National Auto Credit, Inc. Business Information, Profile, and History

History of National Auto Credit, Inc.

National Auto Credit, Inc. is a "new" company with a 25-year heritage. In 1994, the firm shifted its focus from the insurance-replacement segment of the auto rental industry to used car sales and financing. Its initial establishment as Agency Rent-A-Car in 1971 formed the foundation of the insurance-replacement segment of the auto rental industry, consisting of companies that rented cars to victims of accidents or thefts (as opposed to vacation or business rentals). Agency's growth was the bellwether of that business, and its decline signaled the segment's maturity. In the early 1990s, when the market began to show signs of saturation and Agency's revenues and profits took a precipitous slide, founder, president, and majority owner Samuel Frankino restructured the company to focus on used car sales and financing and named it for National Auto Credit, Inc., the financing subsidiary.

Foundation and Growth in the 1970sand Early 1980s

Incorporated by Sam Frankino in 1971, National Auto Credit's genesis actually came in 1969. At the time, Frankino was a real estate agent and landlord. One day, an insurance agent and tenant mentioned that a client of his needed a car on a short-term loan. Frankino stepped in, offering to rent the man his daughter's Chevrolet Impala. He charged $9.50 per day; it was the most the insurance company would pay, but significantly less than the standard rate. By the time the first client was through with the car, the insurance agent had lined up another taker. Frankino later reflected, "My daughter never did get that Impala," in a 1985 interview with Jay McCormick of Forbes.

That first rental signaled the dawn of the insurance-replacement segment of the auto rental industry. Frankino incorporated the service under the blasé, but straightforward, Agency Rent-A-Car name in 1971, maintaining it as a private concern. He attracted business by keeping his rates low and made money by keeping his cars on the road. The company's daily rental cost about half as much as the going rate of traditional auto rental companies, which, not coincidentally, was about as much as insurance companies would reimburse their customers. Agency kept its overhead low by maintaining low-rent offices and offering free delivery of its cars to incapacitated clients. And the fleet's typically low-mileage use resulted in less wear and tear.

Although it eschewed the commercial rental market, Agency maintained the car rental industry's highest utilization rate, at more than 90 percent, compared with a 65 percent to 75 percent industry average. Frankino did not advertise, either. Instead, he hired salesmen to promote the service to insurance agents and adjusters. Forbes's McCormick credited Agency's success to "a little hustle and a lot of service." This fairly simple formula kept the company's operating margins high. At 20.5 percent, they were more than twice as high as those of Avis, Inc., at 7.8 percent, and quadruple Hertz's 3.5 percent.

Frankino had modest aspirations for his sideline, hoping eventually to build the enterprise up to 50 or 60 cars. In fact, he kept up his real estate business throughout Agency's first decade and did not pay himself a salary until after he took the company public. He was especially adamant about avoiding debt; in October 1985, Frankino proudly told Delinda Karle of the Cleveland Plain Dealer that, "For the first nine or ten years each piece of equipment was free of debt."

Agency clearly exceeded all of Frankino's expectations; it had a fleet of 9,800 vehicles and annual revenues of about $60 million by 1983. Frankino took the company public that year, raising $30 million with a minority stake. As if that payoff was not enough of a reward, the businessman also won the Harvard Business School Alumni Association's George S. Dively Entrepreneur Award. Sales doubled, from less than $60 million in 1983 to $118.3 million in fiscal 1986 (ended January 31, 1986), and net income nearly tripled from about $5 million to $14 million during the same period. Agency's success inspired awe and imitation.

The Industry Matures

Frankino and Agency began to feel the effects of steadily increasing competition in the late 1980s, much of it from Agency expatriates. A 1974 mutiny led to the formation of Adjusters Auto Rental Inc., later known as Jiffy Auto Rental. Agency president Russell A. Smith and three other executives left the company to launch a competitor in 1983 and had built up a 3,900-car fleet by 1986. Agency's success also inspired Robert Birrer, owner of a suburban Chrysler-Plymouth dealership from which Frankino had leased 300 cars, to found Replacement Enterprises Inc. in the late 1970s. (Agency acquired Replacement, called a "friendly rival" in a Crain's Cleveland Business article, for $9.6 million in cash and stock in 1988.) Agency's biggest competition, however, came from St. Louis's privately held Enterprise Rent-A-Car, which had built up a 30,000-plus fleet by 1986. These new rivals exerted downward pressure on rental rates, while low used car prices had a correspondingly bad influence on the amount Agency made when it sold its cars on the wholesale market.

Thus, although Agency's revenues and net income continued to increase in the late 1980s, its profitability shrunk. Sales nearly doubled, from $118.3 million in fiscal 1986 to $227 million in fiscal 1989, but net income only increased by 65 percent, from $14 million to $23.5 million during the same period. The gap grew wider as Agency entered the 1990s. Although revenues increased to $331.7 million by fiscal 1993, profits shrunk to $16.8 million. It was readily apparent that the segment of the rental business that Agency had founded was maturing and that prospects for a rebound were slim.

A New Avocation Emerges

Luckily for Frankino and company, other aspects of Agency's business were gathering steam during this same period. The firm's auto sales and financing business evolved out of the natural "recycling" of Agency's fleet. Cars were typically rented for 24 to 30 months, then auctioned at wholesale. By 1985, the company was operating three car dealerships, which economized on both new car purchases and used car sales. Executive Vice-President Peter Zackaroff described the evolution of this sideline in an interview with Donald Sabath for the Cleveland Plain Dealer. In 1988, Agency found itself stuck with several of Chrysler Corp.'s K-cars, which were notorious for rapid depreciation. The crisis, which cost the company $5.6 million that year, compelled Agency to diversify its selection of cars and to retain more of the yield from its used car sales. This well-timed move coincided with the growth of the used car market overall. By 1992, Agency had 18 retail operations nationwide.

This operation spawned another business, auto financing, which was formally organized as Agency's National Auto Credit, Inc. (NAC) subsidiary in 1992. NAC provided financing services to Agency and other dealers, garnering a roster of 750 dealers, four branch offices, 11,000 retail installment loans, and $80 million in receivables by the end of 1993. NAC focused on the "alternative financing market," targeting "customers who have limited access to consumer credit."

As Agency's insurance-replacement business declined, both in terms of gross revenues (down from almost $300 million in 1993 to $132.1 million by 1995) and percentage of sales (down from about 85 percent to less than 35 percent during the same period), the financing segment grew. By mid-1994, NAC boasted 1,150 dealers and $132 million in receivables. The potential was even higher; Agency estimated that only 5 percent of the nation's $100 billion used car financing market went to alternative financers like NAC.

A New Business for the 1990s and Beyond

Financing became so significant and renting so competitive that in 1994 Frankino and Agency's board elected to divest the original rental business to concentrate on the financing operation. That June, the firm formally changed its name to National Auto Credit, Inc. One year later, NAC announced that its fleet of rental cars (which had shrunk from a high of 45,000 vehicles in 1992 to just 8,000 cars by 1995) was on the auction block. The company sold its rental operations to Avis, Inc. in August 1995.

The firm's transformation from renting to financing made for a rough ride, for both stockholders and company executives. The company's stock started its roller coaster ride in 1988, when operating margins began to erode. Rumors that Sam Frankino was gearing up to sell his majority stake in Agency fueled run-ups throughout the late 1980s and into the early 1990s. The stock started at about $14.60 in the beginning of 1989, rose to $24 (in spite of lukewarm operating results) after Frankino publicly revealed that he was in negotiations to sell mid-year, then plunged to $10 by February 1990 when the sale was not forthcoming. Frankino continued to hold about 55 percent of the firm as of 1995. NAC's stock price stood at about $10.50 early that year.

Agency's upper echelon was plagued with high turnover throughout its history, and this trend intensified in the late 1980s and early 1990s. From 1988 to 1994 alone, the company had five different presidents; Frankino served the longest in this capacity during this period. Vincent T. Garrenton, Jr. advanced from executive vice-president (a position he had held since 1974) to president and chief executive officer in 1987, only to resign in October 1988. He was replaced by Kenneth J. Lorek, who served less than a year in his new role. The 64-year-old Frankino resumed the presidency in August 1989, holding Agency's three top offices until June 1992, when Terry W. Holt was elected president and CEO. But Holt's reign under Chairman Frankino also proved short-lived. He resigned in March 1994, when it became clear that NAC would be changing its focus. Holt was succeeded by Chief Financial Officer Robert J. Bronchetti. McDonald & Co. Securities analyst Robert C. Damron judged this last appointment logical, noting that, "It is important to have someone with a finance background at the top," in a 1994 Crain's Cleveland Business article.

Regardless of the executive shakeups, NAC's fiscal performance undoubtedly improved following its transformation. Although annual revenues declined from $303.2 million in fiscal 1994 to $219.1 million in fiscal 1995, its profits surged from $18.2 million to $22.4 million, nearing fiscal 1989's record high of $23.5 million.

Principal Subsidiaries: Agency Chrysler Plymouth, Inc.; Agency Ford, Inc.; Agency Rent-A-Car, Ltd.; National Motors, Inc.; NAC, Inc.