Road to Recovery?

When John Marazzi left Fort Myers Toyota in 2008 after 18 years he had plenty of suitors vying for his services. There was a Mercedes dealership in Jupiter, a Toyota store in Tampa—substantial stores that needed only to “tweak this, improve this,” he says.

Instead, Marazzi assumed the Nissan franchise in Naples, choosing to venture into business for himself. He proceeded to build a glittering new-car showroom just west of I-75 on Pine Ridge Road and threw open the doors of John Marazzi Nissan on Sept. 14, 2008.

News broke of Lehman Brothers’ collapse the next day. 

Marazzi spent his first day as the managing partner of his own dealership in the store’s lounge watching the Dow plummet. “I told them, ‘Listen, I don’t ever want to see the stock market on that TV again,’” he says. “I said, ‘You put the Travel Channel on, you put the History Channel on, you put anything [on] but Fox News, CNN or CNBC.’"

“It was crazy because the auto industry went from 16 million to 10 million [annual new car sales] overnight. Literally 60 percent vanished overnight. The biggest effect was the banks immediately shut off lending. Unless you were the kind of person who didn’t need credit, you were the only person who could get credit.”

It got worse before it got better. For the past two years, national news has been filled with doomsday reports of the auto industry. It began with the government bailouts and bankruptcies of domestic manufacturers General Motors and Chrysler, took a quick respite with the federal Cash for Clunkers stimulus, only to reach a fever pitch when Toyota was forced to recall 2.3 million vehicles in the United States.

Finally, the auto industry appears to be rebounding. National sales improved by 24.3 percent during March and appear to remain steady in April. “[The recovery] began in early 2009 and has been rising ever since,” says John Wolkonowicz, a senior auto analyst for IHS Global Insight. “We’ve seen the worst.”

With the national outlook listing toward profitability, it’s time enough to review the past two years to find out what effect the bailouts, Cash for Clunkers and the Toyota recall had on local dealers. It’s time to find out who survived, who thrived, and who didn’t make it out alive.

The Bailouts

Unlike John Marazzi Nissan, Fort Myers Toyota already had its glittering showroom. It was just too small.

By 2008, the dealership was averaging 400 new car sales per month and 4,800 a year. Management did what it could to appease the crowds—converting sales desks to finance centers and squeezing in sales modules where possible—but lines of people waiting to hand over money weren’t rare.

“If any of my friends were coming from Sarasota to buy, I’d say, ‘For God’s sake, get here early,’” Fort Myers Toyota Vice President Pamela Templeton says. “That’s how incredibly busy we were. Some people were buying two cars at a time.”

They were so busy, in fact, that when Toyota launched its new, full-size pickup that year and predicted the dealership would sell 33 per month, Fort Myers Toyota built a new, two-story truck center. 

Less than a year after it was completed, gas hit $4 a gallon in Southwest Florida. At the same time, the housing bubble was bursting, and soon, the area ranked among the nation’s leaders in foreclosures.

People suddenly owed more on their mortgages than their houses were worth. The equity they had in their homes during the boom years, and the plentiful loans from banks and Toyota financing that blossomed from it, disappeared. Getting financed for a new car became a struggle. 

Between May and June of 2008, Fort Myers Toyota’s new car sales dropped 43.8 percent. Management thought it might rebound. It didn’t.  

The next year produced some of the worst sales numbers, in terms of volume, that many Southwest Florida auto leaders can recall—ever. Bob Bisplinghoff, COO of Gettel Automotive in Sarasota and Bradenton, says new car sales dropped 30 percent. Steve Johnson, sales manager of Dixie Buick in Fort Myers, recalls his dealership’s figures falling below 1986 numbers.

It turns out credit was available for some: The U.S. government gave General Motors and Chrysler more than $25 billion in loans in ’08-’09, allowing the manufacturers to restructure and escape burdensome union and franchisee agreements that had pushed the domestic auto industry to the brink of insolvency.

Despite the bailouts and the outspoken opposition to them, dealerships that weathered the worst of the recession did so regardless of brand. Instead, survival seemed predicated on taking one of two (or both) courses: slashing expenses or taking risks.

At its height in the mid-2000s, Fort Myers Toyota recorded monthly expenditures of $2.8 million. Attrition and smart spending—“which hadn’t been going on here very well,” Templeton says—accounted for 60 percent of savings due to curtailing overhead during the recession. The rest came from layoffs and closing the dealer’s pre-owned service center, a separate maintenance facility just for its used cars.

It worked. In December ’09, expenses stood at nearly $1.59 million. Because of its reduced budget, the only losses the dealership reported during the last two years occurred in July and August of ’08. Gettel Automotive recognized early a need to restructure its business model, slashing its advertising budget by 50 or 60 percent and reducing personnel. Dixie did the same, becoming more efficient, says Johnson, but also laying off sales people.

While “streamlining” and “efficiency” became auto industry buzzwords, several Southwest Florida dealers fought through the recession by taking strategic risks. Galeana Chrysler Jeep Dodge in Fort Myers was simply Galeana Chrysler Jeep before the recession. At the urging of Chrysler, who sought to consolidate all of its lines into single dealers, Galeana purchased the Dodge franchise from Galloway Dodge around Thanksgiving 2008.

Leon Mudry, general manager of Galeana, estimates that in 2006, before the merger, he sold 1,800 new cars. That number would have slipped to 1,000 during the recession if the merger had not occurred. “Now we’re selling almost as many cars as we were, of course with two franchises,” Mudry says. Expenses swelled only slightly because Mudry was able to move the Dodge lot onto the existing Galeana dealership, using the existing Galeana staff.  

There are three prongs to revenue at dealerships: new car sales, used car sales and fixed operation (or parts and service). The idea behind fixed operations is that people might not buy cars, but they still have to get them fixed.
At least that was the idea behind Fort Myers Toyota’s renovation of its shuttered pre-owned service center, turning it into a collision center. But to say that spending thousands of dollars to refurbish during the recession received unanimous consent would be a lie. “We’re doing OK,” Templeton remembers thinking. “Let’s not put a gun to our head in the middle of summer.”

Marazzi had no such option. His Nissan dealership was brand-new. It lacked a strong, loyal fan base to generate service revenue while sales sought traction. Says Marazzi, “I was faced with the dilemma of growing a business in an imploding market.”

Rather than retreat, Marazzi upped his advertising budget, maximized Internet visibility through search engine optimization, video, press releases and an all-female office (for their “gracious” manners) on the second floor of his showroom.

“I took a very big risk here,” Marazzi says. “Two years later, yes, it’s worked out very well. But I lost a lot of hair in the meantime.”

Cash for Clunkers

There appear to be two things that Southwest Florida car dealers agree on: (1) Cash for Clunkers was a mess; and (2) Cash for Clunkers was fantastic. 

Cash for Clunkers, officially known as the Car Allowance Rebate System (CARS), was a federal program that provided $5 billion in incentives for people trading in gas guzzlers for fuel-efficient rides during July and August 2009. It was designed to boost the economy, but faced criticism right away from those who believed future sales would suffer for the benefit of one month.

Also, the logistics of the program were frustratingly murky. There was a mountain of paperwork to go with each sale, the program’s website only went live on the day it started, and once it became active, it wouldn’t stop crashing.

Says Marazzi: “We hate it. It was a nightmare.”

Says Templeton: “Heinous.”

A few seconds later, though …

Marazzi says: “You have to call a spade a spade. … We did enjoy that one-time program.”

Templeton says: “Cash for Clunkers was a real homerun for us.”

“It was a tremendously screwed up deal, like anything the government does,” Wolkonowicz says. “It ended up helping the person that usually bought a two-year-old used car, but the deals were so good they bought a new car for a change.”

Therein lies the ugly beauty of Cash for Clunkers: a wonderful present wrapped in sticky red tape.

Marazzi recorded the highest sales figure of his tenure in Naples during that month, 163. Fort Myers Toyota stayed open 24 hours a day to take advantage of every deal. Galeana sold an extra 150 vehicles in a two-month period. It was Gettel Automotive’s biggest sales month of the year.

Marazzi estimates that Cash for Clunkers saved 20 percent of U.S. dealerships from failing—local dealerships that were “teetering on going under.”

Toyota Recall

On March 9, James Sikes called the California Highway Patrol from his cell phone and told them that the gas pedal on his 2009 Toyota Prius was stuck to the floorboard. He was rocketing down a San Diego highway at more than 90 mph and he couldn’t stop. The ordeal ended when a patrolman snuggled his cruiser in front of the Prius and gradually forced it to stop.

Although Toyota was aware of the problem by September 2009, Sikes became the face of what came to be known nationally as Toyota’s “sticky pedal.”

Sikes’ version of events was later called into question, but it didn’t matter. Toyota recalled more than 9 million cars between November and April and incurred the largest automaker fine in U.S. history, $16.4 million.

“All we went through in ’08 and ’09 with the credit meltdown. [The recall] was unexpected,” says Templeton. “The hits just kept coming.”

Fort Myers Toyota found itself besieged on three fronts: in the service department, from local competitors and from the media.

The worst assault came from both the national and local media, says Templeton. “It was like watching a corporate assassination. It was just an all-encompassing onslaught. They would say something but not use numbers, not use any context.”

Bobby Yoxall, the dealership’s director of operations, says that the dealership never sold a car with sticky pedal (or “floor mat entrapment,” as they call it around the Toyota lot). That didn’t stop a local news station from ambushing Templeton at the dealership and demanding answers.

“Government motors hard at work,”  Yoxall grumbles.

The biggest winner of Toyota’s recall was Ford, which became the leader in quality due to a glowing review from Consumer Reports. It also helped Dixie Buick gain back customers. For years the brand hadn’t been able to shake a reputation of inferior quality. The recall let GM showcase its new appreciation for dependability.

“I can’t attribute how many direct sales are from it,” Dixie’s Johnson said. “I think it just opened people up to other makes and models more than anything else. No longer are they hard-set, ‘It has to be an import.’”

Dixie’s conquest sales—those that pull a driver away from another manufacturer—for the Buick LaCrosse have tripled since the beginning of the recalls and quadrupled against imports alone.

Marazzi says that he took the “high road” during Toyota’s recall fiasco; he’d have had a difficult time sniping at the dealership and brand he peddled for nearly two decades. Furthermore, Marazzi claims that Nissan is happy with a small market share and has no desire to take on the world’s largest manufacturer.

Still, John Marazzi’s slice of the Southwest Florida pie has increased from 1.24 percent at the beginning of the recession (good for 20th locally) to 3.25 percent in the first quarter of 2010 (third), according to Experian Automotive. Marazzi argues that his lot has stolen market share from all brands and not just Toyota. But, when pressed, admits that Toyota’s recall “helped but wasn’t the primary factor.”

The consensus both nationally and locally, however, is that Toyota will bounce back quickly.

“Toyota’s a very, very big, strong, wealthy company,” says Marazzi. “When they finally do figure out what’s causing the problems with the electronics they’ll be back as strong as they ever were.” (For the record, Toyota maintains that electronics have nothing to do with the sudden acceleration.)

In an attempt to generate positive headlines, Toyota began offering increased incentives during March by extending zero percent financing and improving its lease programs. It worked: The company recorded a 40 percent increase in sales during March after tallying a 9 percent fall in February.

It paid off locally, too. Fort Myers Toyota posted sales of 247 in January and 212 in February to start the year, before selling 313 in March. Yoxall says April figures are on pace to match March’s; Bisplinghoff says Gettel’s sales improved 35 percent.

Fort Myers Toyota is still the top-selling dealership overall in Southwest Florida and has been for the past two years, says Experian Automotive.

However, in the early 2000s domestic manufacturers found that rebates hurt more than helped. They drove up sales figures, but failed to address the inferiority of the products and they damaged resell values.

“We’re coming from the valley into recovery,” said Bisplinghoff. “[The rebates] have done a great job. Although all domestics fell into this trap, it was necessary for us in the short term.”

Beyond the Bailouts

Nearly two years after the automaker crises began, the shadow of the bailouts still hangs over Southwest Florida. Car dealers still rely on financing that banks are loathe to release in a region that struggles under a 12-plus percent unemployment rate.

In an effort to streamline manufacturers’ budgets, some franchises in Southwest Florida have closed, including a Jeep franchise in Naples, a Pontiac lot in Fort Myers, and Sarasota Chrysler is now Sarasota Mitsubishi Suzuki.

“It’s still a little scary in the market because of the unemployment and the foreclosure rates and the real estate down here,” Mudry says. “It’ll come back, because this is Florida and the people are going to move down, but it’s going to take a little longer in this market.”

Even though national and local experts predict a recovery of the auto market in the next four years, it might not be the same market. In a global world, says Mudry, manufacturers will continue to absorb each other. He forecasts a menu of only five manufacturers in seven or eight years.

Marazzi is staking his entire future on electric cars, going so far as to buy into an Audi dealership because of that brand’s new E-Tron line.

“More will change in the auto industry in the next six years than the last 60 years,” Marazzi says. “I believe that the future of automobiles is going to be electricity and electric. Just like cell phones, where battery technology initially we had bag phones, now we can play real time video games across the country with someone in Russia without a wire.”

Toyota extended its rebates into May, hoping to prolong positive press in the midst of its stop-sell of the Lexus GX 460 SUV. “Toyota is a very well-capitalized company and they’re stepping it up,” Templeton says. “We’re offering deals because this is the way of the world until we get back on our feet.” 

Mostly, Southwest Florida dealers, from every brand, eagerly await the return of the pre-recession boom; the hectic, lucrative normalcy they miss.

For Toyota, that means repairing an image that once seemed unshakable. For the domestics, it means taking advantage of a playing field that’s more level than it has been in years.

But despite the optimism of globalization, electricity and tempting discounts, the most important question facing anyone, asked by Templeton but applicable to everyone, is unanswerable: “What’s the new normal going to be?”