Hyman, who goes by the nickname Huddy, can spot an industry trend. Eight years ago, he was among the first to open a Saturn showroom and try the company's no-hassle sales concept. In October, Hyman leaped across the Atlantic to open three dealerships in Paris for the new two-seater Smart Car, a European venture of Daimler-Benz.

Perhaps the biggest trend reshaping the industry is the steady disappearance of lone dealerships. They're being bought up by neighboring dealers or by big publicly owned nationwide companies like the Wayne Huizenga-led Republic Industries. Even the automakers themselves are buying dealerships.

"It's getting to the point where one free-standing dealership is now a little unusual," says Max Pearson, president of Pearson Auto Group, which owns Richmond Honda and 13 other dealerships in Virginia, Florida and Texas.

Then there's CarMax, owned by Richmond-based Circuit City Stores Inc. The Wal-Mart-style used-car retailer parked its first megastore in Richmond five years ago. CarMax's low-key, no-pressure approach to sales "woke up a sleeping giant" and forced traditional dealers to change their ways, says Don Hall, president of the Virginia Automobile Dealers Association in Richmond.

The Internet is changing the business, too. Buyers can find out what the dealer paid for a car before they come in to negotiate a price. And industry veterans predict that the Internet's role in sales will continue to grow. Dick Strauss, owner of Dick Strauss Ford-Isuzu-Suzuki Inc. in Chesterfield County, estimates that in 10 years, a quarter of car sales will be done on the Internet. "It's going to be something we'll have to deal with," Strauss says, though he thinks most people "are still going to want to drive the car and kick the tires" before they buy.

Hyman contends that the jury is still out on where all these changes are going to lead. "A year and a half ago, I thought I knew where it was going," he says. "But now I'm not sure."

Although there is a lot new in the industry, Hall predicts that the old hands will do the best. "It's the insiders who will ultimately make that change," he says, because they know how to walk the increasingly thin line between profit and loss. "It's a hard business," Hall says. "You have to grind out every sale."

* * *

There is one kind of customer who can "get under the dealer's skin," says Dick Strauss. He's the one who waltzes into the showroom, picks out a $20,000 car and then haggles over the price until he gets the dealer down to barely above cost. Even then, he might decide that's too much.

"It's amazing to me," Strauss says. "If you tell a customer -- and if he believes you -- what your invoice is, and then you say, 'How much do you think it would be fair for me to make?' A lot of people will say 7 or 8 percent. Then a lot of guys will say, 'I think you ought to sell it to me for $100.'"

Buyers are tougher than ever these days. Hyman says the low-pressure approach introduced by Saturn and CarMax is a big reason why. "A lot of dealers said, 'If I can make it a better experience for our customers, then we do a better business.'"

Under the CarMax philosophy, a single sales representative takes the buyer through the entire process, from test-drive to financing. "We wanted to take the anxiety out of buying a car and make it fun again," says CarMax spokesman Val Brown. Sales reps are paid a flat commission fee, he says, so they aren't driven to push the more expensive vehicles.

Many dealers are beginning to imitate CarMax's customer perks, such as kids' play areas, roomy lounges and business offices where customers can plug in laptops. Hyman, however, doesn't think that lavishing extra attention upon customers has created a huge edge for any individual dealer. "Everybody's doing it, so it's not that big of a difference," he says.

While CarMax's sales volume is high, it has yet to turn a profit. "Because of the markets we went into last year, we didn't have the critical mass to leverage our advertising," Brown says. CarMax's gross sales reached $874 million in its most recent fiscal year from March 1997 to February of 1998, and the company just added its 24th store, near Dulles Airport in Sterling.

The big news, however, is that CarMax has announced plans to acquire some new-car franchises, including Laurel Toyota in Maryland. That's making some family-run dealers uneasy, especially in large metropolitan areas that CarMax traditionally targets, such as Northern Virginia, Richmond and Hampton Roads.

Then there's the virtual dealership. Internet-based buying services like Auto-by-Tel and Carpoint let customers choose a new or used car from their home computers, in some cases bypassing the salesperson altogether. Most major dealerships have begun to ride the technology curve themselves, hosting their own web sites to give customers a heads-up on inventory and special promotions, or for just plain PR purposes.

The National Automobile Dealers Association estimates that more than half of the nation's new-car dealers have web sites, and 40 percent more plan to start one within the next six months. About 20 percent of the existing sites offer on-line purchasing of both new and used cars, and 26 percent of these sites let their customers finance their vehicles on line, too. But so far, the Internet hasn't sparked any sales explosions: Dealers with web sites say they average about five on-line sales of new vehicles per month.

"About 2 million of the 35 million new- and used-car sales were done" using the Internet and its information, says Strauss. "Any dealer who's not preparing himself for the onslaught of shopping on the web has his head in the sand."

Still, few consumers are comfortable just pointing-and-clicking their dream cars into reality. "The web enables us to reach more people. But people still want to come look at the vehicle and drive it," says John Pohanka, chairman of Pohanka Automotive in Maryland.

So does all this techno-touchy-feely stuff mean a truly transformed -- and reformed -- industry? Not necessarily. Old habits die hard: This high-stakes industry still has a seamy side. The industry is haunted by the notorious Honda scandal of more than two years ago in which several Honda dealers around the country were caught bribing Honda Motor officials in order to obtain scarce inventory or, in some cases, franchises.

And not every dealership today has completely embraced the customer-friendly, soft-sell approach that CarMax promotes. It's hard for salespeople to stay calm when they still rely in part on commissions. But the industry has come a long way.

"Our business generally is becoming more professional," says Pohanka. "We've definitely improved the quality of people and service we provide."

* * *

Today's automobiles are built better and last longer, and that fact is driving enormous cultural and technological change in this historically staid industry. The average price of a car today is about $22,000. So it's not surprising that drivers keep them longer -- for about seven years, given the time it takes to pay off a typical auto loan.

So how do dealerships make money in these times of sturdy vehicles?

"You need to be in the business for a long time, ratchet down on your margins and have good warranty and service operations, parts and used cars, too," says Hall at the auto dealers association. "You'll go broke if you think you can make money on just new cars."

Strauss has been in the business for 45 years. In the good old days, he says dealers made a 10 percent gross profit from new car sales. In the late 1970s and early 1980s, however, that margin started slipping.

For the past five years, Strauss estimates that dealers are averaging about 6.4 percent gross profit -- below the 8 percent he thinks they need to stay in the black. "If you can net 3 percent of your gross sales, you've had a good year," Pearson says.

So dealers are turning to the service and parts business that follows the sale. "We have to compete for the after-warranty service business," says Strauss. His business offers extended service plans to new- and used-car customers. Manufacturers are starting to respond to this trend by producing parts that dealers can sell at prices that are competitive with those at auto parts stores and repair shops. Dealers are trying to convince buyers "that all things being equal, it's much better to have your car serviced at the dealer that handles the brand," Strauss says.

Maintaining late-model cars isn't cheap. Many of them require sophisticated testing equipment -- an engine analyzer can cost anywhere from $35,000 to $50,000, and a wheel-alignment machine can cost $50,000. The repair-shop guys once known as "grease monkeys," who could put an ear to an engine and diagnose the problem, are gradually fading away, both for technical and economical reasons. Many of their customers are migrating to dealership service departments, where service technicians wear spiffy uniforms and wield computerized diagnostic tools. This new breed of service technicians also command bigger salaries.

"Ten to 20 years ago, a salesman made twice as much as the average technician," says Pohanka, who pioneered the industry's now-popular voluntary licensure for service technicians, ASE, which stands for automotive service excellence. Now some technicians make more money than salespeople do, he says.

Cash is in short supply, however, as dealers race to upgrade their service departments, renovate their showrooms, and acquire their competitors.

"Owners are looking for liquidity," says Peter Taylor, a managing director for Wheat First Union in Richmond. And the newest tool to help them generate cash is the real estate investment trust. A REIT is a publicly traded company that invests exclusively in real estate. Auto dealers are forming REITS that purchase their land and lease it back to them -- typically for 15-year periods. By selling their land, large auto dealers can free up millions of dollars to reinvest in their franchises. That's especially important for strategically located dealers in Northern Virginia, where land sometimes sells for hundreds of thousands of dollars per acre.

The auto REITs can facilitate estate planning and business succession for old timers who want to split up their holdings among their children. They also allow dealers to diversify their wealth by shifting some of their auto eggs into other baskets. "A bank traditionally lends you 70 to 75 percent of the value of the real estate, but with a REIT, you can get 100 percent," Pohanka says.

REITs aren't new -- they have been around for many years in commercial real estate markets for shopping centers, apartment buildings and office parks. But Pohanka was the first person to apply the concept to car lots. He came up with the idea while doing some estate planning of his own, and he teamed up with friend Robert Rosenthal, a major automobile dealer in Virginia. They launched Capital Automotive REIT in McLean last year. Pohanka is its chairman, and Rosenthal is one of its directors.

Capital Automotive REIT targets dealerships that sit on top-dollar property anywhere in the country. Its average acquisition has cost about $25 million. So far, it has closed deals with 135 franchises in 16 states, and it expects to reach $650 million in assets this year. "One of our goals at the end of the year is to have 15 percent of the top 100 dealers in the country" in the Capital Automotive REIT portfolio, says David Kay, the company's vice president and chief financial officer.

Dealers who buy into the REIT get a tax shelter plus a nationwide portfolio of real estate. "And if they can expand through partnerships with us -- we can buy real estate for them and lease it back on a long-term basis," Kay says. "That will help them expand into new markets." A couple of dealerships in Texas and Atlanta are doing just that, while others are investing their new-found cash in local franchise acquisitions.

"With the big consolidation trend," Kay says, "dealers are striving to offer lots of different products to their customers."

* * *

Industry veterans have this advice for people who want to break into the business of selling new cars: It's not as easy as it looks.

Pohanka thinks automakers who try to run dealerships will have problems. "I think manufacturers are going to have great difficulty with these experiments: They will be reluctant to give authority to the dealers to run the [businesses]," he says. "They are not cut out to be retailers any more then we are to be manufacturers."

At the auto dealers association, Hall says the same thing about companies like Republic Industries. Virginia's 250 dealerships grossed about $11.5 billion in sales last year, but "the net is very small," he says.

The big, publicly traded car dealers have courted some Virginia dealers, but the local players have turned them down flat. For now, all Virginia dealerships are still privately owned. But that could change, given the rapid-fire rate of consolidation occurring throughout the nation's car dealership industry, says Hall. Republic, for instance, has purchased nearly 300 dealerships in 17 states during the past two years, including Super Bowl quarterback John Elway's Honda dealership in Denver.

Pearson, who has been approached by the mega-dealers, says he wants to remain independent. "I don't think they are as qualified as me to handle my money," he says. "And their track records have been dismal, with their stocks down and none showing profits."

But buying existing dealerships is the only way to break into the business. The market is just too tight. Statewide, franchise rules prevent, for example, two Ford dealerships from locating on the same block. It's nothing like the old days, when entrepreneurs like Pearson and Dick Kern, president of Kern Motor Car Co. in Winchester, jumped headfirst into the business. "I didn't know a thing" about the car business, says Kern, now 78. "I just knew that with the backlog of cars then, it might be a good opportunity."

And although Virginia's franchise laws keep manufacturers like Ford from buying private dealers here, many of them are worried that factory outlets in other states will drive prices too low for them to compete. "If they control the market and you're outside, it's not fair competition," Hall says. "This is a business of small entrepreneurs. Doing away with small operations isn't going to benefit us."

And manufacturers and other public companies just don't have the community roots of many of the family-owned dealerships. You don't get guys like Kern of Winchester, who served on the city council and as vice mayor of the city for over a decade, or Carter Myers, CEO of Colonial Auto Center in Charlottesville, which has pledged $100,000 to the University of Virginia over a five-year period, and donates vehicles to the athletic department. "We [dealers] are one of the last local retailers left in communities," Myers says.

Those local roots are going to be hard for newcomers to break, Hyman says. Local dealers "have more clout" in their home market, he says. And they know their customers. "The people in the industry in Virginia have stuck around and adapted."

© DECEMBER 1998, VIRGINIA BUSINESS MAGAZINE