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Leap of Faith: Jaguar Dealers Hurting

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Leap of Faith

New Jaguar dealerships have hard time covering costs as automaker stuggles

By MARK RECHTIN | AUTOMOTIVE NEWS

AutoWeek | Published 02/07/06, 9:32 am et

When Jaguar told U.S. dealers in 2000 that its sales volume would double in several years, dealer Dennis Squitieri jumped at the chance to improve his fortunes.

Surrounded by affluent customers at his store in Bergen, N.J., he built a sister dealership in nearby Englewood. But the entry-level X-Type flopped, and Jaguar's sales went into free fall. Last year Jaguar's U.S. sales were down 50.3 percent compared with 2002. Likewise, Squitieri's sales of new Jaguars are down 40 percent at both stores, and he is propping up his profits with service, parts and used cars.

"We drank the Kool-Aid," Squitieri says. "We spent a lot of money on expansion, on adding capacity. But we also spent money in stupid places because we were growing."

Squitieri is far from alone. Many dealers jumped on the Jaguar bandwagon. In 1999, Jaguar had 130 dealerships; it has 177 now. And as Jaguar struggles to recreate itself as a smaller, more exclusive luxury brand, those new dealerships will have a hard time covering their costs.

While much of the sales decline followed Jaguar's decision to ease up on the unprofitable X-Type, all four Jaguar nameplates have seen sharp percentage declines. And the bad news is far from over, Jaguar executives said in recent interviews.

"It's going to be goddamn tough for the next two or three years," said Bibiana Boerio, managing director of Jaguar Cars Ltd. in the United Kingdom since mid-2004. Boerio, an American, was brought in to fix the company, which is saddled with high costs and plummeting sales of cars that lag behind the top luxury competition.

"We know our mistakes, and we know where we are going," she says.

Boerio says that Jaguar is "in rebuild mode," and that sales volumes will decline in 2006 and 2007. The redesigned 2007 XK coupe coming this spring should ease the pain, but it won't be enough by itself, Boerio acknowledges.

Jaguar is pinning its rebound on the redesigned S-Type, which arrives in the United States in spring 2008. Jaguar sold 8,897 S-Types in the United States in 2005, far from its 2000 peak of 24,507 units.

'Pressuring dealers'

When Jaguar dealers poured money into expanded stores, they weren't planning to become glorified used-car dealers and quick-lube merchants. But that's what they are counting on to keep the doors open.

Former dealer council chairman Martin Bennett says Jaguar pressured dealers for the past seven years to open exclusive dealerships. The pressure has all but stopped in the past year. A new store, depending on how lavish, can cost $3 million to $8 million.

Bennett, who owns Jaguar, Saab, Porsche and Audi stores in Nashville, Tenn., says, "The ones who are taking it in the shorts are the most loyal dealers who followed the party line and built the facilities."

While gross profits are still strong on the premium XJ sedan, XK coupe and S-Type sedan, overall volumes are way down, says Brian Allan, general manager of the Galpin Premier Collection (Aston Martin-Jaguar-Volvo-Lincoln) in Van Nuys, Calif.

"Jaguar is coming back to what it was, a niche high-end sports-luxury line," Allan says. "But it will be painful, because dealers ramped up for big volumes."

'Blowing up'

Despite Jaguar's falling sales, most Jaguar dealerships are profitable, says Mike O'Driscoll, president of Aston Martin Jaguar Land Rover North America. But O'Driscoll declined to estimate the profits for stand-alone Jaguar showrooms or dealerships in new locations. No dealer contacted by Automotive News would provide profit-loss numbers.

Jason Stopnitzky, a dealership broker with National Business Brokers in Irvine, Calif., predicts dealers who built Jaguar showrooms or made major expansions will have a hard time covering their costs.

"If a Jaguar store is supposed to be doing 40 or 50 new cars a month based on its market area, rent alone will be $50,000 a month," Stopnitzky said. "When volumes shrink the way they have, no way can their grosses cover that. It's blowing up in their face." Forty sales per month is a typical goal for a U.S. Jaguar dealer. Jaguar dealers sold on average 14 per month in 2005.

Stopnitzky says his brokerage is contacted "all the time" by dealers trying to get out of their Jaguar stores. Problem is, no one is buying, except to acquire the real estate. The blue sky, or the intangible value of the franchise, is nearly worthless.

"Jaguar has very little desirability," Stopnitzky says. "People don't see the value. If it's a stand-alone store, and all the other luxury franchises in the area are locked up, it's not a good investment."

Volumes way off

Multifranchise dealer Tom Price moved his Jaguar franchise in Corte Madera, Calif., into a new store with Land Rover and Aston Martin last year. It was a fortunate move for Price, because his Jaguar volumes are one-third of his peak sales of 40 new vehicles a month.

Even though Land Rover and Aston Martin are doing well, he says, "It's a challenge" for the dealership to be profitable because of Jaguar. If he sold just Jaguars, the dealership would be unprofitable, Price says.

"I think Jaguar can turn it around, but right now it's tough," Price said. "If I had only a Jaguar store, it would be very, very tough."

Indeed, multifranchise dealers and large dealership groups are insulated from a brand going through a rough patch. If it gets bad enough, they can just walk away.

That's what megadealer Greg Penske did last year when he and Jaguar couldn't agree on a new location in eastern Los Angeles for his existing stand-alone Jaguar store. Penske, son of Roger Penske and president of the Penske Automotive Group, shut the store and walked away from the franchise.

Mark Hennessy, a multiline dealer based outside Atlanta, has seen his sales of new Jaguars fall from 675 in 2001 to 360 last year. He's counting on certified used Jaguars to prop up the dealership's finances.

"Our cost structure allows us to survive a downturn," Hennessy said. "We own the land and the building. If we had to relocate Jaguar across the street, I couldn't do it."

As Manley Eubank, longtime Ford dealer in Charleston, S.C., says of his Palmetto Jaguar franchise, "We were not intending to be a used-car dealer, but that's the way the cookie crumbles."

The errors

The X-Type folly was key to Jaguar's swoon. Company engineers reworked a Ford Mondeo, and customers perceived it as a cut below the luxury competition.

Boerio disagrees with industry pundits who say Jaguar never should have tried to sell the entry-luxury sedan.

"There was room in the lineup for the X-Type 10 years ago, five years ago and still today," says Boerio, a former Jaguar finance director who was a lieutenant for the now-retired Ford execs Nick Scheele and David Thursfield. "We just tried to do too much too fast."

Jaguar rushed the X-Type to market in 2001, although it initially was scheduled for the 2004 model year, Boerio says. That meant compromises in design, performance and packaging. Worst of all, it meant using a mass-market front-drive Ford Mondeo platform in a lineup of rear-drive performance cars.

These days, Jaguar executives are ignoring the X-Type. It's not mentioned in advertising, the model line has been pared, and subvented leases are gone. After saying the United States would absorb at least 33,000 sales annually, the X-Type fell from 21,542 units in 2004 to 10,941 sales last year.

But Jaguar's problems go well beyond the X-Type.

The current S-Type passed its 22,000-unit U.S. sales target only in 2000. It quickly slipped to the 15,000-unit range for several years. Aging badly against newer releases from its German and Japanese rivals, the S-Type dropped to 8,897 units in 2005.

The most recent error is the inability of the XJ flagship sedan to gain traction. Although thoroughly redesigned and built on an advanced aluminum platform, the design was too similar to its predecessor. Consumers couldn't tell there was a new cat under the skin.

Mike Jackson, CEO of AutoNation and former boss of Mercedes-Benz of North America, calls the XJ "a technical marvel but a styling mistake."

"If you change every panel on a vehicle, but at the end of the day it looks like the existing car, that's a serious marketing mistake - even for something as beautiful and graceful as Jaguar," Jackson said. "Playing it conservative is riskier than trying to make strides forward."

When the redesigned XJ debuted in 2003, Jaguar hoped to sell 12,000 to 15,000 units a year in the United States. But the XJ slumped to just 8,304 units last year despite the debut of a long-wheelbase version. The flagship was to be a core profit contributor, but sales are not measuring up.

Is 'Gorgeous' worth it?

Jaguar hopes that its current brand advertising campaign, which avoids price pitches, will re-establish its luxury cachet.

The "Gorgeous" campaign, launched in America in October, is intended to lure customers looking for something beyond a traditional German or Japanese car. The advertisements promise elegance, glamour and Gatsbyesque dinner parties with alluring supermodels. Nowhere is an X-Type to be seen.

In looking for long-term brand building, Jaguar has lost the hard-sell advertising that moves the sales needle in the short term.

"Gorgeous is a long-term plan, not a three-month sales promotion,"

O'Driscoll said "We have to redefine Jaguar's image in the marketplace as a premium, desired product."

While "Gorgeous" intended to help ease incentive spending, incentives barely eased during the fourth quarter after the campaign launched, according to Power Information Network data.

Expensive cats

Even though Jaguar rolled out its “Gorgeous” brand advertising campaign in October, its U.S. incentive spending dipped only modestly in the 4th quarter and remained well above its competitors.

Incentive spending per vehicle

Sept ’05 Dec ’05

Jaguar $7,872 $6,947

BMW 2,962 2,470

Mercedes 1,871 2,787

Lexus 613 751

Totals include customer rebates, lease and loan subvention, loyalty and conquest cash, and dealer cash.

Source: Power Information Network

Link: http://www.autoweek.com/apps/pbcs.dll/arti...1024/LATESTNEWS

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