Lexus dealers are cheering the brand’s having expanded a cap that had limited retailers to owning no more than six Lexus stores.
Going forward, a dealership group can own as many as eight outlets, several sources informed of last month’s decision told Automotive News. That gives several groups that were maxed out on Lexus room to buy the brand’s stores once again and therefore means more potential buyers if a Lexus dealer wants to sell. Most public retailers were at or near the old cap.
The move is expected to spur Lexus dealership acquisition activity, which has been scarce in recent years.
“This will increase the value of these franchises because the most well-funded buyers who were at their maximum franchise number are now in the market again to acquire more,” said Erin Kerrigan, managing director of Kerrigan Advisors, a dealership brokerage firm in Irvine, Calif.
Lexus declined to confirm the expansion or comment on its plans. But sources with knowledge of the move gave two reasons:
1. Likely pressure from dealers. Potential sellers felt the cap limited the value of their stores because some of the industry’s most active acquirers were on the sidelines for Lexus transactions. And potential buyers want to grow with Lexus but felt discouraged by the factory.
2. Plans by Lexus to expand its dealership network. A bigger cap gives Lexus room to award new points to top retailers that had been maxed out.
Lexus sales were up 19 percent through May, better than other major luxury brands and the overall industry’s 5 percent gain.
Some groups confirmed that they’ll be on the hunt for Lexus stores again.
“Lexus is a premium brand, and we believe it fits well within our brand mix,” Tony Pordon, executive vice president of investor relations and corporate development for Penske Automotive Group Inc., wrote in an e-mail. “If an opportunity came up to represent the Lexus brand in another location in the United States, we would definitely be interested in learning more.”
Penske, the nation’s second largest retailer, had been at its limit, Pordon confirmed.
Sonic Automotive Inc., the country’s fourth-largest retailer, also was maxed out, President Scott Smith told Automotive News.
“It’s a great brand,” Smith said. “If a good Lexus opportunity came along, we’d certainly be wanting to look at it.”
The move makes Lexus stores worth more, Smith said. “If they’re at their cap, they’re stifling the natural value of these dealerships because the big fish can’t fish.”
Hendrick Automotive Group also already had six Lexus stores, according to its Web site. Hendrick did not respond to a request for a comment.
Lexus is the only brand with a numerical cap on the number of stores a retailer is allowed to own, said Alan Haig, president of Haig Partners, a dealership brokerage firm in Fort Lauderdale, Fla. Accordingly, even groups with room under the cap were very picky about which Lexus deals they would consider buying. A dealership group that could buy only one more might want to wait for the perfect store rather than maxing out with the purchase of one that wasn’t exactly what the group wanted.
The change likely will increase values most for Lexus stores in smaller or medium-sized markets, Haig said. Just three Lexus store transactions have been reported publicly over the past three years, he said. But top retailers inevitably will become maxed out again under the new cap.
“It’s a positive development,” Haig said. “It’s just not a final solution.”