Consolidation Growing in the Auto Industry
We’ve been saying it for years, but now in the Northeast consolidation is happening. One day we may even see the end of “mom & pop” owned stores, maybe even in the next 5 years not long after we experience “normalized” dealership operations post COVID and Microchip shortage. New England is still the least consolidated region in the US, but in the last three years, we have “grown” several large dealership groups. Consolidation momentum has increased exponentially.
There are now 16,676 dealerships in the US, and consolidation has sky-rocketed in most regions over the past 2 years. There are 6 publicly traded companies who are gobbling up dealerships at a daunting rate: AutoNation, Lithia Motors, Penske, Group1, Sonic Automotive, and Asbury, Lithia being the largest since early 2022. There are also 150 large private groups buying up dealerships throughout the nation.
These big groups have as many as 350+ stores, but they’re still only controlling about 2 percent of the market share. Add the Top 150 privates and that percentage could be as much as 4 percent, still an incredibly fragmented industry. The automotive dealership world holds lots of opportunities, especially during this exciting time of high dealership profit margins
Many criticize that dealerships are a “bad investment” as they see highly successful brands like Tesla and Rivian sell direct-to-consumer online, but the dealership model will not be disappearing. Notably, their businesses are protected by strict state franchise laws. Plus, franchised dealers are the only source for approved warranty work, and, as recent surveys reveal, the majority of consumers still prefer to work with a local dealer when purchasing a vehicle, especially in the very significant F&I area, even if some or most of the process is handled online.
Additionally, dealers are highly resilient, even through times of economic and marketing difficulties. Looking back to the crash of ‘08/’09, a large majority of dealers survived, albeit not materially recovering profits until 2014.
During Covid shutdowns, dealers found a way to continue selling vehicles through online and phone interactions and delivering vehicles to customers’ homes, and they continue to see max profits despite vehicle shortages, long wait lists, and thin inventories.
Why? During the pandemic, and now during the microchip shortage, the demand for vehicles has far outpaced the supply. There was a mass exodus from population-dense areas to the suburbs. People were avoiding public transit and ride sharing. This created an even larger market of new car-buyers.
Does that sound like a bad investment? Absolutely not and here’s proof. AutoNation’s net incomes went from $382M in 2020 to $1.4B in 2021. Lithia saw an increase from $470M in 2020 to just shy of $1.1B in 2021. It’s basic economics. Increased demand + decreased supply = increased prices. In January 2022, 80% of vehicles were sold over MSRP.
Increased revenues aren’t the only way these big companies are increasing profits. Since the pandemic began, there have been more sales online and an increase in efficiency and productivity, reducing personnel expenses by as much as 40 percent. Additionally, less inventory means less money tied up in floor plan investments. All of this means greater net profits.
These big companies are so sure that dealerships are a good investment that they’re buying back their stock. Autonation bought back 25 percent of its shares in the past year. Lithia is doing something similar. They’re doing this because the investment is solid. Use net profits to reduce outstanding shore count, and then buy more stores, creating greater profit per share ratio. Wall Street loves this scenario, so stock prices per share rise even more substantially
Direct sales may be growing in popularity, but not because consumers are asking for that model. OEMs are using the agency model to increase control over their franchisees. OEMs lack the framework for servicing vehicles in the scale required to sell millions of vehicles. Nationally these large dealership groups are investing not just in building out their brick-and-mortar networks, but also in improving technology and online options for their customers, especially over the past two years. Investing in technology expands their reach dramatically. Additionally, local dealerships play a large role in local economies and support their communities.
These big groups are committed to growing. Lithia says they plan to acquire $17B of additional revenue, and their vertical move into lending proves their strategic commitment. Asbury has an annualized revenue goal of $32B by 2025 and only needs $6B more to reach that. Asbury plans to focus on more acquisitions and stock buybacks to get there and says they’re on track to hit the goal.
The bottom line is that there is considerably more consolidation on the horizon, especially in the Northeast as we catch up to the rest of the country, and there’s a lot of opportunity to do so in the next 3 years before the expected “normalization” of the industry.
