High performance Featured

7:00pm EDT January 31, 2007

When Earl Hesterberg arrived at Group 1 Automotive Inc. in 2005, the company resembled the United Nations more than a chain of auto dealerships.

Group 1, which operates 101 dealerships primarily located on the East Coast, West Coast and in the South, had 15 operating clusters but none were speaking the same operational language and none were really able to communicate with each other.

The problem resulted from the company’s roll-up strategy, which was quickly building the company’s scale, but the various parts weren’t operating as a cohesive unit.

“We had 15 clusters of dealerships that were all operating autonomously,” says Hesterberg, president and CEO. “That meant we had 15 different ways of doing things. So we needed a mechanism to really integrate the business and operate it with more uniformity.”

Hesterberg cut down on the layers of management by shifting from 15 operating clusters to four regions, each with its own vice president that reports directly to him.

The company’s leaders also implemented new operational software and financial practices, standardized across the entire dealership chain.

“We’ve begun to switch all our dealerships to a standard chart of accounts,” he says. “We didn’t even have them all on the same accounting format. Ford dealerships would use a Ford financial statement, Toyota dealerships use their own, and it was virtually impossible to compare performance across our dealerships on an apples-to-apples basis.”

Getting all 101 dealerships in the $6 billion chain to speak the same language has been instrumental in enabling Houston-based Group 1 to grow into new markets with minimal problems. Acquisitions are rarely easy, and Hesterberg says forming standard practices and driving them across your company is a key first step. But successful integration starts with acquiring a company for the right reasons, communicating who you are to newly acquired employees and finding the synergies to make your investment pay off.

Playing the field
Finding the right acquisition isn’t just a matter of making sure that you can align your practices. In fact, Hesterberg believes in giving his dealerships a great deal of autonomy in how they conduct their day-to-day business, so long as the metrics and technology provide a way to communicate and compare performance.

As important is making sure that an acquisition is going to fill a need your company has.

When Hesterberg and his senior managers are considering a dealership purchase, they look at two things before all else: market growth and brand growth.

“If we go into a new market, we prefer some ability for market growth, meaning a growing population,” he says. “If there is not a very strong indication of market growth, then we really have to be with one of the top brands in the industry, a BMW or a Toyota.”

It’s why Group 1 has concentrated growing in what Hesterberg refers to as the “smile around the U.S.” The vast majority of Group 1’s dealerships are located in 13 states down the East coast, across the Gulf Coast to Texas and Oklahoma, then up the West Coast, all areas with booming populations.

Hesterberg says once Group 1 has carved out a presence in an area, the goal is to begin building scale in that area. Having an isolated dealership or two in a city isn’t really cost-effective; the bang for the advertising buck isn’t good when you are advertising for only one or two locations in a city, and there is always the threat of being squeezed out by competitors who are more entrenched.

Hesterberg says the key to creating longevity in a market is to become one of the biggest fish in the pond.

“We always look at where we can make an acquisition that we can tuck into an existing operation and give us more scale,” he says. “We bought some dealerships in New Hampshire recently, about an hour north of Boston. We would not have gone into New Hampshire as an isolated venture, but we have eight or nine dealerships in Boston to give us a very powerful position in that market. We have management there, administrative help there and media buying power there.”

Once you have decided to pursue an acquisition, it’s important to find people who have local ties to the area and understand the customer base to which you will try to sell, and let them decide how to best market your business. “The dynamics of each market can be a bit different, the dynamics in terms of the demographics, the income, is it a luxury market, an import market,” Hesterberg says. “For example, some East Coast markets have been heavy lease markets, but Texas has historically not been a big lease market.”

Knowing your market and your customer base is critical, especially if you have investors looking for a quick return.

“We pay a significant amount of money for an acquisition,” Hesterberg says. “We need to start to generate a return on that investment immediately. We don’t intend to wait three or four years because that’s not fair to our shareholders, so we can’t afford to have a lot of trial and error as someone learns the market from the ground up.

“So experienced local management is a critical part of the success formula.”

Being the new boss
Another important part of the acquisition success formula is having employees who are on the same page. While having standard technology and practices can help assimilate employees quickly, it takes a great deal of direct communication from the corporate office to really give employees a sense of belonging to their new company.

Hesterberg drives Group 1’s business philosophy down to the dealer level before his company even assumes control.

“Recently, I’ve gone out and had dinner with all the dealer department heads prior to an acquisition deal closing,” he says. “It’s just to answer questions and show them that we’re real, we’re human beings.”

Throughout his business life, Hesterberg says that 90 percent of all problems he’s encountered have been due to a lack of communication from management. It’s why, from the get-go, Group 1’s management and human resources department are on-site, educating and communicating with the employees of a new acquisition.

The first order of business is to put out any rumor-driven brush fires within the employee ranks, before they turn into a raging blaze.

“They’re worried that everything is going to change,” Hesterberg says. “They’re worried about losing their jobs. That’s something we deal with early on, that we intend to work with the people who are here.”

If you’re making an acquisition, you’re probably purchasing it because it was attractive. That fact needs to be communicated to employees if you intend to keep them on board.

“When we purchase a dealership, we’re paying based on their current level of performance,” Hesterberg says. “We don’t want a dealership to go backward, so we generally keep the employee teams very much intact.”

In almost all cases, Group 1 is a larger company purchasing dealerships from a smaller entity, so the company attempts to make its new employees feel at ease by selling them on the positives of working for a large company. “Our HR department does some training early on,” he says. “We frequently find that by being a bigger company, we have benefits that hadn’t been available to some employees before, like a 401(k) plan with a matching employee stock purchase program. So that shows some of the positives of joining our team.”

After addressing the initial concerns of employees, Hesterberg says it is important to begin coaching them in the culture of your company right away.

Within several weeks of taking over, all employees have been trained on Group 1’s employee handbook and workplace harassment prevention, have taken drug tests and gone through background checks. “It sets the tone that you are working for a large organization with morals and values and ethics,” he says.

On the first day of assuming control, Group 1’s management gives employees a toll-free hotline number to report potential workplace problems. Complaints are personally reviewed by Hesterberg and summarized for the company’s audit committee, which meets quarterly.

The hotline is a way for company leaders to keep tabs on what is going on in the field. It is also designed to give employees a sense that corporate management is interested in what is going on in the field and willing to address problems. “If they’re uncomfortable with what’s happening, if they think business is being done improperly or people are being treated unfairly, they can call the number,” he says. “It can be completely anonymous. That way, there is a mechanism for people to communicate if something is bothering them. And it’s outside their normal chain of management. “Most of the time, going through your chain of management works. But sometimes, people perceive management as part of the problem. This gives them a way to report something without fear of retribution.”

Cross-pollination of ideas
Group 1’s leaders try to reach out to the company’s dealerships in multiple ways, especially in the first few months after an acquisition. But in the ensuing months and years, Hesterberg wants dealers to come to him.

Twice a year in person, and at least twice a year over the phone, Hesterberg brings all his dealer general managers together by domestic, import and luxury brands.

The meetings give Hesterberg and his senior managers a chance to find out what is going on in the field. It’s also a chance for general managers to speak to each other, spreading ideas across the organization. “They’ll compare performance data, financial statements and sales reports,” he says. “They’ll share ideas, they’ll compare performance numbers. We’ll also use the opportunity to train them.”

Hesterberg calls the general managers’ meetings Group 1’s main mechanism for sharing ideas. It helps paint a picture for what moves the company should make next.

Hesterberg says there is always strength in numbers when it comes to cultivating and spreading ideas throughout the company. You can’t have everybody speak at once, but the more minds at the discussion table, the better. “We reinforce our corporate values, we share best practices, we learn from each other,” he says. “That’s one of the advantages of having 101 dealerships. We have enough Ford dealerships, we have enough Toyota dealerships, that we can learn from each other.”

Hesterberg says that you shouldn’t expect all of your managers to have the same management style, the same demeanor or interpret every piece of information the same way. What you should expect is that they adhere to the same values and have high ethical standards. That’s the importance of communication. “We can’t expect 101 general managers to have the same personality or management style,” he says. “But we expect them all to represent the values of honesty, integrity and hard work that we have in this organization.”

HOW TO REACH: Group 1 Automotive Inc., www.group1auto.com