EconSouth (First Quarter 2007)
Volume 9, Number 1
First Quarter 2007
Q & A
Car-Buying Consumers Await Stability in Housing Prices
An Interview with Mike Jackson, Chairman and CEO of AutoNation Inc.
Fort Lauderdale, Fla.–based AutoNation Inc. is America's largest automotive retailer, with 331 new vehicle franchises and about 26,000 full-time employees in 16 states. The company generated revenue of nearly $19 billion in 2006. Mike Jackson is AutoNation's chairman and chief executive officer.
EconSouth: Florida, I understand, is the nation's second-largest car market, behind California. How important is Florida to AutoNation?
Mike Jackson: It represents 30 percent of our sales. Our other big states are Texas and California. But our most important state is the great state of Florida.
ES: Has the housing market downturn affected vehicle sales in Florida differently from other parts of the country?
Jackson: I think [housing in] Florida definitely became overheated and speculative for the last several years. And what was happening was not sustainable. Now, how it affected our business: First, it hurt pickup truck sales in that residential construction was so severely affected. Also, the value of Americans' homes very much establishes their sense of net worth. And not knowing where their home's value is going introduces some hesitation for a big-ticket purchase like an automobile. So the markets that were overheated and highly speculative—such as Southern California, Las Vegas, Phoenix, and south Florida in particular—were disproportionately affected.
ES: The automotive sales industry overall is still having a difficult time. When do you see the market turning around?
Jackson: I don't think the retail consumer is going to come back into the market until the housing situation stabilizes. And I think that stability is still anywhere from six months to a year away. I expect the first half of this year to be difficult, that's for sure. Perhaps the second half will be better.ES: What has AutoNation done to weather the downturn?
Jackson: We have a very diversified approach to the business. We have a huge service and parts business across the country. We service 25,000 vehicles a day, or 5.5 million vehicles each year. That business continues strong, regardless of the economic cycle. It's really a recurring business. Then once you enter the variable part of the business—namely, the selling of vehicles—we can adjust our costs through commissions and advertising. We're diversified geographically with big footprints in California, Florida, and Texas. Right now, we have a housing situation in Florida and California, but Texas is extremely strong. And we're diversified by brands, representing all the major manufacturers.
ES: Does the service business tend to improve when people are buying fewer new cars and driving more older cars?
Jackson: Yes. It's sort of a countercyclical balancing act in that when people are postponing purchases because they don't want to go out and commit $30,000 [to a vehicle], then they'll increase maintenance on the existing vehicle.
ES: Turning to fuel use, are there differences in regions of the country regarding how receptive people are to hybrids and more fuel-efficient vehicles generally?
Jackson: Fuel efficiency for the vehicles sold each year is basically unchanged for the last 25 years. Technology is improving the fuel efficiency of the engine by about 2 percent a year, and then consumers are buying larger and faster vehicles, offsetting the gains in fuel efficiency. You do have certain types of vehicles that are very interesting, like hybrids. But we go from very high consideration [of customers buying] of over 50 percent to a closing ratio of around 1 percent. Hybrids are primarily purchased by individuals with a high sense of social responsibility and the financial means to express it, and there's the fascination with the technology and the super-clean air as well as fuel efficiency. So it's not really a model that can go mass market. But looking forward, I'm more optimistic than I have been in the past that we can finally make progress on this issue.
ES: Is your optimism driven more by customer concerns about environmental quality, national security, and imported oil or by their concern about the price of gas?
Jackson: Well, the price of gas would be the trump card if you really want to change consumer behavior. But gas is very cheap. The last time we had a change in consumer behavior about fuel consumption was in the '70s and the '80s. To adjust for inflation, and for percentage of household income [devoted to gas], you'd need $6 a gallon today to be equivalent to what we paid in the '70s and '80s. So now the fact that we're far below $3 a gallon is basically half price compared to the '70s and '80s. Look at other industrial societies. Take Europe, where fuel efficiency is 50 percent higher than in the United States. They make gasoline relatively expensive, around $6 a gallon, through taxation. And of course you get a change in consumer behavior. You can talk about national security, you can talk about global warming. But if you're not willing to change the price of gasoline, you're not going to change consumer behavior in a meaningful way.
ES: Has your online business gained strength? Are you seeing more people go online to purchase a car and not just to do research?
Jackson: Fully 75 percent of our customers have used the Internet to prepare themselves before they come to market. We have probably 10 percent of our business fully contracted over the Internet, meaning they've selected the actual vehicle and an actual price has been determined. Because of the Internet and by embracing it, we've been able to reduce transaction times by 50 percent over the last five years, and we hope we can make another 50 percent improvement in the next five years.
ES: You were with Mercedes-Benz when that company decided to build a plant in Alabama. What were the keys to convincing the company's leadership to build that plant?
Jackson: What is little understood is that the United States produces more vehicles today than at any time in its history, and it produces more vehicles than any country in the world. The United States is the most cost-effective place in the world to produce something of the complexity of an automobile. So you have the Koreans building plants in the United States. If they have this huge labor advantage, why would they be doing that? Labor as a component of the cost of producing a vehicle is going down, but the skill level of the worker is going up. All those factors play in favor of the United States. For a company like Mercedes-Benz, which was committed to the U.S. market long-term, strategically it was not a difficult decision to say we must produce in the United States.
This interview was conducted by Charles Davidson, a staff writer for EconSouth.