Consolidation vs. fragmentation

The top 150 dealership groups together represented 24.1% of the industry’s total 2023 retail sales, up nearly a percentage point from 2022. Although they say there are no signs that merger-and-acquisition activity is slowing down, Bank of America’s experts in the field suggest that despite this consolidation, the fundamentals of the industry remain largely unchanged — whether you’re a large group or a smaller dealer.

Compared to many industries, the dealership body remains vast and fragmented; despite the continuing strong buy-sell activity, there is plenty of room for more consolidation, says Marisa Carnevale-Henderson, Bank of America market executive. NADA points out that 92% of dealers still own between one and five stores. That’s a good number, because dealers of that size remain attractive to investors both inside and outside the industry.

Despite the ups and downs of the past five years — when dealers saw margins compressed and the business and sales model evolving — the dealership industry remains a healthy business with solid profits.

Over the past few years, that leſt many dealers confronting a very attractive catch-22 situation: With profits for some dealers up 300% to 400% in 2021 and 2022, and many making more money than ever, it was an advantageous time to sell — but on the other hand, some questioned whether to exit when business was so strong. Many dealers have faced that decision, says Bank of America market executive Derek Comestro — to take advantage of strong purchase prices from investors or to stay and keep investing in their business. There really was no right or wrong answer, but simply a personal choice based on each dealer’s situation and objectives.

The dealers that opted to sell typically had no logical successor to take over the business or had concerns that changes in the industry would require a significant investment in technology, an adjustment in the business model, or other concerns. For those dealers, selling now was the answer.

Dealers who put their business on the market continue to find strong investor interest. Carnevale-Henderson says there is a robust M&A market for dealerships, especially as industry inventories have rebounded and dealership financials have normalized post-pandemic and post-supply chain issues.

The large public dealership groups are intent on expanding, but instead of adding one or two stores here and there to tuck into their portfolio, they increasingly are looking for regional bases: acquisitions that can provide an immediate presence in a new market area or complement an existing footprint, Comestro says.

In terms of potential acquisition targets, Carnevale-Henderson says brand matters — as do geography and scale. Small to mid-size groups with multiple rooſtops in a single area are the prime acquisition targets, she says.

In addition, though, over the past five years, a number of the top 150 dealership groups have been sold. “When that happens, it’s a big deal in the industry,” says Jim Cockey, Bank of America market executive. He predicts that further consolidation will involve not only small dealership groups, but also selected transactions among the top 150 groups as well.

Buyers are coming from outside the industry as well. Private equity investment in dealerships continues to grow. In addition, many so-called family offices have made auto retailing a vertical they’re interested in. A family office — usually a single buyer — can be attractive to a dealer looking to sell, because they often are “silent owners” who keep the existing management team in place.

No matter when and to whom they’re selling, dealers should have a sale-and-succession plan in place. Carnevale-Henderson says one key task is making sure the dealership’s financial records are in order with audited statements, to make a sale proceed more efficiently. Comestro agrees, and points out that dealer principals should work with their lawyers, bankers and accountants on estate and tax planning, to be prepared for an eventual sale.

What impact does this continued consolidation have on the dealership industry — an industry built on locally owned businesses, oſten under the dealers’ names? Carnevale-Henderson says as long as a dealership’s new owners continue to focus on the customer service and personal relationships that have been the hallmark of the industry, everything will be just fine, and most car shoppers will not notice the difference.

From a business standpoint, Comestro says, while consolidation has accelerated, it really has not significantly changed the competitive landscape, nor the ability of a single-point dealer or small group to prosper.

“When I hear people say that if you’re a small mom-and-pop, you won’t be able to compete against the big dealership groups, I think nothing is farther from the truth,” he says. “The three biggest costs of operating a dealership are people, inventory and real estate. It doesn’t matter if you are a big group or only own one store, those costs are the same. A dealer is paying the same amount for a car on invoice, the same on real estate, and the same for people.”

With that said, there certainly are some economies of scale for larger businesses, such as vendor costs. “But at the end of the day, it comes down to the operator,” Comestro says. “We see single point stores that do just as well as any other store — sometimes even better — because they’re more focused on a single market, a single team.

“So my advice to dealers would be: There are many reasons you might want to get out of the business; however, it shouldn’t be based on fear, but rather your own personal experience and objectives.”