Car dealer gets a front-seat view of 'uncertainty' in the economy
Casa de Cadillac has been in business more than six decades. When owner Howard Drake took issue with my questioning whether uncertainty was the cause of the nation's economic stagnation, I went to Sherman Oaks to hear more.
The closest thing there may be to a certainty in Southern California business (death and taxes aside) is that there will always be a Casa de Cadillac.
We're speaking, of course, about the big auto dealer that has occupied the same location on Ventura Boulevard in Sherman Oaks since 1948. The business is part of the memories of generations of Valley residents, the towering plate-glass front wall of its showroom an enduring artifact of not only the Southern California car culture of the '50s but Art Moderne "Googie" architecture.
That's not to say that Casa's business hasn't undergone revolutionary changes over the years, especially during the recent period of economic upheaval. It's those changes ? and the question of what lies ahead ? that brought me to the dealership one day recently for lunch with Howard Drake, who owns it with his wife, Susan.
Drake and I started corresponding after he took issue with a column in which I questioned the U.S. Chamber of Commerce talking point that "uncertainty" was the cause of the nation's continuing economic stagnation. The chamber says this "uncertainty" is the product of the administration's healthcare and financial reform initiatives.
I argued that the real problem was lack of consumer demand. He wrote me to say that I was underestimating how deeply unsettled the economic landscape was ? and that "uncertainty" wasn't at all the wrong term to describe it.
On the reasoning that anyone who can sell a couple of hundred vehicles a month to a demanding clientele is a lot closer to the business front line than I am, I came out to Sherman Oaks to hear more.
A tall, trim, friendly man of 51, Drake greeted me in his upstairs office overlooking the Cadillac showroom, which is currently being renovated. He was brought into the business in 1993 by his father-in-law, James Wilson, who thought Drake's Pepperdine MBA and his experience on the business side of Rocketdyne would enable him to help manage the dealership through the tough market of that era. The Drakes took over full ownership of Casa Automotive Group in 2008.
Drake had already helped remake the dealership through diversification. The first addition to the lineup was Saab. Then, in 2002, he added Hummer, a GM brand. That was a good decision then, but soon lost its charm.
"In 2002 I had every ballplayer, rock star. ... It was a brand built in Indiana by Americans for Americans, and people felt great driving it," Drake told me. Then came the Iraq war, Katrina, soaring gas prices, "and for one of the first times in my life, I felt I was on the wrong side of the argument."
It didn't help that Hollywood, a core clientele, had turned against it. "Suddenly Leonardo is showing up at the Academy Awards in a Prius and giving us dirty looks." Hummer was still a profitable brand in 2006 when the Drakes pulled the trigger, completing their exit in July 2008.
They converted their Hummer showroom on Van Nuys Boulevard to a Subaru franchise and added Kia in March 2009. Earlier this year they added Buick and GMC to their main location, exploiting GM's Darwinian culling of regional dealerships. With a partner, the Drakes will be managing the new dealership Chrysler is opening in downtown Los Angeles at the end of January.
It's hard to be more diversified than a dealer selling Kias and Caddies. Drake says that's what helped see the business through the recent recession. "If you had told me the dealers in Glendale, Downey, downtown L.A. were going to go away, I would have thought I'd get rich. But the demand went away with them, so it let us tread water."
For Casa Automotive, the collapse in demand started to hit in mid-2008. It was not only that people stopped wanting new cars, but that consumer credit suddenly dried up. GMAC had been a crucial part of the business for Casa, as it was for most GM dealers. Unfortunately, GMAC had the brilliant idea of moving into subprime mortgage lending, and when that business collapsed it dragged the whole company down with it.
This was especially tough on Casa because its customer base was heavily dependent on leases from GMAC, and GMAC stopped financing leases for anyone without the most gilt-edged credit ? and even then on much tougher terms than before.
"My lease customers just went away," Drake says. The percentage of cars leaving his lot on leases fell to 10% from 60% to 70%, and overall volume fell. Casa, which had sometimes moved more than 200 cars a month, dropped to fewer than half that in some months in the trough of recession, between November 2008 and April 2009. (It's recovered to more than 150.) Payroll fell to 105 employees from 130.
Drake echoed a complaint I've heard from other business owners: The chief obstacle to recovery may be the banking sector. That's important, because banking is an industry that's arguably received less attention from the White House and Congress than it deserved, and been most resistant to the reforms that have been proposed or enacted.
GMAC, which is now known as Ally, got a federal bailout and is still majority-owned by the taxpayers. But its lease terms haven't loosened up as much as the market warrants, in Drake's judgment. "They've been stickier than I would have thought," he says, though he can't tell how much the cost of leasing may be suppressing showroom traffic.
The unsettled credit situation is just one of many imponderables. Healthcare? Casa provides medical coverage for all employees, Drake says. Before reform, he paid solid double-digit insurance premium increases for four straight years.
"Maybe I'm pessimistic, but I don't think it's going to get any cheaper," he says, but the real problem for him is that he doesn't know what healthcare costs going forward are going to look like. "And I really don't know who to ask."
To Drake, that uncertainty compounds the doubts he has that government at any level is coming to grips with broader economic issues. "My big concern is that the policy part of this discussion is over," he says. "We had the stimulus, we had TARP, we had 'cash for clunkers' ? which was great for us, by the way ? but now we're in a world where the other shoe hasn't dropped.
"Something's got to give ? is it my kids' education? A union member's retirement? Is it health and welfare, trash collection? Are we just going to nibble at all those places? Until that gets defined, I'm reluctant to spend a lot of money." He's done some hiring recently, but "the threshold is higher" to justify bringing another employee on.
It's not all pessimism on Ventura Boulevard. Drake believes he's positioned Casa well for an upturn, in part by taking advantage of the downturn. "We added Kia, Buick and GMC, we added a big body shop this summer ? it would have cost way more money than I had to put a deal like this together five years ago."
But some things may have changed for good. "In good times you pick up bad habits, and in bad times you pick up good habits," he told me. "So my charter as the guy steering the ship is to make sure that we don't go back to the bad habits again."