Auto dealerships: what's up with improving profit margins and value?
"The major trend in the industry for the last 15 years has been the influx of public companies," Tim York is explaining to a group of specialist appraisers at the ASA's meeting at the Arizona Biltmore this morning. "And now we're getting more consolidation, down to a total of about 17,000 dealerships." There are six main public companies in the dealership acquisition businesses, and their activity, York reports, has made the automobile dealership world a very good early indicator of economic conditions. "Some of these players had no transactions in 2009," he says; they're back now, as new vehicles sold trend back up to over 14 million (the average was 15-17 million a year between 2000 and 2005--but it dropped to 10 million in the bad recent years.
A lot of dealerships simply went out of business in 2008-2009. Margins have always been very thin (less than 2%) in this business. "Today, we're at 2.5%," York reports. "Those that have survived are doing much better."
Margins are already moving up as the public companies buy up more quality dealerships. "This is a business dominated by family-run businesses. The groups buying today are performing better than their competitors, starting having cash again sooner, and are better at controlling costs than the one-offs."
Of course, like the old days, the implied multiples (and seller expectations) are governed by the franchise. "Are you going to put your family's entire net capital into a Suzuki franchise these days? I hope not. Perhaps Mercedes or Lexus," York joked.
Another point is that the dealerships are producing cash--dad's on the payroll, and so is every one else. And there are trips, and loaner cars, and all sorts of other benefits. "It can be hard to to get to a reasonable price when every one is living well," he commented. "What we have is a group, to some degree, who are what I call 'thrilled survivors'." After what they went through the last four years, they want to cash out.