Dealership expert: Best and worst franchises, what's next for the car market

Welcome to another episode of the Car Dealership Guy Podcast.

On today’s episode, Alan Haig, President of dealership buy-sell advisory Haig Partners, joins me for a discussion about the 2024 mergers and acquisitions (M&A) market, covering everything from top sellers to manufacturer-dealer relations.

You can stream the full episode now on YouTube, Spotify, or Apple.

1. A look back.

During the COVID-19 pandemic, manufacturing disruptions and product shortages forced car prices up. While that would normally have a freezing effect on demand, an influx of cash from stimulus checks helped drive new and used vehicle sales, further straining the already limited supply. This caused profits for automakers and dealers to skyrocket, a trend that lasted for most of the last three years. But the car market is changing quickly in 2024. Not only has manufacturing caught back up to demand, but demand is also starting to decline, a shift Alan attributes to the affordability crisis. That is starting to eat away at dealership profits, one of the biggest factors driving mergers and acquisitions (M&A) activity.

2. M&A today.

But even though profitability is down, dealers are still making much more than they were in 2019. Before the COVID-19 pandemic, Alan notes that publicly traded dealership groups generated roughly $1,900 in gross profit for each new vehicle sold. In 2022, that amount spiked to roughly $6,000 but dropped down to $3,500 in the second quarter of this year. However, that’s still almost double what retailers were making prior to 2020.

3. Winners and losers.

Some brands are seeing faster declines in profitability than others. Alan notes that Honda and Toyota have seen strong margins throughout the last two years due to their low inventory levels, reasonable pricing, and excellent product mix. Then there’s Stellantis, which has seen a significant drop off in performance. While the automaker’s CEO, Carlos Tavares, appears hesitant to leverage incentives or price cuts, Alan believes that it’s only a matter of time before the brand makes some sort of adjustment. Another struggling brand is Nissan, although its issues are different from Stellantis. Instead, the Japanese company hasn’t been able to differentiate itself from its competitors, leading consumers to opt for bigger import brands like Toyota. Alan stresses that he believes both Nissan and Stellantis will resolve their problems in due time, noting that they have navigated ups and downs many times before.

4. The market is changing.

Alan explains that dealership buyers are starting to change their habits in 2024. Over the last 18 months, he recalls that his team oversaw multiple record-setting transactions, including the sales of the highest-value BMW store in Florida and the highest-value Stellantis store in North Carolina. But in only a year, the market has become troubled. Dealerships aren’t generating the same profits that they were during the pandemic, leading buyers to make lower offers.

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5. Why did demand surge during the pandemic?

Alan believes that most of the M&A activity between 2020 and 2023 was driven by dealership groups. Before 2020, the average public dealership group generated roughly $2 million per rooftop. During the pandemic, this ballooned to $6.7 million, meaning companies like Lithia Motors and AutoNation had plenty of extra cash to invest in expanding their business. On the other hand, smaller dealers who were benefiting from pandemic-era profit margins realized that they suddenly had enough money to retire early. These two factors led to an increase in both supply and demand, causing M&A transactions to rise from around 300 purchases in 2019 to 700 in 2021. Alan also notes that dealers have also grown more confident in their business model. While companies like Carvana and Uber led many to believe that the traditional path to car ownership would become less popular, that doesn’t appear to be happening. This bolstered faith in the franchise system and spurred demand for storefronts.

6. Where is that demand today?

Now that dealers aren’t generating the profits they were several years ago buyers are showing more hesitation. But even though demand is cooling in 2024, M&A activity is still busier than usual. While Alan believes age is the primary reason dealers are looking to exit the business, he notes that many are also worried that store values will drop if they wait too long to sell. Larger dealership groups are also looking to divest, with many putting up smaller storefronts for sale. Alan points out that bigger retailers tend to perform best when they run bigger stores. This is because larger businesses tend to have access to more talent, allowing them to maintain stability even when managers leave the brand. Getting rid of smaller dealerships helps the company prioritize more profitable locations. With blue sky values (the intangible cost of buying a dealership) coming down and so many sellers on the market, Alan believes that now is a good time to get into the business, especially for younger buyers who for many years have been priced out of the market.

7. The EV problem.

Alan reflects on how dealers have navigated the electric vehicle market. In 2022, Ford introduced its EV program, which called on dealers to invest up to $1.7 million in new equipment and infrastructure or risk losing access to EV inventory. This wreaked havoc on the M&A landscape. Alan recalls that Haig Partners was overseeing acquisitions at two different Ford dealerships at the time. In both cases, the buyers expected the $1.7 million to come out of the purchase price, a request that the sellers balked at, ruining both deals. Alan estimates that the EV program ultimately wiped out about $5.5 billion in store value when accounting for all Ford dealerships affected by the initiative. 

8. Ford’s resurgence.

While this and other decisions caused demand for Ford storefronts to decline, sales are starting to pick back up. Alan attributes this to several factors. For one, the company has shifted focus away from EVs and back towards products that consumers are interested in, such as hybrids and F-series pickups. For two, the brand’s commercial business has continued to outperform others, benefitting dealer fixed-op earnings. As a result, buyers are starting to show more interest in Ford dealerships, a trend Alan expects to continue, provided the company maintains its focus on profitable products.

9. Why some franchises are special.

Toyota and Lexus dealerships are some of the best performers in today’s retail automotive sector, with both fetching a high price on the M&A market. The automakers’ emphasis on hybrids, introducing new models and maintaining low inventory levels have driven demand and kept retailer profits high. There’s another quality that sets these brands apart from others. Dealers at other franchises often feel suspicious of their manufacturers, especially the ones that have shown interest in direct-to-consumer or agency models. But Japanese automakers, like Toyota and Subaru, continue to treat their retailers as partners. This not only makes the business run smoother for both parties but also improves the customer experience. Alan adds that Hyundai and Kia are also seeing higher blue sky valuations, thanks to the rapid increase in both brands’ sales numbers over the last few years. Should they continue to gain market share, he expects this to continue well into the future.

10. Final thoughts.

Overall, the M&A market is performing well, as is the overall automotive industry. Alan expects to see dealership profits normalize more in the coming months, although he hopes that lower interest rates will help offset the effects of shrinking margins. Dealers also have much to look forward to. Not only have they learned valuable lessons in efficiency thanks to the COVID-19 pandemic, but manufacturers have also realized that over-producing is no longer a viable strategy for driving sales. Furthermore, car prices should start to come down as automakers “de-content” vehicles to cut costs, ultimately boosting demand among deal-hungry consumers.

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