How do you feel the industry has changed since the pandemic?
Howard Keyes: I think the pandemic showed us how much gross we were leaving on the table before 2020. In many ways, it was a real gift to the industry. Auto retail has never been so profitable. While I am hopeful lessons were learned during these tremendous years of prosperity, I also know how competitive the car business is and expect we will return to lower grosses and higher days’ supply in the future.
Howard Tenenbaum: I feel the last couple of years during and after the pandemic, it became really easy to sell cars for larger-than-usual margins. It was hard to tell who was doing a good job, what stores were good and not so good, as everything was just too easy. I think the real test is how we put the genie back in the bottle and go back to selling cars the way we used to and whether our employees will work for the same wages that they used to work for historically. There is likely going to be an industry shift in personnel based on compensation that has been made over the last few years and is potentially unsustainable going forward.
Do you expect to see more consolidation in our industry?
Howard Keyes: Yes, I do think consolidation is a trend that is not going away. It is very difficult to be a smaller dealer today, particularly in a major metro. If you don’t have big stores or a large group, I think the future will be challenging. Scale will be a key component of success in the future, and that requires size.
Howard Tenenbaum: I do think there will be more consolidation due to an aging dealer population and a market shift back to selling cars with normalized margins. I also think that certain dealers will make the decision to sell versus commit to the capital expenditures that are necessary to keep up with manufacturer requirements, especially given today’s high construction costs due to inflation.
Scale will be a key component of success in the future, and that requires size.
What are your thoughts on how electric vehicles will affect the auto retail business model?
Howard Keyes: I think EVs are coming, and everyone needs to be prepared for the changes that will happen in the business as a result. EVs need less service, and that will certainly impact the future of fixed ops. That said, EVs are still cars, and I expect we will continue to make good margins on them and sell attractive F&I products as well as take in trades to resell. That’s what car dealers do.
Howard Tenenbaum: We are currently selling EVs right along with ICE models. I don’t think this business model will change anytime soon. As far as service, I think EVs are too new to predict. However, at some point, we will certainly see a shift from labor gross to parts gross as we start replacing batteries and EV components.
Do you have concerns about how some manufacturers are changing the retail business model?
Howard Keyes: I have been a bit surprised by some of the announcements by OEMs about their plans to go direct to consumer in one way or another. It seems to me their memories are short. OEMs have tried this in the past and failed. While Tesla is certainly an outlier, I expect others will have a very hard time following them. I think the dealer is here to stay..
What’s your outlook for 2023?
Howard Keyes: We expect 2023 to be another strong year for our dealerships. Maybe not as incredible as 2022 and 2021, but still very strong.
Howard Tenenbaum: I feel 2023 will be a good year, but a little more challenging than 2022. I think in the second half of the year, we could see margins erode, inventory levels increase and advertising expenses rise. We have enjoyed a low-interest-rate environment for some time. As inventory returns in this higher-interest-rate environment, it’s going to get quite expensive for most dealers. It’s times like this that you really have to be on your game. This is where the last few years and the ease of doing business needs to be reversed in your organization. I’m sure a lot of bad habits were created in 2021 and 2022. In 2023, we need to get back to the basics. Some dealers will do that better than others.
Do you expect higher new-vehicle gross margins will remain, or will the industry return to the pre-pandemic lows?
Howard Keyes: Auto retail is competitive. As inventories become more available and demand is met or exceeded, I expect margins will come down. Maybe not all the way down to the lows we saw in 2019, but definitely lower than what we saw last year and the year before.
Howard Tenenbaum: It comes down to supply and demand. Once you have one too many cars on the lot, which you will, I think we go back to pre-pandemic lows. I’d like to say that maybe we learned something during this pandemic, as we did back in 2009 and 2010. But really, the last couple of years were so easy due to lack of inventory and high demand that I think really bad habits have manifested. Everybody did very well, and I think we need to go back to the blocking-and-tackling fundamentals that we’ve talked about in this industry forever and get back to actually selling cars. That’s our challenge going forward.
Going forward, where would you acquire dealerships, and which brands are of greatest interest to you?
Howard Tenenbaum: Going forward, we are looking to grow our footprint in the Southwest with the right manufacturers. Top of the list for us would be Toyota, Mercedes-Benz, Lexus, BMW and Audi.
Why did you choose Kerrigan Advisors to advise you in your sale?
Howard Keyes: We have known Erin Kerrigan for a long time. Kerrigan Advisors’ track record is beyond any other firm in the industry, particularly on the largest transactions. We were grateful for the hard work of her whole team and her insight into the buyers who could expedite on a large, complex group acquisition. Kerrigan Advisors proved to us they have unparalleled insight into the most aggressive consolidators in our industry.
Howard Tenenbaum: We chose Kerrigan Advisors because of their level of professionalism, knowledge of the market, tremendous network and focus on confidentiality. From start to finish, our transaction closed in 90 days. We attribute that timeline to Kerrigan Advisors.