Attention Car Dealers – The Industry is Changing Rapidly
April 9, 2018
This message should be seriously considered.
The landscape is changing rapidly. A disruption to car dealerships could be just around the corner.
With a slow start in 2018, many experts and financial institutions have lowered their SAAR predictions substantially, through 2020. As such, dealership values are slowly plateauing and we believe that this is just the beginning:
- A disruption is coming to the way cars have been distributed and sold for the last 100 years!
- Individual dealerships will look drastically different.
- The hi-tech revolution is coming to this fragmented industry, and perhaps it is already here.
- Brick and mortar retail is dying everywhere as e-commerce continues to grow rapidly.
- The uncertainty is all around us: in our industry, economically, globally in general and geo politically of course. We are indeed traveling into unchartered territories.
The Everyday Challenges
Some of the problems/issues that dealers are facing can be fixed, however others are out of their control:
- A slowdown in sales is already here. Sales have been down for eight straight months.
- Front-end grosses are eroding year over year.
- The factories are in control, not the dealers. And their agendas are different.
- Dealers are forced to rely more and more on below-the-line money to show substantial profits.
- Demands for facility upgrades are endless and dealers are stuck with dangerously high fixed costs for buildings and real estate which offer no (reasonable) return.
- The consumer is stretched financially to unprecedented levels. Every 26th loan/lease is delinquent more than 90 days. Wages are not catching up with Wall Street.
- The value of used vehicles continues to erode due to technological obsolescence and due to a high number of vehicles coming off leases, after four strong years for the industry.
- The evermore scrutinized metrics of sales-effectiveness is causing tension and legal issues between dealers and the manufacturers.
- As occupancy rates get too high, coupled with consolidation, competition and the internet, gross margins and net profits continue to shrink.
No, of course it is not the end of the car retail business, but changes are coming to the distribution channels. Sales volume must increase for dealers to benefit from manufacturers’ incentives, while the service departments will contribute a larger part to the bottom line.
The medium-large groups will not be effected as drastically, and will most likely be part of the change.
Get Bigger or Consider Getting Out
The individuals/operators owning one-two dealership(s) will find it much more difficult to compete in the new normal. In our view, formulated from the trenches where we spend our time 24/7, since we don’t believe it will get any better, as goodwill values have peaked in 2017, those dealers should seriously consider selling soon. To state it bluntly, if you own a single dealership and are occupying real property that could not be developed in the future for a use other than a car dealership, you are sitting on a diminishing asset.
So How Does This Impact Value?
The dissatisfaction among dealers is growing and they claim it is not as much fun being a car dealer as it used to be. The return on equity is no longer as attractive for a single dealership, and unless they can benefit from high volume, multiple stores, synergy and alike, it is no longer best use of capital.
- Blue sky levels reached an all-time high last year. Buyers were in a relentless pursuit of good dealerships with pockets full of cash after a good 4 to 5-year run, interest rates were at historical lows, private equity companies jumped in after Buffet and Soros had entered the sector, etc. Well, that resulted in a very strong buyer-side pressure/demand and that frantic race naturally led to higher prices, but that is no longer the case.
- Even if the down cycle does not last long, the value of dealerships will never get higher than we witnessed during 2016 and 2017. It simply can’t go any higher. Buyers will not purchase dealerships if they can’t see a way for at least a 12%-15% ROI at best case scenario. So, what is the advantage to waiting?
- Those high valuations were not sustainable. Buyers have finally sobered up realizing a multi-million-dollar acquisition is not an emotional decision, it has to pencil.
- The President of Group 1 was quoted to say 2-3 years ago that valuations were getting too high. Many private equity companies are no longer buyers, and others are already trying to get out after realizing it was not as easy as they had thought. Additionally, many serious buyers went to the sidelines as well.
Strong buyers are still searching for good opportunities. However, it is important to understand that the valuations are brand-specific and geographically related. As such, some brands in certain areas still command better value while others will experience a slow deterioration of the value of their assets/enterprise.
Because of your hard work or perhaps luck, your dealership could be one of those exceptions and could still yield a higher price. We know from experience that for some dealers it is difficult to let go, but a sober assessment will uncover that the timing is right to capitalize on what could still be the top of the market:
- Car dealerships no longer offer the best return on equity and there could be a better place to park the proceeds from a sale.
- A sale will eliminate the exposure to the (many) unknowns/uncertainties which are just around the corner.
- A sale will unlock your net worth, converting your assets into cash which will allow you to buy when the (inevitable) asset bubble bursts again.
As the industry slows down month after month and year over year, so will the demand for dealerships and naturally, the valuations will decline.
Timing is everything, and although the full effect of the disruption to car dealerships may be years away, if selling your dealership has crossed your mind lately, please call us now to discuss the market conditions and to begin exploring your possibilities. No commitments of any kind.
About Performance Brokerage Services
We have been in business for over 25 years, sold over 600 dealerships and enjoy a closing rate of over 90%. As such, we developed an exceptional reputation in the market place. The following link will take you to the testimonials page of our website where you could browse over 200 testimonials from dealers and industry related professionals about their experiences while working with us. Reviews & Testimonials
Unfortunately, the brokerage community is notorious for overpromising and under delivering. However, our highly experienced team of intermediaries and former car dealers have demonstrated expertise in the buy/sell process, skillful negotiations and unparalleled ethical conduct.
Understanding that high brokerage fees often get in the way of the deal, we offer a competitive and flexible fee structure: a percentage-based-fee that is below our competitors, a success fee only, no retainers or upfront fees, and no reimbursement of any costs. We get paid only after you get paid.
We recognize that your dealership may represent the majority of your net worth and this could be one of the most important business decisions you will make. We pledge to do it right and are committed to providing you outstanding service. Our team is ready to make you our #1 priority and serve you as a customer in a restaurant for one. We hope to earn your business and we will not disappoint you.
Understanding your sensitivity to confidentiality, we will vigilantly protect it. All interactions with our company will be held in the strictest of confidence. No exceptions!
One cannot have enough friends in this industry, and we are here to help.
We hope to hear from you soon.
Moshe Stopnitzky, President
For Further Reading:
Wall Street Journal
New York Times
Automotive News: Used Market Ripe for Disruption
Automotive News: Dealers Will Be Disrupted
Automotive News: Amazon
Jaw dropping reads, by:
Automotive News: Redesigning the Industry, an Article by Bob Lutz