Can dealerships beat the odds?

Hey, everyone. It’s about that time of year…when auto reviewers and publications start sharing their “best of” lists for 2023. I’ve got my own predictions on which models will be fan favorites, which will be sleeper hits, and which are headed toward discontinued status. But what do you think? Hit reply and tell me your end-of-year superlatives. 

—CDG

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Today’s Biggest News

Here’s Why Dealership M&A Is Still So Strong

Historically high inflation. Even higher interest rates. The threat of a recession. A first-of-its-kind triple strike. All things considered, you might think the demand for buying car dealerships would be down (or way down).

But it turns out: Inflation is cooling. The Fed is set to relax on interest rate hikes. The recession economists promised never really materialized. The strike came and went without totally wiping out the automotive industry. And with all that…dealership demand, or the demand to acquire actual dealerships, is sky high. 

Here’s what I mean: At least 385 “rooftops” (aka dealerships) traded hands through the end of Q3, according to the most recent data from Haig Partners, a leading dealership buy-sell advisor (Haig is also a friend and sponsor of the CDG Podcast). If this pace continues through the end of this year, 2023 will be the third most active year for buy-sells, behind only 2021 and 2022.

I dug through Haig’s Q3 buy-sell report to find out the details—the what, who, where, and why of sustained dealership demand, no matter the macro circumstances.

The what: 

Dealerships continue to show signs of normalization in this post-post-Covid (is this a thing?) world. Earnings for publicly owned dealerships dropped by 17% to $5.4 million in the 12-month period ending in Q3, per Haig. But: Profits are still 2.5x higher than before the pandemic.

Breaking it down further:

• Publicly traded auto retailers made an average of $4,582 in front-end gross profit per vehicle in Q3—that’s the sixth straight quarter of declining gross profits.

• Used vehicle gross profits in Q3 decreased 13% annually to $1,781 per vehicle.

• One note on margins → Haig noted that almost every public auto retailer CEO has said that they expect margins will remain higher than pre-pandemic levels.

I’m sure you’re wondering: If profits are normalizing, what’s happening to deal value? Well, with what Haig found to be a 12% decrease in the average blue sky value (aka a dealership’s intangible value over and above the net asset value of the business) per publicly owned dealership…acquisition spending is down.

But? There’s always a but. That brings us to…

The who and the where: 

Nationally, dealership demand remains predictably strong in an automotive market showing signs of both resilience and normalization. But there are certain geographic outliers that paint a picture of where dealership demand is strongest.

For example, Haig said:

• Al Hendrickson Toyota in Coconut Creek, Florida, set a new record for the highest price ever paid for a single dealership. Haig said Toyota shops remain in-demand.

• Haig said two Mercedes-Benz dealerships + their real estate recently sold in Miami-Dade County for over $700 million.

“We are seeing very strong demand for dealerships in regions that are growing quickly and have pro-business climates,” Haig wrote in its report.

Bottom line on the who and where: Buyers are picky. They’ve shown less interest in pursuing domestic franchises in smaller markets (mostly over concerns about their electrification strategies and the challenge of running low-volume stores, Haig noted). Spending on domestic auto dealership acquisitions declined 92% quarter-over-quarter while spending on non-domestic auto dealership acquisitions nearly doubled quarter-over-quarter.

So it really depends on where you are and what you’re selling.

And worth noting: Consolidation continues to be a major theme in the dealership world. The top 10 dealership groups in the country owned 5.3% of dealerships in 2011…but they owned 8.9% of all dealerships by 2022 (that’s a 68% increase).

The why:

Haig President Alan Haig summed it up well in explaining the Q3 data. “The buy-sell market remains near record levels because of strong profits and significant demand from dealers who want to grow their companies. We believe blue sky values will remain elevated since buyers believe profits will also remain elevated,” Haig said. “There is pent-up demand for new units and service drives remain full.”

Tell me: What do you think about the future of dealership M&A?

P.S. I’m excited to announce that Alan Haig is coming on to the CDG Podcast this month. Send me your questions for him by hitting reply!

This Week’s Episode of the CDG Podcast

Is it possible to keep all of your stakeholders happy, no matter how many there are? Jason Trevisan, CEO at CarGurus, joined me to explain how he attempts to keep both customers and dealers happy…and how CarGurus is taking on Big Tech and bad-faith actors, plus tons more.

Listen to the episode here, and subscribe to the CDG Podcast on Apple, Spotify, or wherever else you get your podcasts. And thank you to CarNow and CDK Global for making this episode possible.

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In Other News

The Cybertruck reviews are in. Four years after announcing the electric pickup, Tesla finally debuted its first Cybertruck models late last week. Our industry has been waiting for this moment for a while—mostly because electric pickups are still a white whale…but also because it’s Elon Musk.

So here are the things that caught my attention in the Cybertruck launch.

1. Site traffic on Edmunds: As of last week, Cybertruck page traffic was up 109% in a month. Ford Lightning and Rivian R1T page traffic was down 22% and 15.5%, respectively. What do you think this says about consumer excitement?

2. The skeptics’ POV: Even if you’re a Musk fanboy, it’s worth understanding why some people aren’t so sold on the Cybertruck becoming the silver bullet for EV adoption. This piece outlines a lot of the naysayers’ perspectives well.

3. The business impact. What might the Cybertruck—success or failure—do to Tesla’s larger business? Here’s a rundown of the revenue projections and what they mean for Tesla.

The Backlot

• An interesting read from Forbes: Car dealers are giving up on online sales and giving in to Amazon and Cars.com.

• The average loan amount for new and used vehicles was down to $40,184 in Q3, according to Experian. It was $41,543 this time last year.

• The UAW is recruiting—it’s got its sights set on unionizing 12+ foreign automakers and EV companies.

• Here’s your look at the models with the biggest price drops since August. Who saw this coming for the Porsche Cayenne?

• What if EVs aren’t enough? These are some of the other ways automakers can help the world meet its climate goals—from net carbon-neutral production to material reuse and recycling.

Thanks for reading. Only 24 days left this year—let’s make them count. See you next week.

—CarDealershipGuy

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