A Cream Puff Or A Lemon?

IF YOU BELIEVE WHAT YOU READ, KEVIN Rinke is about to become roadkill. For 80 years his family has run a car dealership in suburban Detroit, and a big chunk of his profits comes from selling used cars. But just up the road lies AutoNation USA, part of the chain of used-car superstores that plans to take the country by storm. AutoNation, controlled by Blockbuster Entertainment founder Wayne Huizenga, hopes to transform the industry, replacing high-pressure salesmen with computer kiosks and no-haggle pricing. It's only a matter of time, experts agree, before AutoNation kills off traditional dealers the way Blockbuster squashed the mom-and-pop video stores. So why isn't Rinke sweating? Months after the superstore's arrival, his sales haven't been dented-and he thinks AutoNation's investors could face a bumpy road. Says Rinke: "They may find that the emperor has no clothes."

Heretics like Rinke are still rare, but their ranks are growing. For months the used-car superstores have been the auto industry's hottest story, and Saint Wayne has been lionized as the smartest automotive mind since Henry Ford. Now comes some revisionist thinking. Researchers at R.L. Polk say the superstores have overestimated the size of the used-car market by up to 50 percent. Wall Street seems to be having second thoughts, too. Shares in AutoNation's parent, Republic Industries, have dropped 18 percent since January, and when another superstore chain, CarMax, went public last month, its shares went nowhere. Says analyst Ryan Jacob of IPO Value Monitor: "The [superstore] industry is at such a nascent stage it's difficult to judge how profitable it will be, or if it's a concept that sticks," he says.

Walk around AutoNation's metro Detroit lot and it's easy to understand the hype. Outside you'll find rows of late-model cars of all makes and colors. Inside are a cappuccino bar, a kids' playroom and computers that let buyers search the inventory. "Why on earth would you buy a car from anyone else?" boasts AutoNation senior VP Gerald Weber. Apparently somebody is: area dealers say the superstore is selling fewer than 200 cars a month, less than half what it takes to break even. "Totally wrong," insists Weber, who offers quick comebacks to any criticism. Polk's research is "grossly inaccurate"; Republic's stock drop is due to "erroneous media stories." What about dealers who say they'll copy AutoNation's gimmicks without the high overhead? "That's what they said about Blockbuster," he scoffs.

AutoNation is just one of Huizenga's automotive ventures. In the last two months he's also become the country's largest owner of new-car dealerships and bought a big chunk of the rental-car industry. In fairness, even if AutoNation flops, those ventures might do well. But it's not at all clear the superstore concept really has wheels. Buyers may remain loyal to familiar neighborhood dealers; to keep their business, many dealers have copied the superstores by reconditioning their used cars, offering generous warranties and spiffing up customer service. In a current ad, Saturn touts how its employees drove across the state to pick up a used Honda for a buyer. Dealers also say they'll warn buyers that many of the superstores' wheels were once in rental fleets, which are typically driven hard. Another question: will enough buyers like no-haggle prices, an experiment that's failed for new-car dealers because buyers realized they'd saved money by bargaining? "We had a lot of people get angry when we held firm on one price," says John Cooper, who recently ditched no-haggle pricing at Cars & Cars, the used-car lot he rims up the strip from AutoNation.

The bigger question is whether AutoNation can move enough metal to pay its big bills. The Detroit store is huge compared with a normal dealership, but it's only half the size of the lots AutoNation is building at new locations. JD Power consultant Donald Keithley still likes the superstore concept, but fears AutoNation is spending too much building oversize outlets to attract publicity. Economist George Hoffer already sees signs that rival CarMax is hedging its bet on the used-car biz by building lots to accommodate new ears. And then there are naysayers who wonder if there's any way to make the superstores work. "It seems like an idea somebody had late at night after too many drinks," jokes Chuck Boron, editor of Ward's Dealer Business. This much is clear: if the superstore concept doesn't earth fire, it will be quite a tarnish on Huizenga's halo.