Americans who have been buying cars from the same mom-and-pop dealership for generations could be greeted by a different kind of for-sale sign the next time they visit.
Small to mid-size dealer groups are selling their businesses to auto-retail giants or investment firms at a robust clip even as auto sales remain strong. The trend—highlighted by Warren Buffett’s entry into the dealership business in 2014—has gathered momentum as electric, shared and autonomous vehicles threaten to reshape the car business.
Enessa Carbone recently sold the family’s New York stores to Lithia Motors Inc., a publicly traded company with a $2.5 billion market capitalization. Her stores are among about 1,000 dealerships expected to have changed hands between 2014 and 2018, according to California dealer sell-side adviser Kerrigan Advisors. “It is not your father’s dealership,” Ms. Carbone said after selling a business founded by her grandfather in the 1920s. “Given the changes in the industry we were not sure that was a challenge we wanted to have one of our children take on.”
Dealers say they need to as much as triple revenue in the next half-decade to offset shrinking margins and increasing competition from companies that didn’t exist a decade ago.
The internet has made car prices more transparent for customers and given them the ability to shop around. It has also enabled online purchases of used cars. Electric-car maker Tesla Inc. is using online ordering to circumvent dealerships entirely. And Uber Technologies Inc. envisions a world where more people will rely on ride-hailing apps instead of owning a car.
These developments have helped fuel consolidation of the 16,800 U.S. dealerships into the hands of fewer owners. The top 50 dealer groups are poised to book more than $175 billion in revenue this year, compared to $144 billion when Mr. Buffett’s Berkshire Hathaway Inc. entered the sector four years ago, according to industry publication Automotive News.
Erin Kerrigan, founder of the Kerrigan advisory, said about 200 dealerships changed hands in 2017, near an all-time high with a similar level of transactions to take place this year. Sellers are scrambling to cash in while commercial real estate prices are high, or partner with a deep-pocketed investor, she said.
Car makers, which can block a sale, historically resisted transactions with private-equity owners or family offices. But they have warmed to the idea as the business has become more capital intensive, thanks to the need to invest in new technologies and offerings, such as subscription services, as a way to diversify their businesses, according to Cliff Banks, founder of The Banks Report, which tracks automotive retail.
New England’s Prime Motor Group is not a small business, but its former owner David Rosenberg realized it wasn’t quite big enough to compete in this new era. He sold the company—which generated $1.5 billion in sales of cars, financing and service annually at 25 dealerships—to Capstone Automotive Group in September.
Capstone retained Mr. Rosenberg as chief executive. He’s charged with expanding into new markets and raising annual revenue to $4.5 billion within five years.
“In order to survive and thrive you need scale and scope and access to capital,” he said.
For many years, analysts said that the dealer business was too fragmented and localized for owners to get serious benefits from consolidation. But now, big dealer groups such as AutoNation Inc. and Group 1 Automotive Inc. see potential for economies of scale.
Mr. Rosenberg, for instance, is using investments from his Prime dealership’s new owner to develop proprietary software for the dealership group, launch a finance company and potentially offer subscription services. Such a strategy could mirror Cadillac or Porsche AG, which charge a flat monthly fee to buyers for virtually unfettered use of a variety of vehicles.
Annual auto sales have hovered around 17 million for several years and are expected to stay in that range, and dealerships of https://www.chem-ecol.com/xanax/ all sizes are benefiting from a resurgence in sales of higher-priced pickups and SUVs thanks to falling gasoline prices.
Still, dealer margins are shrinking amid tough competition and the increased pricing transparency enabled by the Internet. Dealers took home about 2.5% of the selling price of the average new car in 2017, down from about 4.7% in 2009, according to data from the National Automobile Dealers Association; used-car margins slipped to 6.9% from 10.7% in 2009 during that period.
More potential headwinds loom. One example: Electric cars, which are expected to represent a growing chunk of U.S. sales in coming years, need less maintenance than their gasoline-powered counterparts because they don’t have an engine or a transmission. That could cut into the revenue that dealers make from their service bays.
Further into the future, many analysts foresee a time when many more Americans choose not to own a car, relying instead on a fleet of hailable autonomous, electric vehicles, which could give dealerships a new purpose as a place for charging and housing vehicles during off hours.
As profit margins have declined, more of the value in each dealership is in the land it sits on. In the past, owners often chose to hold on to their real estate and rent it to the person who bought their dealership. But commercial real-estate values in the U.S. have risen more than 25% above pre-recession highs, according to the real estate research firm Green Street Advisors, and this has owners increasingly wanting to sell everything.
Kerrigan Advisors is honored to work with auto retailers throughout the US to enhance the value of their enterprise. Learn more about our services below:
Customized and confidential sell-side services for higher value dealerships and dealership groups nationwide, with a proven record of achieving the highest sale price per transaction of any firm in the industry.
Capital raising and partnership structuring for growing dealership groups, supported by the largest investor database in the industry.
If you are a buyer in today’s market, Kerrigan Advisors welcomes the opportunity to learn about your acquisition criteria and include you in Kerrigan Advisors’ proprietary Buyer Database.
We welcome the chance to learn more about your acquisition criteria so that we can contact you in the event a client matches your investment profile.
Contact us to learn more about Kerrigan Advisors’ client services, or to have a conversation about the buy/sell market. All of our conversations are 100% confidential.