THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Sunday, February 18, 1996 TAG: 9602170427
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY STEPHANIE STOUGHTON, STAFF WRITER
DATELINE: RICHMOND LENGTH: Long : 173 lines
An uneasy, Maalox-craving feeling grips Donna Lollo when she walks into in automobile showroom.
Will the salespeople pressure her, tack on ``extras'' or low-ball her on her trade-in?
``The dealing really annoys me,'' said Lollo, a Richmond resident. ``I don't like the hassle.''
But Lollo's latest visit to CarMax, Circuit City Stores Inc.'s used-car superstore in Richmond, wasn't so stressful. She and her husband, Fred, found a relaxed salesman, dressed in a polo shirt, and a touch-screen computer that pictured the hundreds of cars and trucks in the parking lot. By pressing a button, they could get a photo of a prospective automobile, plus its no-haggle price, features and exact location in the parking lot.
CarMax is the automobile industry's first so-called ``category killer,'' a mammoth dealership offering a low-pressure, no-haggle approach to car buying. Its customer-friendly frills include lounges, coffee sections and child-care centers.
The Lollos' decision should frighten many traditional car dealers, analysts say. That's because the industry is evolving, with fed-up customers writing the rules.
Car shoppers who don't like wheeling and dealing are being given alternatives. They can use buying services to negotiate for them. They can visit one-price, new-car dealerships like Saturn. Or, they can visit large used-car auto malls like CarMax.
Why should auto dealers in Hampton Roads care?
Because Circuit City is convinced that this region, filled with military personnel, is ripe for its used-car superstore. The company is making plans for one at Chesapeake's Greenbrier area just off Interstate 64, though a final decision has not been made, city and state officials say.
``We're looking at markets across the country ,'' said Paul Rakov, a spokesman for Circuit City. ``We have looked at (the Hampton Roads) market in the past, but we haven't made any announcement.''
So far, CarMax has opened four stores: one each in Richmond and Raleigh, and two in Atlanta. The company also wants to debut stores in the Washington area, Charlotte and in several cities in Florida and Texas.
By 2000, Circuit City analysts predict the company will have 50 dealerships.
Big retailers have more clout. Wal-Mart proved that. If Circuit City sells used cars - or new cars, for that matter - like it sells VCRs and TVs, independent and smaller dealerships may feel the pressure.
``They want to be the Wal-Mart of used cars,'' said Michael M. Via, research director at the Richmond investment firm Anderson & Strudwick.
Dealers in Hampton Roads don't need the extra heat. If CarMax moves in, it will arrive at a time when auto manufacturers are trying to trim the number of dealers in markets where there are too many of the same franchises.
A decade ago, a business like CarMax would not have been possible.
``The used-car market, until the early '90s, was a market of lemons,'' said George Hoffer, a automobile analyst and economics professor at Virginia Commonwealth University in Richmond. ``No first-class firm with a brand name to protect will put its goodwill on the line. No major firm of any kind sells used (products) of any kind.''
Even with high profit margins in used cars, a company like Circuit City would not have wanted to enter the business, Hoffer said.
Then came two important changes: an explosion in leased cars and manufacturers' willingness to extend new-car warranties to second owners. That allowed Circuit City to have a regular source of low-mileage, used cars, with Ford, General Motors and other manufacturers paying for much of the repairs.
``In reality, if anything goes wrong with the car, CarMax doesn't service,'' Hoffer said. ``It's the new car dealer who services it.''
While dealers might not be thrilled by CarMax, auto manufacturers aren't sure what to make of it. The Big Three might like what CarMax embodies, but they can't risk offending the traditional network of dealers.
``If nothing else, we consider it a wake-up call for the dealers and ourselves,'' said Philip M. Novell, general sales manager for the Ford Division of Ford Motor Co.
``Our industry, as is all of retailing, is going through a dramatic change,'' Novell said. ``We see them as a competitor that may have some good ideas, no different than the ideas that are created on our own or what the customer is telling us we need to do.''
Last month, Chrysler Corp. surprised many dealers and competitors by giving CarMax in Atlanta a new-car franchise.
The franchise gives CarMax access to Chrysler's newest used cars - the ones that are coming off six-month leases with rental companies and others used at the factory. These low-mileage cars can only be bought by Chrysler franchises at auctions.
``I think eventually, most of the superstores will have new-car franchises associated with them,'' Hoffer said. ``The Chrysler dealers are scared.''
However, manufacturers are being careful. Leaning too much in favor of CarMax and other auto superstores could irk the small, traditional dealers who still hold the strings.
Dealerships are counting on state franchise laws to protect them from this emerging threat. Auto dealers provide big sales taxes in many states, and their clout is evident.
Virginia and other states have dealer franchise regulations that make it difficult for retailers like CarMax to barge into the new-car business. Most of those laws can prevent an auto company from opening a new franchise within a certain distance of another dealer.
``It protects them with new cars, not used cars,'' said Lori Weaver, a spokeswoman for the American International Automobile Dealers Association.
But many dealers, like Hall Auto World, considered the future and saw the superstore threat - even before Circuit City gave birth to CarMax.
Virginia Beach-based Hall, which carries more than 1,000 used and new autos, changed to a no-haggle, one-price dealership more than three years ago and began tacking on extras, like free loaner cars and state inspections.
Beginning March 1, the dealership will begin offering computer technology. A customer at a Hall showroom in Virginia Beach will be able to access information about autos at its store in Newport News.
Hall executives say they aren't feeling threatened by CarMax.
``It's kind of like a herd,'' said Kevin McHugh, president of Hall Auto. ``There are always weak links within the herd.
``The strong competition will always weed out that weak link. So, I'm sure that the dealers who are unprepared could possibly be in danger.''
Several used-car chains are already following Circuit City's lead. Earlier this month, some of the nation's biggest dealers announced plans for Driver's Mart, which they hope to grow into a chain of about 100 used-car superstores in a few years. H. Wayne Huizenga, former chairman of Blockbuster Entertainment, and a Toyota distributor are planning AutoNation USA, a second giant used-car chain.
Going big takes big money, which could be a problem for small dealers looking to expand. To be an auto superstore, they would need to buy acres of prime real estate, plus provide extras such as baby-sitting areas and computers that light up at the touch of the screen.
Even those who do switch to the CarMax format don't always adhere to all of its policies. Some who have adopted the superstore, one-price methods may still haggle on trade-in cars and financing.
``You've got several instances where car dealers are consolidating all of their used cars in one location and calling it a superstore,'' Hoffer said. ``In reality, it's the same way of doing business.
``CarMax is a clean sheet coming in from the Circuit City store side. All the other people out there are making marginal changes from the traditional automobile retailing side.''
None of this means customers will be saying adios to the ol' dickering dealership or the image of the polyester-wearing, fast-talking car salesman.
One of CarMax's weaknesses is that its one-price policy leaves no room for haggling. There are some studies showing that customers, fed up with set prices, are going back to bargaining.
``The dealers will be able to sell their cars for less than CarMax will,'' said Conoly Phillips of Conoly Phillips Lincoln-Mercury in Norfolk.
For CarMax, another danger comes from the manufacturers, who control extensions of new-car warranties to second owners. In a bind, automakers could up the ante by refusing to extend warranties to second owners.
A less-known risk is CarMax's decision to introduce its ValueMax line of cars. These worn automobiles, targeting people with lower incomes, are cheaper and generally carry more mileage.
``If you go into cheaper cars to broaden your market, the danger is that you are liable to get more lemons, which is always the problem with used cars,'' Hoffer said. ``Then, you risk developing the reputation that other used-car dealers have.'' MEMO: Staff writer Lon Wagner contributed to this story. ILLUSTRATION: BILL TIERNAN color photos/The Virginian-Pilot
TOP
Customers at the CarMax in Richmond first scan a touch-screen
computer for the many vehicles available, along with the price and
location, before walking the lot.
ABOVE
Peggy Thibodeau of Richmond, talks to Mark Frye in the showroom of
the CarMax superstore in Richmond. For Thibodeau, the experience
wasn't new: She had bought a vehicle from CarMax before.
Graphic
ROBERT D. VOROS/The Virginian-Pilot
[For complete graphic, please see microfilm]
by CNB