The Wall Street Journal just did a piece in regards to Roger Penske's choice to take on the Smart Car distribution to the US.
Smart Car a Shrewd Move?
Penske Takes a Flier on Distributing DaimlerChrysler's Tiny Vehicle
By John D. Stoll
June 27, 2007
Roger Penske is taking a gamble on Smart.
The race-team owner and former driver, who is also chief executive and controlling shareholder of United Auto Group Inc., has gradually taken a stronger hand in running the Bloomfield Hills, Mich., car-dealership chain since assembling it in the 1990s. Next week, the company will change its name to Penske Automotive Group Inc., to take advantage of name recognition from his racing career and the logos on the trucks owned by his moving company, Penske Truck Rental.
'Drafting In' on Rivals
Smart cars are expected to retail for an average of about $15,000. The cars, which get 40 miles to the gallon, seat two and are so small that two of them can fit in a traditional parking spot. In Europe, they are typically seen zipping through urban areas, although DaimlerChrysler and UAG say it can travel highways safely, too. It reaches a top speed of 90 miles per hour.
To sell the car, Mr. Penske is ripping a page from Toyota Motor Corp. and BMW AG, both of which recently launched new brands, Scion and Mini, respectively, using a largely Internet-based advertising model that targets niche buyers, which includes younger buyers and other trendsetting groups. Mr. Penske, using a racing term that is the equivalent of "riding their coattails," said Smart could be successful "if we could draft in behind those two models."
If it works, the move could validate UAG's efforts to broaden its business lines and tap profitable niche markets. The company has been alone among its peers in expanding to Europe, where new-vehicle margins are typically higher. Despite what is expected to be a flat U.S.-retail-car-sales environment this year, the company has been able to increase sales because of its reliance on portions that remain strong: luxury cars and imports.
To burnish its image, the Smart will have to appeal to younger buyers. Despite the success of Scion and Mini, the auto industry has had trouble appealing to that group, most famously with the botched effort by Fuji Heavy Industries Ltd.'s Subaru brand to appeal to younger drivers in the early 1990s and Honda Motor Co.'s recent unsuccessful attempt to tap into the youth market with its funky Element sport-utility vehicle.
Hitting the Information Highway
Mr. Penske, in an interview, said starting up Smart is the biggest challenge facing his company. He said there is one key element in reaching Smart's target buyer: "They like to be communicated to via email. Period."
Consumer-research company Edmunds.com estimates Scion and Mini spend "virtually nothing" on incentives like discounts and rebates. That is an important trait for Penske Automotive to follow, given that Penske would have to shoulder at least some of the responsibility for Smart's sales incentives. If demand for the cars should show fatigue, the company could be dishing out millions in incentives. "We'd have to erode our margin," Mr. Penske says, denting Smart's profitability.
To stay away from incentives, Mr. Penske said, Smart has adopted a strategy that relies almost entirely on Internet marketing. The company is staging a 50-city road tour so people can drive the car. The tour has attracted 10,000 people who have test-driven the vehicles, and more than 20,000 people have plopped down $99 deposits for the cars through UAG's Reservation Program, Smart spokesman Ken Kettenbeil said.
UAG Automotive will essentially serve as the interface between dealers and Daimler, ordering cars for the U.S. market and distributing them to about 60 dealers affiliated and non-affiliated with the chain. The dealers will take home about a 9% margin on each car sold, and UAG's margin, which it won't disclose, will come on selling the vehicle to dealers.
Wachovia Securities auto analyst Rich Kwas estimates the Smart distributorship could add eight cents to 11 cents in annual earnings per share, not including the 9% margin at UAG-owned dealerships. Wall Street analysts expect $1.49 a share in 2007 earnings and $1.68 in 2008. Last year, UAG reported net income of $124.7 million, or $1.32 a share, on revenue of $11.24 billion.
UAG, which has 311 franchises in the U.S. and Europe, trades heavily on Mr. Penske's name, which is on thousands of rental trucks thanks to his Penske Truck Rental business. Also, his racing teams in two top U.S. leagues are top contenders in weekend races in major cities. The 70-year-old executive owns about 40% of UAG, much of it via the Penske Corp. transportation company.
Profitable Niches
The company's stock, which was at $21.06 at 4 p.m. in composite trading on the New York Stock Exchange yesterday afternoon, trades at a premium compared with its peers because it carries a 14.3 forward-looking price-to-earnings ratio, compared with the 11.5 average posted by the other four publicly traded new-car retail groups. "In a sense, you are buying Roger Penske," Wachovia's Mr. Kwas said.
Still, UAG's shares are off from a 52-week high of $24.62. Some analysts have criticized the company's light operating margins, and weakness in the key luxury markets of California and Florida could hurt new-car sales
Dealers typically diversify their revenue base by selling used vehicles and vehicle parts, offering full-scale service operations to customers, and financing cars. UAG's business has been fortified by its attention to luxury and import buyers, who make up more than 90% of its North American revenue base. Bear Stearns auto analyst Michael Geoghegan says UAG has a strong connection to Toyota, particularly in Europe
Mr. Kwas says the company's growing reliance on auto malls, which showcase many brands on the same campus, promises to create economies of scale in part by consolidating back-office work and increasing traffic on a per-store basis. Leveraging those opportunities could help increase return on invested capital, which has ballooned as UAG has pumped more money than have many of its competitors into improvements aimed at luring discriminating buyers.
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