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Dealership consolidation happening at ‘stunning’ pace in Canada

More than half of all new-vehicle sales in Canada are controlled by large auto dealership groups that own dozens of locations and sell a multitude of brands, a trend that’s expected to accelerate as more single-store owners exit the business, industry experts say.

“It’s stunning,” Dennis DesRosiers, president of

DesRosiers Automotive Consultants Ltd., said of the rapid change in ownership structure.

More than half of all new vehicles sales in Canada — 58 per cent — were handled by group-owned franchised stores in 2017, according to data compiled by his Richmond Hill research and consulting company.

That’s up from nine per cent of sales in 2000 as the number of the ownership groups with at least five stores exploded from 27 that year to 121 in 2017, DesRosiers’ data showed.

Cross-border deals, such Edmonton-based AutoCanada’s blockbuster $110 million purchase of U.S.-based Grossinger Auto Group, are also on the rise, while demand for dealership acquisitions remains strong this year, especially among smaller regional chains that own three to seven stores, experts said.

MULTIPLE OFFERS

Buyers continue to outnumber sellers, with some strong auto brands in ideal locations receiving multiple offers. But more sellers are entering the market this year as single-store operators entering their third or even fourth generation look to the future and see a lot of uncertainty and change.

More than 1,000 individual dealer owners have opted to sell in the past decade, most of them to ownership groups, DesRosiers said. Last year alone, 128 dealerships changed hands, with less than a handful remaining owner-operated, he said.

Some of the biggest groups, like Edmonton-based AutoCanada and Toronto’s Dilawri Auto Group, own more than 60 franchised showrooms offering dozens of brands across multiple provinces.

But many are smaller regional players with about half a dozen stores in cities such as Barrie, Windsor, Kitchener, and London, Ont., and an appetite for more.

“The initial targets were the biggest dealers in the country. Now, you’re starting to see the secondary, tertiary dealers get gobbled up by the big groups as the number of big stores become scarcer and scarcer,” DesRosiers said.

Money is driving the trend toward group ownership, he said, noting that the cost of meeting automakers’ rising demands for glossy showrooms has skyrocketed. In 2000, the average dealer borrowed $4.5 million to make capital improvements to his or her store. Last year, that figure had tripled to nearly $16 million, DesRosiers said, citing commercial lending figures.

A single owner-operator relying on personal assets as guarantees “may get uncomfortable with that,” said Chuck Seguin, president of Seguin Advisory Services in Toronto.

The average owner-operator is now in his or her 60s, and even if he/she has kids who are interested in the business, he/ she might think twice about saddling them with that kind of debt, Seguin said.

RECORD SALES

The past several years have been good to auto dealers.

Rising consumer confidence has pushed Canadian new-vehicle sales to new highs, crossing the two-million mark in 2017 for the first time.

“The automobile retail industry is immensely profitable right now. So, people want to get into it, and the people who are in it want to expand and grow,” said Michael Lewicki, president of Lewicki Automotive Consulting Ltd. in Toronto.

With banks eager to lend and interest rates at historic lows, more money is available to finance acquisitions, Lewicki added.

The market for dealership acquisitions remains strong this year, with smaller groups of three to seven stores among the most active acquirers, Seguin said.

Cross-border deals also are becoming more common with Canadian groups taking advantage of lower U.S. valuations, which help offset the higher cost of paying in U.S. dollars, said Erin Kerrigan, managing director of Kerrigan Advisors, Irvine, Calif.

Kerrigan advised AutoCanada’s takeover target Grossinger Auto Group, of Normal, Illinois, in March as well as Oregon-based Wilson Toyota and Subaru, which was bought by Toronto’s Alpha Auto Group in June.

Kerrigan viewed the consolidation trend as the natural progression of events. Few businesses remain family owned beyond the third generation, she noted, adding that many are looking down the road and seeing big changes in the way consumers will buy and own cars, she adds.

“All of this change discussion is accelerating some of the consolidation that would naturally be occurring in our industry,” Kerrigan said.

Either they want to be part of that change or get out.

INVESTOR INTEREST

Private equity – high net worth investors – are also getting in on the action, giving dealers looking to buy an alternative to bank financing and debt, she added.

Dealership valuations are a closely guarded secret. But, a rough rule of thumb is eight to 10 times earnings before taxes, depreciation and amortization for a luxury brand, such as Mercedes-Benz, or a popular import, such as Toyota, and roughly half that for a domestic brand, such as General Motors or Chrysler.

In March, AutoCanada, the country’s only publicly traded dealership group, paid $110 million for Grossinger Auto Group, an eight-store chain in Illinois, a deal that would add US $400 million in sales to its $2.8 billion in annual revenue.

But every deal is unique, said Samir Akhavan, managing director of Templeton Marsh, an automotive-mergers-and-acquisitions advisory company in Toronto. Individual operators can still make a very good living, industry experts said, especially if the family has deep pockets or the dealership is located in a smaller, less competitive market. But they’re getting fewer and farther between.

“When I was a dealer, I painted the walls the colour I want. If I want to change the carpet, I change it,” said Akhavan, who once owned a BMW store.

“These days, BMW says, ‘We're changing the showroom floor tiles from grey number 12 to grey number 15.’ You look at the tiles. There’s really no difference. And then they say, ‘You have to buy them here at $27 a tile.’

“And you think to yourself, ‘Didn't I just do this four years ago? To heck with this, I’m going to sell.’”

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