in the country. "Our exclusive retailers show a higher profitability percentage of sales than our nonexclusive retailers," says Brad Bowers, Volvo's vice president of franchise development.

Independent dealers like Tony March and Ernie Hodge have made consolidation work in their favor by joining forces to create March/Hodge Holding Co. (No. 4 on the BE AUTO DEALER 100 list with $184 million in sales), which shares both the profits and expenses of their combined dealerships. (See "Bigger is Better," this issue.) However, dealers like March and Hodge are the exceptions rather than the rule as smaller operators, black and white, fear they may be "consolidated" right out of the industry. One such dealer is Peggy Cockerham of Southlake Buick & Volvo in Morrow, Georgia, with nearly $20 million in sales, who hasn't appeared on the BE AUTO DEALER 100 list since 1997.

"I'm caught in the crunch between both GM and Volvo's consolidation efforts," says the 40-year-old dealer whose store is located just a stone's throw away from Dyer and Dyer. "It's hard to compete when other dealers are receiving manufacturer incentives for being exclusive--which I don't qualify for, since I carry other product lines. It's a Catch-22," she adds.

Bowers asserts, however, that all of Volvo's dealers receive the same follow-up from the company's regional reps. But how much time a company rep spends at an individual dealership is based on the store's volume. "Our rep may spend days out of the week at the other dealers, but because we're not the largest dealer, we may see him once a month for half a day," says Cockerham.

The consolidation squeeze doesn't end there, as the line between domestic and import is becoming increasingly blurred. Now the Big Three have set their sights on market niches the imports have dominated since their arrival in the States. Ford, for example, has taken a toehold in the lucrative luxury car market by acquiring Jaguar and Aston-Martin. And it now has a presence in the small- and midsize-car category with its January acquisition of Swedish carmaker Volvo. Add to this a 33% stake in Mazda.

Meanwhile, GM owns a 49% stake in Isuzu, 10% in Suzuki and 50% in Saab, while Chrysler hit the mother lode late last year with its marriage to Daimler-Benz AG, parent company of Mercedes-Benz, to form the new DaimlerChrysler. Earlier this year, there were rumors Daimler-Chrysler was courting Nissan, but the maker signed on this past March with French automaker Renault.

Rather than reinvent the wheel, couldn't the imports simply tap into their domestic partners' existing MDD programs? Not exactly, they say.

Ford has aggressive sought to keep the look, production, marketing and distribution of Jaguar's models separate from its homegrown lineup. So it's not suprising that Ford has extended this laissez-faire approach to Jaguar's embryonic dealer diversity program. "The wonderful thing about the Jaguar/Ford association is that Ford gives us help when we ask for it, and lets us run our business, "says Odell.

Ford seems to be taking a similar approach with its new Volvo addition, which has only three African American dealers out of its 360 dealerships. Neither does Bowers foresee the merger affecting its new dealer diversity initiative, which got under way earlier this year.

"We're in the process of forming a Minority Management Advisory Council that will help us identify and select minority management candidates as well as minority ownership of some of our Volvo dealerships," says Bowers, He expects the selection of the eight- to 12-member council to be completed by summer.

Whether Volvo will create financial assistance for its minority candidates is still up in the air. But for independent operators like Cockerham, who need that assistance now rather than later, time may not be on their side. "Volvo is still in the infancy stage of developing their diversity program," she says. "But it will probably be too late for me."

[GRAPH OMITTED]

TOP TEN GROWTH LEADERS

                                                  1997
COMPANY                     LOCATION              SALES(*)

Panhandle
Automotive Inc.             Panama City, FL       28.000

Barnett Auto Group          Houston, TX           32.004

Legacy Automotive Inc.      McDonough, GA         62.000

March/Hodge Holding Co.     Hartford, CT         114.863

Winston Pittman
Enterprises                 Louisville, KY        41.323

Pavilion Lincoln-Mercury/
JMC Auto Group              Austin, TX            67.460

Family Automotive
Group                       San Juan
                            Capistrano, CA       123.330

Fairway Ford
of Augusta                  Evans, GA             21.805

Vicksburg Chrysler
Plymouth Dodge Inc.         Vicksburg, MI         47.880

Mike Johnson
Automotive Group            Richmond, MI          25.900

                            1998       PERCENT
COMPANY                     SALES(*)   INCREASE

Panhandle
Automotive Inc.              64.000    128.57

Barnett Auto Group           66.450    107.63

Legacy Automotive Inc.      101.000     62.90

March/Hodge Holding Co.     184.000     60.19

Winston Pittman
Enterprises                  65.301     58.03

Pavilion Lincoln-Mercury/
JMC Auto Group              105.667     56.64

Family Automotive
Group                       192.000     55.68

Fairway Ford
of Augusta                   33.939     55,65

Vicksburg Chrysler
Plymouth Dodge Inc.          71.345     49.01

Mike Johnson
Automotive Group             36.500     46.00

1999 TOP 100 AUTO DEALERS

BLACK AUTO DEALERS           1997         1998   % CHANGE

NUMBER OF EMPLOYEES         9.111       10,744   17.92%

TOTAL SALES(*)        $ 5,554.587   $6,286.993   13.]9%

(*) In millions of dollars, to the nearest thousand.

Prepared by B.E. Research. Reviewed by Mitchell & Titus L.L.P.
Minority-Owned Import Franchises

                  TOTAL        TOTAL AFRICAN-AMERICAN
MANUFACTURER      FRANCHISES   DEALERS

BMW                     337      N/A

Honda/Acura           1,200      N/A

Hyundai                 467        5

Jaguar                  134        2

Lexus                   174        2

Mazda                   770       10

Mercedes-Benz           315      N/A

Mitsubishi              491        4

Nissan/Infiniti   1,070/151     13/1

Toyota                1,195       16

Volkswagen              600        4

Volvo                   360        3

                  % OF AFRICAN-AMERICAN   TOTAL MINORITY
MANUFACTURER      DEALERS                 OWNED

BMW                     N/A                 32(*[dagger])

Honda/Acura             N/A                 32(*)

Hyundai                1.07                 22

Jaguar                 1.49                  7

Lexus                  1.15                  4

Mazda                  1.30                 29

Mercedes-Benz           N/A                 11(*)

Mitsubishi             0.81                 25

Nissan/Infiniti   1.21/0.66               31/9

Toyota                 1.34                 47

Volkswagen             0.67                 27

Volvo                  0.83                 N/A

(*) Company did not provide specific breakdowns

[dagger] Include women-owned dealerships

Prepared by B.E. Research. Reviewed by Mitchell & Titus L.L.P.

Additional reporting by Ahmad Wright3