Cover Story
by jacquelyn horkan, editor
T r i f e c t a
If Wall Street were a race course,
Wayne Huizenga's horse would be the one breaking late from the gate. Then, with a burst of
power and speed, it would blast through the pack, and as it passed the finish line, would
grab the poles and move them about a mile farther down the track.
Right now, Huizenga is running
three different public companies in the Wall Street race. If the past is any guide, he's
got three winners to take first, second, and third. Win, place, and show. The combination
bettors call a trifecta.
Republic Industries is the Huizenga company garnering all of the
attention. The second company, Extended Stay America, is a chain of hotels for
budget-conscious travelers who need a hotel room for several weeks, and it's growing at a
blistering pace. Completing the triumvirate is Florida Panthers Holdings, Huizenga's
entertainment-leisure conglomerate.
Up until about mid-January of this year, the three publicly traded
companies enjoyed a spell of Wall Street popularity. Then, share prices began dropping and
kept dropping. Conventional wisdom - that blend of savvy, scuttlebutt, and herd instinct -
seemed to shift against Huizenga. Some were suggesting the magic was gone.
Through it all, Huizenga stays calm. After all, he's been here before.
To Boldly Go
The first impression one gets upon meeting Huizenga is
that he should be taller. The former garbage man turned billionaire works in a large,
relatively modest office, bright with sunshine. The credenza behind the desk is loaded
with pictures of friends and family, including his three grandchildren. Large studio
portraits of his four children adorn the wall. With a push of a button on a remote
control, the office doors slide silently together.
This is where Huizenga rules his empire of waste collection
companies, home security businesses, hotels, resorts, sports teams. Oh yes, and automobile
showrooms.
In June of 1995, Huizenga took control of a mid-sized publicly
traded waste collection company with a respectable balance sheet. He renamed the company
Republic Industries and made it his vehicle for revolutionizing the auto retail business.
Toward the end of 1996, Republic began acquiring new car
dealerships; by the end of January, the company was the largest dealership in the United
States. With the acquisition of five rental car agencies, including National Car Rental
and Alamo Rent-a-Car, Republic is also the country's fourth largest rental car agency.
These acquisitions are the accessories to AutoNation, USA, the
centerpiece of Huizenga's automotive revolution. AutoNation is a chain of used car
megastores, each lot carrying an inventory of 1,000 automobiles. When 1996 ended, Huizenga
had opened seven of the megastores. When 1997 draws to a close, that number will have
leaped to 25.
Republic has also entered the high margin businesses of auto
financing, insurance, service, and warranties.
Automotive retailing is a magnet for someone like Huizenga who
savors the challenge of reconfiguring entire industries. It's the largest consumer retail
market in the country, accounting for about 8 percent of the U.S. gross domestic product
in 1995. It's a business worth about $1 trillion a year when service, accessories, and
financing are factored into the total.
It's also a market sector ripe for consolidation and re-engineering.
In 1996, Americans spent $320 billion on the purchase of new cars, and $365 billion on
used cars. That's a $685-billion pot of money that no one controls. Last year, the 100
largest new car dealer groups controlled fewer than 5 percent of all franchises and
accounted for less than 10 percent of revenues from new car sales.
Selling cars is a tough business. On average, a dealer makes $77 on
each new car sold, while he gets $259 in profit on the sale of a used car. But new car
dealerships only account for 43 percent of all used car sales in the United States. The
rest are bought at independent used car lots or through private transactions such as those
that originate with a classified ad.
Those are the kinds of numbers that mean opportunity to Huizenga.
"It doesn't seem right that someone buying a used car would have more confidence
going to a stranger to buy a car that has no warranty, no guarantee, than they would going
to a used car dealer. We set out to change that."
Rewriting The Rules
While other consumer appliances gave in long ago to
mass merchandisers, automotive franchises are the lone holdout in American manufacturing.
That's the target of Huizenga's efforts and other's objections.
It all comes down to brand identification. Huizenga wants to create
a retail brand. Manufacturers and dealers want to maintain a wholesale brand. The
manufacturers' interest in keeping consumer loyalty is obvious. Some dealers, however,
worry just as much about manufacturers' loss of control.
If AutoNation creates brand identity in the business of selling used
cars as well as new, smaller dealers are afraid that the megastores will dictate better
terms to the manufacturers, leaving them at a competitive disadvantage. They foresee the
same kind of battles that have taken place in communities across the nation when Wal-Mart
muscles in on the territory of the family-owned store on Main Street. With the small
dealerships playing David, this time Goliath will win.
Under economist Joseph Schumpeter's theory of creative destruction,
economic growth depends on developing better products or methods of production. When that
happens, economic actors either adjust or lose. According to some automotive industry
experts, the distribution and retail process accounts for between 20 and 25 percent of a
vehicle's sticker price. The average price for a new car in 1996 was $22,000. The person
who figures out how to cut the cost of getting a car from the factory and into a new
owner's garage starts the creative destruction process. Huizenga thinks he's that person.
Naturally, there are those who disagree.
Jitterbug
Thus far, Republic's growth has been fueled by
acquisitions. Eventually, the strategy of earnings growth through acquisitions will have
to come to an end. Some analysts believe that Republic won't grow operationally once it
stops growing through acquisitions. Some of the more brutal critics have called Republic a
chain letter, a financial jitterbug, a house of cards.
Huizenga knows he's walking a risky path. If the risk wasn't there,
he wouldn't be either. But he's got a plan of where he wants to go and how he wants to get
there.
Huizenga's strategy is to build a pipeline through which almost
every conceivable automobile transaction will flow. One car could represent up to four
transactions for Republic. For example, a new car is leased from one of the dealerships.
When it comes off lease, it is sent to AutoNation where it is leased again as a used car.
When that lease is up the car is sold. The car could potentially be sold one more time at
ValuStop, Republic's used car lot for those vehicles with a lot of miles and years on
them. A small percentage of new cars coming off lease will also make a stop at Alamo
before they are sent to AutoNation.
In addition to the strategy of recurring revenues, Huizenga plans to
cut costs at the dealerships through economies of scale. If he owns 15 franchises in one
area, where once there were 15 accounting offices and 15 license and tag departments,
there will now be one. They can offer cheaper financing to customers, passing along some
of the savings and keeping some for themselves. Because Republic is cash-rich and enjoys a
cheaper cost of money, it can pay off the dealer floor plans and save on interest.
Finally, Republic will buy advertising in bulk, saving the dealerships 40 to 45 percent on
placement fees.
Even if the strategy is sound, there are those who are now
questioning Huizenga's entire career. In mid-July, the Wall Street Journal asked the
question, "Is Wayne Huizenga losing his touch?" The venerable Journal answered
yes.
The evidence cited was the sliding share prices for Republic,
Extended Stay, and Panthers Holdings. All have been on a downward trend since the
beginning of the year. Republic reached $44 5/8, then dropped to $24 5/8 by the end of
July. Extended Stay's October high of $23 nosedived to $16 1/8 in July. Panthers Holdings
took a similar trip, from $32 to $21 7/16.
If that wasn't bad enough, the Journal also blamed Huizenga for
recent drops in the stock of Viacom and Waste Management, and for the bankruptcy of
Discovery Zone. The new game of casting stones at Huizenga thus reached an all-time low.
After all, Huizenga sold Blockbuster to Viacom three years ago. He retired from Waste
Management 13 years ago. Both experienced success and setbacks after the reins dropped
from Huizenga's hands. As for Discovery Zone, Huizenga invested in it, but he didn't
manage it.
Wall Street prognostication is a team sport anyone can play. But
what the noisy say today is soon forgotten. What you see at Huizenga's companies speaks
louder than what you hear on the Street.
Cleanliness And Godliness
On Sample Road in north Broward County sits the first
AutoNation opened by Republic Industries. In a large, bright showroom, sparks of light
bounce off the lustrous bodies of the cars. A hot pink pick-up is parked to one side vying
for attention with a gleaming yellow roadster. These are used cars?
"At a new car dealership, they're trying to sell you a new
car," says Lynne Fernandez, an AutoNation spokeswoman. "We're trying to sell you
something you don't even know exists."
That something is the no-haggle, one-price purchase of a used car
backed by a seven-day, full-refund policy and a 99-day bumper-to-bumper warranty.
AutoNation can make that kind of guarantee because each car is subjected to a 165-point
inspection of every component of performance, safety, and appearance.
At mid-afternoon on one rainy Monday, there are five cars sitting at
the portico waiting for their new owners to drive them away once the paperwork is
finalized. These customers have just completed a sales process designed for their comfort.
Banks of touch-screen computers stand ready to help customers select
a vehicle. You can search for a particular year, make, and model. Or you might request
reports on every minivan on the lot within a particular price range. A salesman is
standing by with a golf cart to whisk you away to take a look at the cars on your list.
There is a supervised playroom to entertain children while their
parents are shopping. Financing and insurance can be finalized on-site, minus the
intimidating and irritating practices sometimes encountered on other lots.
There is an accessory store on-site if you want to spruce up the new
family sedan with sporty hubcaps or a top-notch CD player.
Attached to each AutoNation is a service center open seven days a
week and staffed by ASE-certified technicians. All makes and models are welcome, and the
staff will honor any warranty. The service center waiting room is equipped with phones,
fax machines, and computer connections with modems in case a customer wants to take care
of business while waiting for his car.
"If you're trying to change the image of the used car
lot, you have to be different," says Huizenga. "Cleanliness and godliness,
that's what we're pitching."
That's the Huizenga method: figure out what the consumer wants that
he's not getting, then set out to fulfill those wants bigger, better, and faster than
anyone else. He's doing it with AutoNation and with Extended Stay, another new venture.
Staying With The Cookie-Cutter
George Johnson and Wayne Huizenga met in 1976 when
Huizenga's Waste Management bought Johnson's South Carolina trash-hauling business. The
two continued their partnership with Blockbuster where Johnson was the company's largest
franchisee and then president of its consumer products group.
Now, they are teaming up again with Extended Stay America, Inc.
Johnson is running this show with Huizenga adding his prestige to attract investors.
Extended Stay is Johnson's response to a growing demand for
long-term hotel accommodations at a reasonable price for business travelers. According to
some industry experts, demand in this niche exceeds supply by a ratio of 10 to 1.
Johnson says he is following the Blockbuster formula for the hotel
chain. "Find a business with high margins, take a cookie-cutter approach, and capture
the market."
The company opened its first facility in August 1995 in Spartanburg,
S.C. By the end of July 1997, Extended Stay had 120 properties in operation. It's the
nation's fastest growing provider of economy stay lodging with three different brands
offering weekly rates ranging from a low of $169 to a high of $400.
A room at an Extended Stay hotel features a full kitchenette, phone
service with voice-mail, computer and modem hook-ups, weekly housekeeping, and twice
weekly towel service. The chain maintains its low prices by cutting out the frills that a
cost-conscious traveler does not need, such as restaurants, room service, and lounges.
According to Johnson, the average occupancy rate for the hotels is
78 percent; the break-even point is 27 percent. With average guest stays of three to five
weeks, at a 120-room facility, the hotel only has to attract about 1,400 customers in a
year.
The chain has yet to invest heavily in advertising. Instead, it is
relying on word-of-mouth and the recommendations of satisfied customers to fill its hotel
rooms. In fact, according to Johnson, 27 percent of Extended Stay's guests check in after
they see the rates on the sign outside of the hotel.
Industry analysts say the chain must have 300 hotels to achieve
critical mass. Johnson says they will reach that objective by the end of 1998, two years
ahead of schedule. Unlike most hotel chains, Extended Stay owns all of its properties;
none are franchised. That means that by the end of 1998, the company will own more hotel
rooms than any other chain in the United States.
To manage such rapid growth, Johnson has adopted another line from
the Blockbuster creed. He has divided the nation into zones. Each zone office is staffed
with real estate experts and construction engineers.
"The key advantage we have is capital and organization,"
says Johnson. "If you look at each zone as a separate company, it becomes easier to
manage our growth. And capital is what has kept other people from doing what we're
doing."
What Johnson is doing is surprising others in the lodging industry.
According to Huizenga, "A lot of people said these guys are
going to fall on their face because nobody's ever opened that many hotels in one year.
Well, you can't say it can't be done because George is doing it."
Hat Trick
Of Huizenga's three sports teams, the Florida Panthers
have come the closest to winning him a national championship. The hockey team played its
first game on Oct. 4, 1993, then went to the Stanley Cup finals three seasons later.
Victories on the ice aside, the team has been a loser at the bank.
Blame for the financial failure can be set squarely on the team's
home field disadvantage. The Panthers were the second tenant at the Miami Arena. As the
first tenant, the NBA's Miami Heat got first dibs on revenues from sales of suites and
advertising.
That will all change in October of 1998 when the Panthers move into
their new home in Sunrise, just west of Ft. Lauderdale. The arena will be owned by Broward
County, but the Panthers' sister company will manage the property.
"Once we get the new building up," says Huizenga,
"then there's light at the end of the tunnel."
That light is shining on the opportunity to make money, not just
from retail and concession stands, but from the more lucrative sale of private clubs and
suites, and from the booking of other events.
In November of 1996, the team went public as Florida Panthers
Holdings, Inc., raising $67.3 million in the initial public offering. Since that time, the
company has evolved into an eclectic collection of entertainment and leisure properties.
Richard Evans, president and CEO of Panthers Holdings, brings to the
mix a wealth of experience gained at Radio City Music Hall, Madison Square Gardens, the
Grand Ole Opry, and Disney World.
Evans and Huizenga met while the latter was working on plans for
Blockbuster Park. Huizenga wanted to tour a San Antonio, Texas, amusement park Evans was
developing. The two crossed paths again when Evans was working with Nashville officials to
lure a hockey franchise to their city.
"I was trying to get the Panthers to move to Nashville,"
says Evans. "Instead, he got me to move to Ft. Lauderdale."
Panthers Holdings is not following the standard Huizenga blueprint
of creating a brand. Instead it is slowly cobbling together a group of hotels and resorts,
including some of Florida's premier properties.
The hotel acquisitions began in December with the purchase of the
Pier 66 Resort and the Bahia Mar Beach Resort and Yachting Center. Nestled within close
proximity to each other, the two combined represent the largest marina on the east coast
of the United States, with 70 percent of the commercial marina space in Broward County.
The real coup came in March when Panthers Holdings announced plans
to acquire the Boca Raton Hotel and Club, the grande dame of Florida resorts. The original
building was constructed in 1926, designed by the legendary architect Addison Mizner to
resemble a Spanish castle.
The deal on the Boca Raton resort closed in June and shortly
thereafter Panthers Holdings announced its plans to acquire a controlling interest in The
Registry Resort in Naples. According to Evans, the acquisition of higher-end resort
properties will continue in South Florida, and eventually will expand elsewhere in the
country.
He is concentrating on elite properties that cater to prestigious
business groups, many of which meet in a different location every year. Evans hopes to
create a niche for Panthers Holdings to serve those customers. Initially, the company
would create a group of premium properties through acquisitions. Perhaps in the future, it
would begin developing new properties.
"We could provide those same services in different geographic
areas across country," he explains, "and provide the level of service the group
likes."
Place Your Bets
Amid all the controversy and second-guessing that's
sprung up around Huizenga's three companies, there's one fact that often gets overlooked:
none are mature yet.
Republic's waste collection and home security divisions are both
profitable. So are the dealerships and the rental car agencies. The company is expected to
reach $10 billion in revenues this year, a 400-percent increase over 1996 sales. During
the first six months of 1997, profits were $102.3 million on $4.15 billion in sales,
representing increases of 115 percent and 50 percent, respectively, for the same period in
1996. The used car megastores have yet to begin contributing to profits, however, since
the first AutoNation won't celebrate its first birthday until October.
"We're expecting each one of our used car lots to do about $100
million a year in business," he says, "but it's going to take 15 to 18 months
for each store to ramp up to where we finally reach that number."
Extended Stay's plans to become the brand name in its field are well
under way, but the company is still under construction. The company's net loss of $9.1
million for the second quarter was due to $19.9 million in one-time pre-tax charges
related to the purchase of the Studio Plus chain, the negotiation of a $500 million credit
facility, and charges for moving its listing to the New York Stock Exchange. Second
quarter sales hit $29 million, an increase of more than 360 percent from the same period a
year ago. Extended Stay ended June with $175 million in cash, $822 million in equity, no
debt, and $800 million in available credit.
As far as Panthers Holdings is concerned, the new hotel properties
are profitable, but the hockey team will keep losing at least $20 million a year until it
moves into the new arena.
As the saying goes, the proof of the pudding is in the eating, and
Huizenga's pudding won't be done cooking until the end of 1998. That's when the Panthers
move into the new arena, Extended Stay reaches critical mass with 300 properties, and
enough AutoNation megastores have been in operation long enough to settle all the
questions about their potential.
So, to paraphrase another overused expression, the reports of
Huizenga's imminent collapse are greatly exaggerated.
Criticizing someone else is always easier than taking risks and
producing results. Huizenga is accustomed to taking risks, producing results, and
listening to criticism along the way.
But, as he says of AutoNation, "if we didn't have confidence,
we wouldn't be building them at the rate we're building them."
