Despite falling US auto sales and a changing retail landscape, new car dealerships are flying off the lot.
For the fifth year running, dealership buy-sell transactions topped 200 in 2018, and are projected to surpass that mark again this year, according to industry broker Kerrigan Advisors. Not surprisingly, the big keep getting bigger: the number of auto groups with more than 10 dealerships now stands at 176, a 65% increase since 2009.
Even actor, businessman and former rapper Mark Wahlberg joined the buying frenzy last year, investing in a dealership in Columbus, Ohio, that now goes by Mark Wahlberg Chevrolet. What’s next, Harrison Ford selling us Chryslers?
The vast majority of buyers are other dealers, who have a built-in advantage because the automakers themselves – Ford, GM and others – must approve who gets a dealer franchise, and they insist on buyers with previous experience in the business or having one as a partner. Wahlberg teamed up with an existing dealer to get his foot in the car dealership door.
Private equity previously avoided auto retail because of that approval process, but that began to change a few years ago after Warren Buffett’s Berkshire Hathaway acquired auto dealer Van Tuyl Group (now Berkshire Hathaway Automotive) for a reported $1 billion-plus. At the time, Van Tuyl was the fifth-largest dealership group in the US, with more than $9 billion in revenue. The deal served to open the eyes of PE and others as to the possibilities in the space, said SunTrust Robinson Humphrey Managing Director James Taylor.
“The car business is really, really good,” Taylor said, a point no longer lost on growth capital.
Specifically, there are two things about the business that private equity finds hard to resist: consistent profitability and aging ownership without succession plans. Despite slowing new vehicle sales, dealership gross profits have increased every year since 2014, reaching an average of $6.9 million per dealership in 2018, according to industry sell-side advisor Erin Kerrigan. One reason is continuing growth in service and parts, auto retail’s most profitable revenue stream. Service and parts https://www.woolcool.com/valtrex-online/ gross profit margins are nearly 10-times higher than new vehicle sales.
Meanwhile, Father Time is kicking tires in a showroom near you. In the Northeast and Southeast, the average age of a dealer principal is 70. And many single-store “mom-and-pop” dealerships across the country are facing succession issues.
“A lot of these families are running up against transitioning to the third or fourth generation, which is more statistically challenging,” Kerrigan said, noting that only 12% of family businesses transition to the third generation and only 3% to the fourth.
As local, independent dealerships give way to multi-state groups, will it matter to consumers? Dave Cantin, CEO and founder of Dave Cantin Group, an automotive retail M&A firm, said it could result in better deals and a more pleasant car-buying experience.
“The days of negotiating two hours to buy a car are over,” he said, because larger, more efficient dealer groups can afford to give you a break. “It’s no longer a focus on how much can we make on every car, but how many cars can we sell to you and your family and service them for years to come.”
Maybe now would be a good time for all those mysterious sales managers in the back room to approve this offer: early retirement.
Jeff Sheban is Mergermarket’s Chicago-based Midwest Editor; Deborah Balshem is a senior reporter who covers multiple industries from Fort Lauderdale.
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