Changing retail market prompts some dealers to get bigger or get out

Dealership buyers who are seeking economies of scale and scope for their businesses and dealership sellers bent on getting as much as they can for their stores while the getting is good, are strengthening an already active buy/sell market.

Erin Kerrigan, managing director of Kerrigan Advisors, a dealership buy/sell advisory firm in Irvine Calif., said she is seeing more sellers coming to market because they are concerned about future changes in the retail auto business model.

“Electric vehicles have the potential to reduce service and parts revenue; autonomous vehicles could result in the reduction of car ownership; or it’s e-commerce, which could result in a more challenging sales environment or the subscription model, which could change the business model as well,” said Kerrigan. “Some are saying ‘if I can receive the kind of pricing that’s out there for my business, perhaps the most prudent thing to do is to sell today rather than pass along to my sons and daughters a business that may experience a great deal of disruption in the future’.”

Flattening new-vehicle sales and costly factory-mandated facility upgrades give dealers more reasons to call it quits, advisers said.

“Clearly, the consolidation of auto retailing has continued and if anything, picked up the pace,” said Sheldon Sandler, chief executive offi cer of Bel Air Partners, a buy/sell advisory firm in Hopewell, N.J. “We are seeing more business than ever.”

Acquisition activity down in 2017

Though the buy/sell market has been quite active over the last five years, activity was down in 2017, said Cliff Banks, president of The Banks Report, which tracks dealership buy/sells.

About 332 dealerships changed hands in 2017, down from about 354 in 2016; publicly-held dealership groups acquired 23 dealerships last year, down from 39 in 2016, said Banks, whose Banks Report is based in suburban Detroit.

That means privately-owned dealership groups, family offices, private-equity groups and others are active dealership buyers and investors.
For example, in October, GPB Capital, a private-equity firm in New York, through its affiliate, Capstone Automotive Group, acquired “a major equity stake” in Prime Motor Group, which owned “25 dealerships and related businesses” in Massachusetts, Vermont, New Hampshire and Maine, according to an October 2017 press release on GPB Captial’s website.
“Capstone hopes to purchase additional new dealerships in New England under the Prime platform and expand into the Rhode Island market in the coming months and raise its annual revenue to $4.5 billion within the next five years,” the press release said.

In January, Atlanta Falcons wide-receiver Julio Jones opened Julio Jones Kia and Julio Jones Mazda in Tuscaloosa, Ala., where he  was a star player at the University of Alabama.The stores are being managed by the Carriage Automotive Group of Gainesville, Ga.

Public companies lead the way

Still, public companies lead the way when it comes to dealership buy/sells. Lithia Motors, which accounted for most of the buy/sell activity by public groups last year, is off to a robust start this year, as is Group 1 Automotive.
In the first two months of this year, Lithia acquired Honda and Acura dealerships in the Buffalo, N.Y., area; the Day Automotive Group in suburban Pittsburgh and Prestige Family of Fine Cars in Bergen County, N.J.
That’s on top of the 18 stores Lithia acquired and the one it opened in 2017.

“The plateauing new-vehicle sales environment seems to be further accelerating the number of acquisitions available, and we believe 2018 activity may exceed the 2017 total,” said Lithia’s CEO Bryan DeBoer, during the company’s quarterly conference call in February.

In January, Group 1 Automotive acquired Audi and Subaru dealerships in El Paso, Texas, and added a Land Rover franchise to an existing Jaguar dealership in the United Kingdom.

In late February, it announced the acquisition of five dealerships from Robinsons Motor Group, also in the U.K.

Pete DeLongchamps, Group 1 senior vice president of manufacturer relations, financial services and public aff airs, said the company’s dealerships in the U.K. and Brazil are a critical part of its business.
“We think it’s an area of growth; investors want growth,” said DeLongchamps, during an interview immediately following Group 1’s quarterly conference call.

International player wants out

And speaking of international strategies, Pendragon North America Automotive, part of Pendragon PLC, an independent operator of franchise dealerships in the U.K., is among the sellers, said Banks.

Pendragon North America is divesting its five locations in California that sell Jaguar, Land Rover, Aston Martin and Chevrolet, the parent company’s website said. Banks said some buyers from other countries pull out of the U.S. market because the retail automotive business is not as easy as it seems.

Manufacturers that exercise their right of fi rst refusal and real estate that is more valuable than the dealership that sits on it are some potential stumbling blocks, Banks said.

“Some had visions of buying up large numbers of dealerships and then they realized how difficult it is to get transactions done,” Banks said.

Expanded used-vehicle sales are a prominent part of most public groups’ strategy. For example, since January 2017, Penske Automotive Group acquired chains of used-car stores in the U.S. and the U.K. and plans to open three greenfield sites by mid-2019.

This year, Penske Automotive expects its standalone used-vehicle superstore operations to sell approximately 70,000 used cars and trucks and generate over $1 billion.