Should We Be Surprised?
"The parties agree that no party … shall make any further public statements regarding the adversary proceeding or the matters addressed herein, except in so far as any party is required to publicly disclose any information pursuant to any statutory obligation…"
That was part of a 13-page binding settlement document issued by U.S. Bankruptcy Judge Susan Sonderby, closing the book on Penske Auto Centers (PAC) and the relationship between Penske Corp. and Kmart.
These former mates might have agreed to public silence after a very noisy divorce, but there is a textbook lesson here that we can all learn from. Some of you larger dealers, in particular, may want to take a few notes.
If one of your core business assumptions is that customers will come simply because of your brand name or on the strength of whatever brand you represent, think again. That assumption might bring failure before you’ve even gotten out of the gate.
Over nearly seven years, Roger Penske shed some 300 stores, pumped tens of millions of dollars into his PAC enterprise, and still enthusiastically spoke of growth and expansion. As only my colleague could put it, "it’s been like watching a sailor bailing rising waters from a sinking life boat with a teacup."
One year ago, Jim Wheat, president and CEO of PAC, spoke glowingly about Penske’s new long-term agreement with Kmart and the "unique marketing advantage" Penske enjoys by having its PACs located at Kmarts. "It certainly offers us excellent exposure to Kmart’s customer base."
Last fall, an even more enthusiastic Wheat unveils PAC’s plans to add 30-40 new stores in 2002, including a handful of stand-alone locations.
Five months later, Kmart files Chapter 11 and closes 284 of its stores, forcing PAC to close 63 of its locations. Wheat says that impact on PAC will be "minimal," and enthusiastically states that the remaining 563 PACs are "strong and performing well."
Not 30 days later, and with no warning, PAC ceases to exist. All locations are shut down, and most are gutted by the time Kmart gets an injunction the next day. By then, Judge Sonderby, who is overseeing Kmart’s bankruptcy proceedings, has little choice but to "negotiate" a divorce settlement.
Despite annual sales dropping from an estimated $400 million back in 1995 to under $300 million in 2001, Penske kept insisting that PAC would grow. But over the same span, PAC never averaged more than $500,000 in annual sales per location. In comparison, the typical tire dealer averaged $1.4 million per location in 2000, according to Tire Review’s Tire Dealer Profile Study.
Other than throwing money at the problem – and Wheat’s cheerleading – neither Kmart nor Penske did much to help the PAC cause.
Kmart’s long-rumored bankruptcy was the capstone to 15 years of lost focus and misguided assumptions about both its competition and consumers. Not to mention a series of eye-off-the-ball expansions – Builders Square, Office Max, Borders, and Sports Authority – that either failed or had to be spun off.
Roger Penske was the polar opposite. Single-minded focus brought him 11 Indy 500 wins, a profitable chassis-design business and valuable business connections. He parlayed those into a successful a truck leasing business and car dealerships, and the revival and profitable sale of Detroit Diesel.
By late 1995, when Penske came to the expected rescue with $112 million for his 64% share in PAC, Kmart had botched its auto service business so badly that it was financially draining and faced numerous well-publicized consumer lawsuits.
No matter that Roger had never been in retailing, and had never sold a single tire. Never mind that Kmart was losing relevance, and its auto service efforts brought consumer mistrust.
Everyone was convinced that Kmart’s market presence – its size and its brand – would drive millions of consumers into PAC bays.
Everyone expected Roger’s name to magically cast the blue light (sorry, I couldn’t help myself) of success on the retail tire and auto service business.
While PAC suffered from many maladies, what really did it in was blind faith in the supposed power of "brand." Because for all the work that goes into building a successful brand, even more must go into maintaining its integrity and value.
So, in this world of consolidation and contraction, if one of your core assumptions is that customers will come simply because of you – or your brand name – think again.