Auto retail is a distinctly different business in 2024 than it was in 2019. The pandemic motivated dealers to take a hard look at operating expenses, particularly personnel expense, resulting in significant improvements in operational efficiencies. By way of example, the average dealership in 2023 operated with a 10% lower headcount than it did in 2019, despite revenue per dealership hitting peak levels. This resulted in revenue per employee of $1.16 million, 32% higher than 2019 (see Chart 1). The robust rise in operating efficiency and employee productivity is leading to a much more profitable auto retail business model today.
“We're still 7% down in terms of head count in the US versus 2019 on a same-store basis. And at this time, I don't see any of that head count returning.” - Daniel McHenry, SVP & CFO, Group 1 Automotive Third Quarter 2023 Earnings Call
In addition to fewer employees producing more revenue, auto retail has become increasingly reliant on big data and technology to optimize sales. Perhaps the best example of this changing dynamic is Hyundai’s recent announcement of its Amazon partnership for the sale of new vehicles. While Amazon’s entrance into auto retail could lead to a decline in future new vehicle gross profits (and may violate franchise laws in certain states), the digital sales engine could dramatically lower the cost of sales for dealers, reducing expensive human capital currently required to complete a new vehicle transaction. The online marketplace may also enable a more seamless data driven process for the consumer.
“Together, we will provide customers with more of the buying experiences they want—and support dealers with an efficient and effective selling platform.” - Marty Mallick, Amazon’s Vice President for Worldwide Business and Corporate Development November 2023
In addition to Amazon’s auto retail debut, the tremendous demand for Pendragon’s Pinewood technology, ultimately acquired by Lithia, is an indication of the rising importance of proprietary retailing systems to enhance performance and reduce the cost of retailing a vehicle. With the AI revolution, auto retailing will undoubtedly continue to change, making 2019 and the historical way of retailing a vestige of the past.
Kerrigan Advisors’ 2023 OEM Executive Survey found that a significant number expect to see changes to the old way of doing business with the relationship between the dealer, consumer and OEM evolving rapidly, particularly as EVs gain market share (see Chart 2).
In addition to operational changes to the auto retail model, revenue per dealership has increased an impressive 19% since 2019 (see Chart 3). Some of this increase is driven by OEM price adjustments on new vehicles and inflation; however, a meaningful amount comes from a substantial increase in fixed operations revenue up more than 14% since 2019 (see Chart 3). With service and parts considered the most profitable and stable segment of the auto retail business model, this rise will meaningfully impact future profitability projections, particularly given the record age of the vehicle fleet in the US and increasing complexity of new vehicles.
“The greater complexity of vehicles is leading to higher values per repair order.” - Mike Manley, CEO, AutoNation Third Quarter 2023 Earnings Call
With this backdrop, the idea that the industry will return to a pre-pandemic way of life seems out of sync with reality. Buyers who seek to superimpose 2019 earnings as a replacement for projecting normalized earnings are overlooking the substantial and evolving differences between the pre- and post-pandemic auto retail business model. With the rebound in inventory availability, sales are expected to rise in the coming years, potentially returning to the 17 million SAAR level achieved for four consecutive years pre-pandemic. This would further increase sales per dealership above today’s current record and likely lead to a rise in earnings.
Simply put, 2019’s dealership financial performance is not only almost four years old, it is also a reflection of a very different retailing environment, making 2019’s earnings increasingly irrelevant to the value of a franchise. To further elucidate this point, taking the industry’s average earnings in 2019 against 2023’s sales would result in a net to sales figure of 2.0% (see Chart 4). Few dealers believe the industry’s profitability margins will normalize below pre-pandemic levels and yet by looking to 2019 profits as a guide for 2024 valuations, that is exactly the assumption.
“While SAAR levels have been trending higher, it is important to note we are still below historical levels.”- David Hult, President & CEO, Asbury Automotive Group Third Quarter 2023 Earnings Call
With this in mind, Kerrigan Advisors recommends buyers invest additional time analyzing their expectations for future earnings when determining valuation. This analysis will include projections regarding new and used unit sales (likely increasing) and margins (likely decreasing), as well as fixed operations (likely rising) and operating expenses (likely flat or potentially declining). In so doing, buyers will more accurately assess the value of an acquisition’s future income stream and expectations for future performance. A dealership’s 2019 performance will have little to do with either.
Kerrigan Advisors is the leading sell-side advisor and thought partner to auto dealers nationwide. Since its founding in 2014, the firm has led the industry with the sale of more than 290 dealerships generating more than $9 billion in client proceeds, including two of the largest transactions in auto retail history – the sale of Jim Koons Automotive Companies to Asbury Automotive Group and Leith Automotive to Holman. The firm advises the industry’s leading dealership groups, enhancing value through the lifecycle of growing, operating and, when the time is right, selling their businesses. Led by a team of veteran industry experts with backgrounds in investment banking, private equity, accounting, finance and real estate, Kerrigan Advisors is the only firm in auto retail exclusively dedicated to sell-side advisory, providing its clients the assurance of a conflict-free approach.
Kerrigan Advisors monitors conditions in the buy/sell market and publishes an in-depth analysis each quarter in The Blue Sky Report®, the industry authority on dealership buy/sell market trends and valuations and includes Kerrigan Advisors’ signature blue sky charts, multiples and analysis for each franchise in the luxury and non-luxury segments. To download a preview of the report, click here. The firm also releases The Kerrigan Index™ comprised of the seven publicly traded auto retail companies with operations focused on the US market. The Kerrigan Auto Retail Index is designed to track dealership valuation trends, while also providing key insights into factors influencing auto retail. To access The Kerrigan Index™, click here. To read the 2024 Kerrigan Dealer Survey, click here. To read the 2025 Kerrigan OEM Survey, click here. Kerrigan Advisors also is the co-author of NADA’s Guide to Buying and Selling a Dealership.
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