The Wal-Mart of auto sales? AutoNation's Mike Jackson has big plans for the car retailer

Chief Executive, The, July, 2004 by Herbert Shuldiner

Come south, young man. That was the siren song Mike Jackson heard from the desperate lips of Wayne Huizenga, the entrepreneur who built Waste Management and Blockbuster Entertainment into behemoths. Huizenga's latest venture, consolidating hundreds of new-car dealerships into a single company based in Fort Lauderdale, Fla., was deep in debt. That's why, in September 1999, he sent Jackson, president of Mercedes-Benz USA and one of the industry's top marketing gurus, an SOS.

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Despite being the biggest car and truck dealer in the country and three times the size of its nearest competitor, AutoNation was sinking fast. Huizenga bet that Jackson, who started his career as a mechanic in a Cape Cod Mercedes dealership, could be the life preserver that AutoNation needed.

Jackson already had spent a decade as a marketing strategist, driving Mercedes to sales levels once thought improbable for a luxury car import. He convinced Jurgen Hubbert, worldwide Mercedes chief, to build cars for the U.S. market with all the safety features available in Europe, because that was what American luxury buyers wanted. And he prodded Mercedes to build a factory in Alabama for assembling vehicles, namely the M-Class SUV, specifically for the North American market.

Another strategy he employed was breaking away from the auto industry's costly spiral of rising sales incentives. "Jackson told me we have to get off the rebate drug," says Bob Crolic, manager of an AutoNation Mercedes dealership in Pembroke Pines, Fla., and a former colleague of his at Mercedes-Benz USA. Jackson achieved this by finding the true transaction price of a model--what it was selling for at the dealership--and setting that as the manufacturer's suggested retail price. He also made sure that supply was in line with demand, helping turn sales around without onerous rebates.

Inspired by the challenge of turning AutoNation around, Jackson took Huizenga up on his offer. After assuming the job of CEO, he initially had a wrenching time of saving the ship. He cut costs dramatically, shedding 200 jobs at corporate headquarters and shutting down the company's unprofitable used-car megastores. They were supposed to be an outlet for the vehicles that AutoNation's car rental companies. Alamo and National, took out of service, but all they produced was red ink. Going further, Jackson spun off Alamo and National to stockholders.

Jackson has focused on AutoNation's core business, new-car dealerships, and he has slowed the company's rapid growth. Under his leadership, he says, the company will save $500 million to $1 billion annually over the next two years. Earnings per share have increased 15 percent a year since 1999 (see charts, this page).

But for all his success, Jackson still faces serious challenges. If history is any gauge, an oil crisis or a recession could cause car and truck sales to plummet more than 20 percent, imperiling AutoNation's future. Jackson's formula for avoiding such calamity is similar to that of companies in many industries: embrace change and innovation or risk losing your relevancy. But, like fellow major retailers Wal-Mart and Home Depot, AutoNation can't do it alone. The company must rely on its suppliers--automakers--to produce vehicles of high value and to shorten model life cycles so car buyers always have fresh choices.

In some ways, Jackson's experience made him ideally suited for the top job at AutoNation. Prior to taking the position, he had worked half of his career in retail and the other half in manufacturing. "The retail experience gave me a sense of selling and servicing customers one at a time," he says. Running Mercedes-Benz USA offered him the experience of managing a company on a larger scale. "I was uniquely prepared to come to AutoNation because I understood scale and long-term planning," he says. As he moves forward at AutoNation, he will need to rely on his expertise in both.

Today, AutoNation is the country's largest seller of new and used vehicles, both through dealerships and over the Internet. It operates 287 dealership locations and 373 new-vehicle franchises, representing 35 brands in 18 states. With revenues of nearly $20 billion, it is the largest public company in Florida. About 61 percent of AutoNation's revenues come from new-car sales, 23 percent come from used-car sales, 13 percent from parts and service, and the rest from finance and insurance services. However, even though it is primarily a new-car retailer, 70 percent of AutoNation's gross profit comes from its other three sectors.

Despite his intense focus on cost cutting, Jackson remains open to growth opportunities. "We're looking for willing sellers and have an ongoing dialogue with many principals," he says. This year alone, AutoNation has purchased five dealerships, paying for each of them in cash. "I am not going to pay with my undervalued stock," the CEO says.

As of early June, AutoNation stock had been trading at around $17, a price that Jackson believed was too low. That's why he ponied up $58.1 million to repurchase 3.5 million shares, or 1.3 percent of the company's common stock, in the first quarter of this year. AutoNation bought back the stock at an average price of $11 per share. "Our shares are undervalued, so I would not give those out for an acquisition," Jackson says. "I have all the cash I need to do acquisitions over the next two or three years and time is on my side." His strategy is to wait for the right valuation from a willing seller.