Everything about the way you buy a car is changing. The auto industry is changing so rapidly and so thoroughly that it may even alter the town where you live.
Car dealerships have begun consolidating under the control of nationwide companies, and their vision for what car shopping may look like in just a few years is radically different than the experience you’re used to.
How did we get here, and where are we going?
Little League Jerseys and Silly Commercials
The first U.S. auto dealership was opened by William E. Metzger in 1898 in Detroit, Michigan. Over the course of a century or so, the franchised new-car dealer system evolved into a pillar of the U.S. economy.
Local businesses that worked with (but weren’t owned by) major automakers spread to nearly every community in the country. In complex financial transactions, they paid manufacturers for new cars and took payment from buyers for them, often using a bank part-owned by the manufacturer to help buyers finance the deal. They made money on sales and service.
Often fixtures on local radio and television, they built political might on the state and local level. They wove themselves into local communities as employers and sponsors of local charity drives and baseball teams.
It wasn’t unusual to see one family own multiple dealerships. They often clustered together – the result of local zoning laws that, in many communities, dealers had a hand in shaping. But they were local business titans, at best.
Big automakers nurtured networks of these dealerships. Laws in most states prevented automakers from directly operating their own stores. The partnerships helped spread risk and ensure an effective feedback loop that helped major international corporations understand what car shoppers in vastly different places wanted.
Car Shopping is Going Online
The growth of the Internet upset that model. Informative free websites gave car shoppers a wealth of information about their options (we love those). Manufacturers developed a much faster and more accurate feedback loop helping them learn what shoppers wanted thanks to web traffic.
Purchasing a car online remained difficult and rare, but researching them, qualifying for financing, and searching dealer inventory for the exact car you wanted became routine.
Tesla Created a New Business Model
Those laws that prevent an automaker from operating its own dealerships have also begun to change.
The catalyst for that has been, mostly, Tesla. In the handful of states that didn’t require third-party sales, the company operated its own stores and sold cars directly to consumers. The company lobbied and pursued changes to franchise laws in other states. In still others, it opened galleries that display the cars and answer customer questions but send customers home to place their orders for new cars through the Tesla website.
Using this model, Tesla has grown. Last year, 79% of the new electric vehicles registered in the U.S. were Tesla products.
Other electric vehicle startups, like Lucid and Rivian, are pursuing similar sales models.
No established automaker has yet moved to a Tesla-like sales model. But some have experimented with selling cars online and using dealerships as delivery and service centers.
Volvo, earlier this year, moved to sell its electric vehicles exclusively online, starting with its new C40 Recharge SUV. Buyers still go through dealers to finalize the sale, arrange delivery, and schedule service.
The Pandemic Taught Everyone a New Lesson
The COVID-19 pandemic may have accelerated new sales models. Last year, Kelley Blue Book research showed, customers proved happiest with their new car buying experience when they spent little time in dealerships. With face-to-face interaction limited by travel restrictions and the need for physical distancing, dealers made it easier for consumers to shop online. Customers bought cars faster. And automakers responded with new systems that made shopping online easier for buyers and dealerships.
Dealerships Aren’t Struggling
According to the National Automobile Dealers Association, the average dealership earned $2.1 million in pretax profit last year. That’s a 48% increase from 2019.
In 2021, a worldwide shortage of microchips has slowed new car production. Many popular models are in short supply, and prices are climbing – the average transaction price for a new car was 10% higher in August than just one year before. Americans have broken the record for the highest average purchase price for five consecutive months.
Car dealers are optimistic about the market. A recent survey of dealer sentiment by Kelley Blue Book parent company Cox Automotive found that most dealers see the future market as strong.
“Dealer sentiment has moderated from a record high in the spring,” said Cox Automotive Chief Economist Jonathan Smoke. “Dealers are still optimistic about the coming months, but the new-vehicle inventory situation is not improving, and sales are suffering.”
Nationwide Business is Taking Over
But with car sales moving online, dealerships are starting to consolidate. That doesn’t necessarily mean fewer dealerships. But it may mean fewer companies operating them. More of them may be owned by national chains.
Kerrigan Advisors, a consulting firm that serves automotive dealerships, reports that larger dealership chains have begun buying smaller rivals. Last year, Kerrigan reported at least 289 such transactions. In the first half of this year, that rate has accelerated.
Bryan DeBoer, CEO of the dealership chain Lithia Group, told the Wall Street Journal last week that his company’s goal is to own a dealership within 100 miles of every American car shopper.
Lithia is currently the third-largest automotive retailer in the U.S.
Growth is still happening in the dealership industry, but much of it is not local. AutoNation, the largest automotive retailer in the country, told the Journal it plans to open 130 new dealerships nationwide by 2026.
Some Industry Stalwarts Are Selling to Retire
Some of those local dealership tycoons are happy to sell. Brady Schmidt, president and CEO of National Business Brokers, recently told Auto Dealer Today magazine that “the average age of single rooftop dealership owners is 72 years old.”
Big Automakers Want Fewer Cars on Dealership Lots
Meanwhile, some major automakers have taken a lesson from the current low-inventory situation: fewer cars means higher sales prices. Last week, the chief financial officers of both BMW and Mercedes-parent Daimler told reporters their companies intended to keep inventories low indefinitely to keep prices high.
General Motors CEO Mary Barra said in May that America’s largest automaker will “never go back to the level of inventories that we held pre-pandemic because we’ve learned we can be much more efficient.”
The Pivot to Electric Cars Is Chasing Some Dealers Away
Finally, an industry pivot toward selling more electric vehicles (EVs) is behind some of the changes. A Kerrigan Advisors statement to investors in March explained, “Owners of large dealership groups are choosing to sell their businesses at today’s high valuations rather than accommodate the changes and investments required in terms of electric vehicles and digital retail sales.”
Selling electric vehicles requires a dealer to invest in new training for service technicians and salespeople and can mean upgrading a dealer’s infrastructure to accommodate a lot full of batteries needing a charge.
Just this week, General Motors reported that 20% of Cadillac dealers had accepted a buyout offer rather than follow the brand into an EV-only sales model.
Putting It All Together
Combining all of those trends gets us to the future of car shopping.
The number of dealerships may stay similar, but nationwide franchises will own more of them. Automakers may reduce the total number of cars for sale even when they don’t have to. That could serve to keep prices high. Shoppers will have a harder time pitting dealerships against one another for the lowest price when just a handful of companies owns more of those dealerships.
Those dealerships may mostly be selling electric cars, and more of the transaction than ever before will take place online. Dealerships will need to earn money as delivery and service centers. And little league teams may need to find a new way to pay for equipment.
Kerrigan Advisors is honored to work with auto retailers throughout the US to enhance the value of their enterprise. Learn more about our services below:
Customized and confidential sell-side services for higher value dealerships and dealership groups nationwide, with a proven record of achieving the highest sale price per transaction of any firm in the industry.
Capital raising and partnership structuring for growing dealership groups, supported by the largest investor database in the industry.
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Contact us to learn more about Kerrigan Advisors’ client services, or to have a conversation about the buy/sell market. All of our conversations are 100% confidential.