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The majority of dealers surveyed by Kerrigan Advisors think the value of their dealership or group will remain the same or increase in the next 12 months, as dealers have high expectations for brands such as Subaru and are less bullish on franchises such as Nissan.

Twenty-six percent of dealers expect their store value to increase in the next year, 60 percent expect it to stay the same, and 14 percent predict a decline, according to the first Kerrigan Dealer Survey, published this week by Kerrigan Advisors and based on responses from 650 franchised dealers — domestic, import, single points and groups — from around the U.S. They were surveyed from June 6 to Sept. 30.

Kerrigan: Few dealers see dip

Erin Kerrigan, managing director of the sell-side firm in Irvine, Calif., said that despite some economists predicting a recession in the next year or two, “I was very pleased with how few dealers thought the value [of their dealership] would go down.”

Dealer sentiment mirrored findings in Kerrigan Advisors’ quarterly Blue Sky Report on the buy-sell industry. In the second-quarter report, Kerrigan Advisors said blue-sky values, including intangible assets, rose less than 1percent to $6.2 million in the first half of 2019.

Dealers think Subaru, Toyota, Porsche, Volkswagen, Mercedes- Benz, Honda and Lexus franchises are the most likely to increase in value over the next year, according to the survey. Subaru led the way, with 43 percent of dealers expecting Subaru dealership values to rise.

On the flip side, dealers are least optimistic about the value of Nissan, Infiniti, Cadillac and Buick-GMC franchises, with the majority of dealersexpecting the value of those stores to decline in the next 12 months. Sixty-five percent of dealers — highest in the survey — expect the value of Infiniti and Nissan stores to slide.

“Franchises which are expected to increase in value have strong or rising buyer demand, while franchises that are expected to decline in value have low or declining buyer demand,” according to the study.

Kerrigan Advisors downgraded Infiniti and Nissan blue-sky multiples in the second quarter, giving a negative outlook for Nissan because of automaker challenges and “earnings swings.” It boosted Volkswagen’s blue-sky multiple to positive during the second quarter.

The survey also indicates dealers have confidence in the values of certain brands. More than 60 percent of respondents predict values of Honda, Lexus, Toyota, Mercedes-Benz and BMW stores will remain the same in the next year.

Kerrigan said those franchises are among the most attractive investments and are consistently profitable. “They retain their value through challenging times and strong times,” she said.

Dealers appear to be split — either optimistic or pessimistic — on Volkswagen and Volvo. The survey found 24 percent of dealers expect the value of Volkswagen stores to rise in the next year, but 28 percent expect a decrease. For Volvo, 20 percent expect a rise in value, while 29 percent expect a decrease.

“The jury is out on those two franchises, and I think they could truly go either way, and the market thinks that way as well,” Kerrigan said.

Despite falling US auto sales and a changing retail landscape, new car dealerships are flying off the lot.

For the fifth year running, dealership buy-sell transactions topped 200 in 2018, and are projected to surpass that mark again this year, according to industry broker Kerrigan Advisors. Not surprisingly, the big keep getting bigger: the number of auto groups with more than 10 dealerships now stands at 176, a 65% increase since 2009.

Even actor, businessman and former rapper Mark Wahlberg joined the buying frenzy last year, investing in a dealership in Columbus, Ohio, that now goes by Mark Wahlberg Chevrolet. What’s next, Harrison Ford selling us Chryslers?

The vast majority of buyers are other dealers, who have a built-in advantage because the automakers themselves – Ford, GM and others – must approve who gets a dealer franchise, and they insist on buyers with previous experience in the business or having one as a partner. Wahlberg teamed up with an existing dealer to get his foot in the car dealership door.

Private equity previously avoided auto retail because of that approval process, but that began to change a few years ago after Warren Buffett’s Berkshire Hathaway acquired auto dealer Van Tuyl Group (now Berkshire Hathaway Automotive) for a reported $1 billion-plus. At the time, Van Tuyl was the fifth-largest dealership group in the US, with more than $9 billion in revenue. The deal served to open the eyes of PE and others as to the possibilities in the space, said SunTrust Robinson Humphrey Managing Director James Taylor.

“The car business is really, really good,” Taylor said, a point no longer lost on growth capital.

Specifically, there are two things about the business that private equity finds hard to resist: consistent profitability and aging ownership without succession plans. Despite slowing new vehicle sales, dealership gross profits have increased every year since 2014, reaching an average of $6.9 million per dealership in 2018, according to industry sell-side advisor Erin Kerrigan. One reason is continuing growth in service and parts, auto retail’s most profitable revenue stream. Service and parts gross profit margins are nearly 10-times higher than new vehicle sales.

Meanwhile, Father Time is kicking tires in a showroom near you. In the Northeast and Southeast, the average age of a dealer principal is 70. And many single-store “mom-and-pop” dealerships across the country are facing succession issues.

“A lot of these families are running up against transitioning to the third or fourth generation, which is more statistically challenging,” Kerrigan said, noting that only 12% of family businesses transition to the third generation and only 3% to the fourth.

As local, independent dealerships give way to multi-state groups, will it matter to consumers? Dave Cantin, CEO and founder of Dave Cantin Group, an automotive retail M&A firm, said it could result in better deals and a more pleasant car-buying experience.

“The days of negotiating two hours to buy a car are over,” he said, because larger, more efficient dealer groups can afford to give you a break. “It’s no longer a focus on how much can we make on every car, but how many cars can we sell to you and your family and service them for years to come.”

Maybe now would be a good time for all those mysterious sales managers in the back room to approve this offer: early retirement.

Jeff Sheban is Mergermarket’s Chicago-based Midwest Editor; Deborah Balshem is a senior reporter who covers multiple industries from Fort Lauderdale.

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 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.

DARREN GUIVER started out as a trainee at a Ford dealership in 1986. He moved quickly up through management, buying dealerships until he had created Spire Automotive group, a network of 12 across south-east England. Two years ago Group 1, America’s third-largest dealership network, made him an offer he couldn’t resist. So Mr Guiver joined thousands of small dealers selling out to global investors and dealership groups.

Since 2014 around 1,000 such dealerships have been bought or sold in America. According to Kerrigan Advisors, a firm that helps sellers, around 200 more will change hands this year. The largest deal to date came in 2015, when Warren Buffett bought Van Tuyl Group, a network of 78 dealerships with over $8bn in annual revenue. Holding companies such as South Africa’s Imperial and Super Group have been buying showrooms across England. Penske, an American group, has become the largest dealer network in Europe by revenue.

Car showrooms might seem an unlikely asset class to go global. For decades manufacturers relied on individual franchise-holders to sell and repair vehicles in local markets. Carmakers liked this fragmented market, because dealers lacked the clout to demand large discounts. For franchise-holders, the advantage was having a local monopoly on the brands they sold.
But the car market is changing in ways that favour consolidation. The spread of ride-hailing means fewer young city-dwellers are buying cars. Larger networks will be better placed to survive, says Andy Bruce, the boss of Lookers, since they have the scale to offer better deals on high-margin financing and insurance. Moreover, says Gianluca Camplone, a partner at McKinsey, a consulting firm, only the biggest dealerships will have the capital to invest in the equipment and training needed to service high-tech electric and, one day, autonomous vehicles.

For manufacturers, consolidation may mean a loss of pricing power. But there is a consolation, says David Kendrick, who specialises in dealership transactions at UHY Hacker Young, an accountancy firm. Interacting with a few dozen networks will be more straightforward than dealing with lots of individual ones—though carmakers still usually seek to ensure that no retailer has more than 10% of a national market.

The appeal of dealerships as an investment is boosted by their location, generally on major roads near retail centres. Such prime plots lend themselves to repurposing as industrial warehouses or e-commerce fulfilment centres, says Tim Savage of CBRE, a property company. Although interiors are tailored to the brands sold, the structure is frequently made of steel portal frames with internal partitioning that is easily redesigned. And it is often a condition of franchises that car showrooms are refurbished every three to five years, meaning they stay in excellent condition.

For small franchises, the main reason for selling may be that they would struggle to find enough capital on their own. Carmakers want their products sold in bigger, more luxurious outlets than they used to, says Mr Guiver. This year he became managing director of Group 1’s British operations, overseeing 53 dealerships across the country. Though he no longer owns the business he built piece by piece, he will still see the investment pour in.

After years of boosting incentives and discounted deliveries to rental-car fleets to fuel its U.S. sales growth, Nissan Motor Co. began this year promising a new era of discipline. The self-restraint has proved to be on-again, off-again.

The Japanese automaker may have gotten carried away with the austerity in April, when it shocked the market with a 28 percent sales plunge. But incentive spending and fleet deliveries picked back up again in May, and discounts were on the rise again in June.

Nissan’s intermittent moderation underscores how challenging it is for carmakers to kick unhealthy habits that prop up sales but can do damage both to earnings and the long-term health of their brands. Taking one’s medicine also is more challenging amid a market slowdown. While automakers are expected to cap a stronger-than-anticipated first half with their sales reports Tuesday, industrywide demand is still expected to decline a second straight year from 2016’s record.

“In a period of off-peak sales, it’s that’s much more difficult to wean yourself from the drug of incentives and fleet sales,” said Michelle Krebs, a senior analyst at Cox’s Autotrader. “Even if Nissan doesn’t spend a lot on incentives, its margins are still getting squeezed by rising interest rates and commodity prices.”

Automakers probably sold cars and light trucks at an annualized rate of 17 million in June, according to a Bloomberg News survey of analysts. The pace, which is adjusted for seasonal trends, was 16.7 million in June 2017, according to researcher Autodata Corp.

While the trade war President Donald Trump is fighting on various fronts is spooking the auto industry, only tariffs on steel and aluminum have actually taken affect, meaning there’s probably been limited impact on demand.

Nissan’s inconsistent approach to incentives and fleet sales has been giving analysts fits. The magnitude of the massive drop the company reported for April caught market observers completely off guard.

“It’s been particularly challenging trying to forecast for Nissan following the abysmal month they had in April,” said Jeremy Acevedo, an analyst at Edmunds. “They really closed the lid on incentive spending, and then reopened it in May and June.”

Nissan Taps Brakes, Then Hits Gas

The Japanese automaker boosted incentives in May after April’s big sales drop.


Sources: Cox Automotive, J.D. Power
Notes: *Total sales percent change; **fleet as a percent of total sales; ***spending as a percent of average transaction price

During the first 10 days of last month, Nissan dangled average discounts of $4,540 per vehicle to retail customers, up 5.3 percent from a year ago, according to J.D. Power data obtained by Bloomberg. That’s more than the $3,708 average incentive spending by all automakers, which was down 2.5 percent.

Even so, Nissan is the only major automaker projected to report a sales decline in June, which has one more selling day than a year earlier. Brian Brockman, a U.S.-based spokesman for Nissan, said the company expects incentive spending to decline through the remainder of the year.

Spending War

Reducing Nissan’s reliance on incentives was one of the challenges Chief Executive Officer Hiroto Saikawa faced when he took over in April of last year from Carlos Ghosn, who remains Nissan’s chairman.

A little over a month into the job, Saikawa issued a surprise forecast that operating profit would drop in the fiscal year that ended in March. Nissan ended up cutting its guidance twice before the year was over, as promotional costs jumped and it dealt with an embarrassing safety inspection scandal in Japan.

“We want to grow, but we need to be a bit cautious about not getting too deep in a war with the spending, or pushing the volume,” Saikawa, 64, said during an interview in January at the North American International Auto Show in Detroit.

Months after that call for vigilance, Nissan reported a more than 30 percent plunge in North American operating profit for the fiscal year.

Dealer Difficulty

Employing too much incentive spending and deliveries to rental fleets risks hurting Nissan’s brands by depressing the value of the vehicles that regular consumers own. The company’s sales tactics also have been a source of contention among its retailers, according to Erin Kerrigan, the founder of Kerrigan Advisors, a broker that helps dealers sell their stores.

When dealers reach monthly sales targets Nissan sets to qualify for certain bonuses, the company is more aggressive than other manufacturers in setting subsequent goals even higher, Kerrigan said. Its stores generally sell for about 3.5 times adjusted annual earnings, compared to multiples of 5.9 for Toyota and 5.7 for Honda franchises.

“Nissan stores are in lower demand because it’s just very difficult for dealers to be consistently profitable with that brand,” she said.

While Nissan’s sales tactics have been spotty of late, it’s been more consistent with regards to production. The company has reduced vehicle output from U.S. plants by 13 percent this year through May. It assembled 17 percent fewer autos in Mexico, a source of models including the Sentra and Versa sedans.

Paul Sansone, executive manager of a Nissan dealership in Neptune, New Jersey, said he tries to reach the company’s sales targets through an aggressive program to train, compensate and retain sales representatives.

He said he’s happy the company is at least trying to step back from what he calls “aggressive’’ discounting.

“I’m selling cars and making money again,” Sansone said. “At least I am. I know other Nissan dealers who are struggling with their margins.”

— With assistance by Virginia Van Natta

For the Shamas family, the decision to sell seven auto dealerships in Southern California was not easy. After all, the family has been selling cars in and around Los Angeles since 1955.

Still, Carol Shamas’ husband, Darryl Holter, says selling the dealerships for an undisclosed amount in July was the right move given the potential changes coming to the auto industry.

“With all the things we’ve talked about, autonomous cars, ride-sharing and car-sharing, you wonder if the auto dealership will be transformed from a full-service automotive provider to basically a delivery agent for the manufacturers,” Holter tells CNBC.

Holter’s feelings about the uncertainty of the future of the auto business is not a surprise to Erin Kerrigan, who runs Kerrigan Advisors, which consults companies or individuals buying and selling dealerships.

In the last year, Kerrigan has noticed an important shift in how small, independent auto dealers view the future.

“More and more dealers are saying, ‘Well, it probably is time to exit instead of rolling the dice for the next generation and have them handle potentially a lot of changes in the future,'” said Kerrigan.

There are more than 18,000 auto dealerships in the U.S. owned by more than 8,000 individuals, private companies and publicly traded firms. The overwhelming majority of them enjoy strong profits due to two straight years of auto sales topping 17 million vehicles, with 2017 on pace to do the same.

So why would someone want to sell a dealership right now?

For starters, the value of the average dealership (real estate and goodwill) is at a record high of $16.9 million, according to Kerrigan Advisors. In addition, many independent dealers, the so-called mom and pop shops, are family run and the owners may not have someone in the next generation interested in being an auto dealer. That brings in the third factor Kerrigan is hearing: The auto business could dramatically change as automakers develop ride-share companies, autonomous-drive vehicles and electric models that may not require as much service.

“There’s no question that auto retail and dealerships have a business model future,” said Kerrigan. “It just might not be the one that dealers want to be a part of.”

Mark Scarpelli, who owns Raymond Chevrolet in Antioch, Illinois, sees the future in a different light. His family has owned Its dealership for 60 years and has no intention of selling it anytime soon.

“If we have autonomous cars, electrification, we are here to serve the public and sell automobiles,” said Scarpelli. “I think you are going to see a new breed, a new generation and excitement in our business for dealers going forward.”

Last month Adam Jonas, a widely followed auto analyst with Morgan Stanley, predicted the industry’s 8,000 plus auto dealers will eventually consolidate and become 10 mega-dealers who operate more as fleet management operators overseeing huge ride-hailing and car-sharing operations.

Extreme? Perhaps.

But as more mom and pop auto dealers survey their operations, there are people like Holter, who believe this is the time to sell.

“Stand-alone dealers may be able to continue in small markets, but I think they’ll have trouble in big metro markets,” he said.

“There are these trends, and they are a challenge for the future.”

AutoNation Inc., AN 0.92% the largest seller of new vehicles in the U.S., is making a $500 million bet on the used-car business. To pay for it, the dealer chain is selling what has long been the industry’s most precious asset outside of the cars: property.

The Fort Lauderdale, Fla.-based company’s move follows a broader trend in the business. As car buyers increasingly use smartphones and internet tools to shape shopping decisions, several large chains are paring property holdings as they shrink the amount of inventory they keep in eyeshot of the showroom.

Auto dealers own or lease about $130 billion of real estate in the U.S., according to Kerrigan Advisors, an advisory firm that helps dealers sell their businesses. Dealers traditionally have sought land on high-traffic roads with enough space to store gobs of inventory, requirements that led to significant real-estate investments.

AutoNation, for instance, owns $3 billion of real-estate assets. It will sell some of it to help raise as much as $500 million to create a line of stand-alone used-car stores called “AutoNation USA,” which the company says could deliver higher margins than the new-car business.

“It’s a very prudent approach to brand extension,” AutoNation Chief Executive Mike Jackson said in an interview.

Car sellers are seeing buying behavior rapidly change, with shoppers sometimes spending more time searching for better deals while in the showroom instead of looking at a dealer’s inventory. Aware of this trend, inventory is being stored off-site on cheaper land

Nearly 90% of car shoppers use the internet to shop for a vehicle, according to a 2016 study by the third-party shopping site Autotrader.com conducted by the research firm IHS Automotive. Of the customers who use their smartphones at a dealership, the study found 59% are comparing prices for vehicles at other dealerships while 38% are comparing inventory at other dealerships.

At the same time, commercial real-estate values have increased for the past eight years, amplifying the underlying property’s role in the overall value of a dealership.

For those dealers who own the land in a prime location and whose business is thriving, the real estate is an asset, said Jamie Albertine, an analyst at Consumer Edge Research LLC. “But our sense is the retail strategy is poised to shift considerably in the next 15-20 years such that land ownership could potentially be a burden,” he said.

Brad Carter, principal of Greystone Valuation Services that specializes in auto dealerships, said it doesn’t make sense anymore for dealers to invest in a big piece of land on auto row. He said the auto dealership model now resembles the trajectory of bookstores, which started as mostly mom-and-pop stores and were overtaken by big-box retailers like Barnes & Noble Inc. and Borders Group Inc., which went out of business in 2011.

“The big-box retailers came in and overnight the mom-and-pop stores were gone,” he said. “The big-box retailers had big and expensive stores. But then people realized they could buy these books on the internet. Why walk into a $3 million Barnes & Noble?”

Dealer groups at the forefront of this change are responding in different ways: Some are choosing to sell underperforming dealerships on expensive land, while others are finding ways to save money by storing cars on less-expensive real estate.

Erin Kerrigan, founder of Kerrigan Advisors, said for those dealers that own the land, it is a good time to sell.

“It would not be a bad idea to sell valuable land and then deploy the money to buy more dealerships,” Ms. Kerrigan said.

Dealerships looking to expand, meanwhile, are confronting record-high prices for land, leading players like Sonic Automotive Inc. to buy smaller plots. Jeff Dyke, executive vice president of Sonic, said many of the stores operated by Sonic’s used-car chain, EchoPark, are located closer to neighborhoods, atypical areas for car dealerships, and carry very small amounts of inventory.

“What we did is develop a hub and spoke model,” Mr. Dyke said. “For example, we have a large store in Thornton, Colo. with smaller stores surrounding it. We are going through a massive transition in our industry…we know that down the road, we’ll need less and less real estate.”

Mr. Dyke said EchoPark uses technology to determine what vehicles sell best at each dealership location. If a vehicle a customer is interested in isn’t on the lot, EchoPark will ship the vehicle to that location.

Holman Automotive, a dealership group with 33 locations across the U.S., has adopted a localized strategy, leasing land in more expensive cities like Palo Alto, or buying smaller plots of land and building up.

“The big thing we’re able to do is lease or purchase space off site,” said Brian Bates, president and CEO of Holman Consumer Services. “We can store cars in old warehouses about two to 5 miles away. It’s much more cost effective.”