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2002 — A look into the past: Penske shuts down 562 auto centers

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Penske shuts down 562 auto centers

(Editor's Note: This story is part of our #TireBiz30 in which we feature one archived story every day of September to celebrate Tire Business' 30th anniversary. Each story represents one of the most relevant news story published in our pages for that year.)

TROY, Mich.—In one swift, decisive action, the nation's largest independent tire dealership, Penske Auto Centers Inc., has disappeared from the map.

Perhaps the most pervading question was the one least answered in the days immediately following the company's April 6 announcement that it was closing all 562 outlets nationwide: Why? Following a wave of press releases issued during a storm of litigation and accusation between it and Kmart Corp., Troy-based Penske Auto Centers (PAC) finally offered a reason for the closure.

Penske President Jim Wheat told Tire Business the decision stemmed from evaluation over several months. He pointed toward the events of Sept. 11 and the resulting economic hit that many in the travel and automotive industry took as playing a role.

"We took a real significant impact," he said. "Beyond that, the fourth quarter was soft."

When Kmart closed 283 stores March 8, Penske, in turn, was forced to close 63 outlets. Mr. Wheat said that bite also was difficult to overcome.

"That's 10 percent of our store base," he said. "Given all the economic situations.... We evaluated it over and over for six months. We couldn't see on a go-forward basis the opportunity to be profitable in the short term ... or the long term."

In an earlier press release, Penske said the decision stemmed from a March 27 meeting involving Penske Auto Centers Chairman Richard Peters and Director Roger S. Penske, and Kmart's COO, Julian Day, and its chief restructuring officer, Ronald Hutchinson.

Kmart owns a 36-percent stake in PAC.

"Julian Day informed us that Kmart had determined through their research that the auto centers provided no value to its core business," Mr. Peters said in the release. "Kmart was therefore unwilling to provide any support to PAC and agreed that the best course of action was to close PAC."

Mr. Peters said upon reviewing Kmart's initial statements, he felt "obliged for the benefit of our employees and customers to provide background on some of the events surrounding (Penske's) decision to discontinue operations." He said that since Jan. 11 PAC's parent company, Detroit-based Penske Corp., had provided $40 million to "support the viability" of Penske Auto Centers.

PAC never turned a profit in the seven years Penske operated it, Mr. Wheat said.

Kmart initially called Penske's decision to close "precipitous," then responded by obtaining a temporary restraining order, issued by the U.S. Bankruptcy Court for the Northern District of Illinois, requiring Penske to continue operating. A Kmart press release said the order enjoined Penske from taking action to close or liquidate the PACs owned and operated by Penske Auto Centers L.L.C.

Penske's customer service department said at the time all stores were "closed for inventory."

Then on April 9, the two companies reached an agreement to cooperate on "an orderly wind-down" of the Penske business, a Kmart press release said. Penske, according to the agreement, has earmarked funds for certain close-down expenses, including facility restoration, removal of hazardous waste and materials associated with the closures, and monies to support Penske Auto Centers customers' future warranty needs, Kmart said.

Penske Corp. approved funding PAC's payment of approximately $10 million for salaries, severance and future medical expenses of its employees, Kmart said. Penske also agreed to pay $6 million to Kmart under the terms of a master lease guarantee, and Penske Auto Centers L.L.C. agreed to waive a claim of $5 million that allegedly was owed as a result of Kmart's previously announced store closing plan.

"This agreement allows us to meet our primary objective of taking care of our employees and customers," Roger S. Penske, chairman of Penske Corp., said in a statement.

Left behind

Exactly how that will happen is uncertain. Left in the wake of the closings are 4,000 employees and untold thousands of customers. Since the first wave of closings in March, Penske repeatedly has said it would try to accommodate the masses in each case.

"Our immediate focus is on the well being of our employees and their families as well as our customers," Mr. Peters said. "I regret that these actions had to be taken."

In a separate press release, Mr. Wheat said that, where possible, Penske Corp. would try to "provide our employees with opportunities for positions within the Penske family of companies."

Mr. Wheat told Tire Business that employees were informed of the closure before announcing it, and employees assisted with shutdown procedures. In addition to severance pay, he said employees will have access to medical insurance through the end of the year and the company's 401k program will be maintained.

Employment opportunities could exist in such other Penske Corp. entities as United Auto Group, Penske Truck Leasing, Penske Logistics and Truck-Lite. When the initial 63 Kmart-related Penske closings were announced in March, the retailer said it would try to relocate as many of those employees as possible in other Penske-owned operations. Penske Corp. employs more than 29,000 worldwide, meaning absorbing the entire PAC work force would amount to a 16-percent increase in the rest of Penske's interest.

As for the customers, an 800 number is operational and, Mr. Wheat said, will be maintained for "well beyond a year." He said immediate problems will be referred to area service outlets and that Penske would pick up the tab.

"We are clearly poised to maintain that customer service group for an extended period of time," he said.

Opportunity knocking

Ross Kogel, executive vice president of the Tire Association of North America (TANA), said local dealers taking shrewd marketing tacks centered on a service approach might be the most likely to score Penske customers looking for a new tire and auto service home.

"The bottom line here is, the people I've spoken to will try to attract these customers with a service-based model," Mr. Kogel said. "They will offer superior service thinking, obviously, that they can improve on the service they got before."

Speaking earlier with Crain's Detroit Business, a sister publication of Tire Business, Mr. Kogel inferred that Penske was more of a price-based business.

Perhaps contradicting Mr. Kogel's theory is Strongsville, Ohio, resident Lisa Assenheimer, who said she liked Penske's prices and would pursue a similarly price-minded outlet.

"I will likely take my car to any place with coupons or specials," she said. "I liked Penske because I could get an inexpensive oil change and other points of inspection for less than $20. And tire rotations were only 99 cents more."

Mr. Kogel added that there was no way to know for certain where the sudden glut of customers might turn for tires and service. There simply has been no event of this magnitude from which any such conclusion can be drawn.

Goodyear loses sales

Gone with the Penske stores is the supplier agreement the company had with Goodyear, which supplied all of Penske's tires, including a Penske line of private label tires. The Akron-based tire maker would not divulge how many tires it supplied or how much money they represented.

Tires accounted for 30 percent-or $89 million-of Penske's $298 million in fiscal 2000 sales, according to the company.

Goodyear called any such information proprietary, but downplayed the significance of the PAC closing. "In the context of the large number of tires we manufacture as a corporation, while that's certainly important in terms of the number of tires, it's still a relatively small number," said a Goodyear spokesman.

The spokesman said Goodyear's relationship with Penske Leasing and Penske Racing will continue, calling the tire maker "a substantial supplier on that side of the business."

Despite being well aware of the volatility surrounding Penske and Kmart, the spokesman said there was no way Goodyear would have anticipated a complete shutdown. "We knew based on Kmart's actions that they would be downsizing, but we did not anticipate the downsizing to be downsizing to zero."

Other suppliers likely to be affected by the closing include Genuine Parts Co., Snap-on Tools Inc. and Tenneco Automotive Inc., among others, according to Lehman Brothers.

Mr. Wheat said Penske is working with those companies to "either return some of the inventory or do some other things. For the most part there are a variety of things going on. I don't want to get into specifics."

Closing shop

Now the question is what might happen to the actual PAC stores. There are 48 outlets not actually inside Kmart buildings. They include a number of what Mr. Wheat termed "free standers," which are in separate facilities on Kmart premises. He said other companies could perhaps rent the space.

Two quick-service-type locations are Penske Express outlets, attached to KExpress convenience stores. A Fort Myers, Fla., location, Penske's only full-size stand-alone unit, was not affiliated with any Kmart outlet. All of those-in addition to outlets attached to Kmarts-have ceased operations.

Kmart Chairman and CEO James B. Adamson said the company is "moving forward with a plan to convert the space occupied by Penske to additional Kmart selling space. Furthermore, we are confident Penske's departure will not have any adverse affect on our business."

The business relationship between the two companies began in November 1995, when Roger Penske bought a controlling interest in about 860 money-losing auto-service centers from Kmart for $112 million.

Company officials said Kmart's failure to participate in a business plan for the auto centers forced Penske to close the operation. Mr. Wheat said he didn't know whether Penske would re-enter the tire and auto service business, but said that currently no such plans exist.

"Kmart has had some significant financial problems over the last six to eight months, so it will be interesting to see how this plays out," TANA's Mr. Kogel said. "I think (Penske's decision) caught a lot of people by surprise. The question is: Should it have?"

Brent Snavely of Crain News Service contributed to this report.

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