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Dwayne Huizenga has hit on a new automotive retailing strategy: reincarnation.

Mr. Huizenga's Republic Industries is creating an automotive distribution system that will reincarnate rental fleet vehicles as retail units on used-car lots.

Already, the strategy has auto manufacturers worrying about the impact on used-car revenues at franchised dealerships and marketers forecasting a shift in power away from auto makers to used-car retailers.

265,000 UNITS

Since November 1996, Republic has acquired Alamo Rent-A-Car and National Car Rental Systems, with a combined fleet of about 265,000 units.

The rental companies will feed the 100 AutoNation USA superstores Republic plans to open by the turn of the century. Access to high-quality, low-mileage used vehicles is the biggest issue facing the new retailers.

In mining the synergies between the rental fleet business and used-vehicle retailing, Mr. Huizenga will change the complexion of both, industry observers predict.

Similarly, Team Rental acquired Budget Rent A Car Corp. in January and will use the rental units to stock its 13 used-car stores.

"The timing is just right," says Jeffrey Stein, retail analyst with McDonald & Co. "The retail used-car business is really a dinosaur and the distribution system is really a dinosaur. The business is ready for consolidation. In the last decade it has already occurred in supermarkets, discount stores and department stores."


For Republic's strategy to succeed, analysts suggest the company will have to spice up the mix of vehicles and the equipment levels of its rental fleets-thus creating desirable retail units.

Rental-car companies now buy most of their new models from manufacturers who agree to repurchase the vehicles at a fixed buyback price. These units, called program cars, are subsequently auctioned to dealers.

The rental company must dispose the remaining units, known as risk vehicles. For the 1997 model year, about 10% to 15% of rental vehicles sold to the seven largest business- and leisure-oriented rental-car companies will be at-risk cars, says Jordan Hymowitz, an analyst with Montgomery Securities.

The percentage of at-risk vehicles in rental fleets will grow, forecasters predict, allowing rental companies such as Alamo and National to equip the cars for the retail market waiting downstream.


"On a risk car, the rental-car companies can add any options they want to order," says Jay Spencer, national used-vehicle remarketing manager with Toyota Motor Sales USA. "If they order their risk cars with more equipment targeted to the ultimate retail consumer, that could have an impact."

Upgrades of the standard four-cylinder engines commonly found in rental units are likely, Mr. Spencer says.

Mr. Spencer also predicts rental car companies will try to obtain at-risk vehicles earlier in the model year, thereby lengthening the depreciation period. That could translate into lower retail prices on used-car lots, he says, creating a price advantage over units sold at franchised dealerships.


But all used cars are not identical, Mr. Spencer warns.

"We and other manufacturers do a stringent reconditioning process of program cars," he says. "I am not sure rental-car companies go through the stringent reconditioning process that a manufacturer does."

The goal of the rental-car/used-car strategy, says Jay Houghton, marketing director of automotive consultancy A.T. Kearney, is to maximize the economic value of each unit as it moves through its life cycle.

"Maybe you ought to upgrade the options if you can maximize the value two years later," Mr. Houghton says.


Currently, rental fleets lack the diversity of models and manufacturers needed by used-car superstores, says Jon LeSage, editor of Auto Rental News.

"The inventory of AutoNation USA will be upscale sport-utilities, minivans, pickups, luxury cars, sports cars, intermediate and full-sized cars, [but] that's not what you see predominantly on the rent-a-car lot," Mr. LeSage says.

Indeed, light trucks-the current hot make in auto retailing-represent only a small percentage of rental-fleet units. And rental fleets tend to be dominated by one manufacturer; for instance, GM cars comprise 70% of Alamo's fleet and 80% of National's cars, Mr. LeSage says.

In the next several model years, Mr. LeSage expects more sport-utilities, minivans and import marques from a wider range of manufacturers to begin appearing in rental fleets that feed used-car inventories.

Michael Karsner, senior VP-chief financial officer of Republic Industries, says it's premature to speculate on the future configuration of the company's rental fleet inventory.

"We do see an opportunity in buying more cars at risk and having a retail outlet. That will give us a competitive advantage in the marketplace," Mr. Karsner says.


Still unknown is consumer response to the rental-car/used-car alliance.

"Consumers place rental cars so far down on the list," says Art Spinella, VP at consultancy CNW Marketing/Research. "There is a massive consumer prejudice against rental cars."

Mr. Spinella says off-rental units should comprise no more than 15% of a used-car outlet's inventory.

"And if a unit is a rental car they should make sure the consumer knows. They don't want to allow the perception or rumor to spread that all their cars are off-rental cars," he adds.

The consolidation in automotive retailing is shifting power from manufacturers, analysts suggest.

"The distribution channel is becoming empowered," says Mr. Houghton, adding that powerful distributors could have the power to specify and brand special fleet models.


Robert Thomas, president of Nissan Motor Corp. USA, says Republic's strategy increases the company's clout.

"That's another way they can get control of their relationship with manufacturers," Mr. Thomas says. "Let's say they come to us and say, `We can sell 50,000 to 100,000 cars.' They also can say, `We'll buy 60,000 of such and such vehicles, at such and such a price, with such and such equipment'."

But not every used-car superstore chain is adopting the rental car strategy.

CarMax, a subsidiary of Circuit City Stores, has said it won't enter the rental car business.

"We don't see the synergy," says Mark O'Neil, CarMax VP-store operations.

Concurs Mr. Stein: "The two businesses need to be exclusive. There are some synergies but Wall Street tends to overblow them. It's the operational know-how that provides the synergy. If you know the car business you should be able to make money and grow both businesses."

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