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- Navigating the post-election landscape in automotive: Trends, risks, and impacts | Pt. 4
Navigating the post-election landscape in automotive: Trends, risks, and impacts | Pt. 4
Featuring Alan Haig, President and Founder of Haig Partners
Welcome to another edition of expert insights from the Car Dealership Guy Podcast, an episode recap that breaks down the high-level takeaways from the conversation.
In this episode, Alan Haig, President and Founder of Haig Partners, discusses trends from the frontlines of dealership mergers and acquisitions (M&A). Alan is an industry veteran with a bird’s-eye view of the retail auto landscape. He also shares the latest findings from the Q3 Haig Report, a quarterly study capturing the M&A market’s latest movements, now in its 10th year.
1. The election has brought a mixture of uncertainty and relief for dealers.
Alan notes that many retailers have been struggling with an aggressive Federal Trade Commission over the last few years, facing an increase in lawsuits. Emissions requirements implemented by the Biden Administration were also causing concerns within the car industry.
With a new administration on the way, dealers feel that government regulation will ease up, paving the way for more efficiency and higher profits.
However, plenty of unknowns remain: tariffs could potentially hurt the auto sector, causing prices to go up. One dealer who spoke to Alan was worried that store values would rise under a Trump presidency, reasoning that a better economy will strengthen sentiments and lead to higher valuations. This could make it more expensive to buy new rooftops and expand.
2. Dealer profitability remains strong despite setbacks.
The latest data from public dealership groups indicate new vehicle profits are still on a decline, falling 27% year-over-year. However, the decline is starting to level off.
“We’re watching that very closely because a lot of the profitability of dealerships is driven by this high value we’re seeing currently of gross profit per vehicle.”
Meanwhile, used vehicle profits are back to where they were in 2019. F&I income is now stabilized, ending a period of decline, and fixed ops profit has grown 4% compared to 2023. The improvement in service profitability is especially noteworthy since many dealers have raised their labor rates to overcome the ongoing technician shortage. Combining all of these factors, the average profit per store is at $4 million, double what it was before the pandemic.
3. Franchise performance varies heavily between brands.
“There have been massive changes in the last in terms of the performance by franchises… Those declines in sales are having a massive impact on the performance of the stores in terms of their bottom line.”
In fact, while Japanese retailers like Toyota and Honda storefronts have seen little to no erosion in earnings, Stellantis dealers have fallen all the way back to 2019 profits or further.
4. Winners and losers in today’s market.
Alan believes these examples of poorer performance are evidence that many retailers got too comfortable with how easy it was to make money during the pandemic: this led them to stop prioritizing the customer experience and pay less attention to spending, bad habits that have now caught up with them. Inventory management is playing an especially important role in who is or isn’t succeeding today.
“We’re doing a valuation on a group of stores this afternoon, and their business includes a Nissan store that’s making $2.5 million a year. So there are some businesses that still, even if they’re part of weak franchises, are still quite profitable, and I think it’s because the operator of that store kept their inventory fresh.”
Failing to keep a watchful eye over inventory, he adds, can lead to a variety of challenges, from higher floor plan expenses to low morale (and thus productivity) among sales staff.
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5. The good news is that struggling storefronts can still find a buyer.
Potentially giving dealership groups a chance to recoup some of their losses or direct attention to more successful locations. Alan notes that boosting performance can be as simple as replacing lightbulbs, freshening inventory with newer models, laying down new carpeting, and enhancing a showroom’s overall appearance. He recalls that one buyer came up with the idea of bringing food trucks to the dealership on the weekends. Good dealers will know how to re-energize a struggling store so anyone can find a buyer.
“One man’s trash is another man’s treasure.”
6. Ford is making a comeback.
While stores like Toyota and Honda are still popular, Alan notes that there have been some surprising shifts in terms of what buyers are looking for. “I would say recently we’ve heard people starting to ask for Ford stores again, which was off the buying list,” he explains, which he attributes to the automaker’s aggressive transition to electric cars.
“They feel like Ford has maybe realized that EVs are maybe not necessarily the future, and will continue to invest in ICE technology, and so the Ford truck franchise is something they want more of.”
7. Volkswagen’s decision to make Scout Motors a direct-to-consumer brand could make it more difficult to reach buyers.
While other EV brands like Tesla, Rivian, and Lucid have followed a similar model, Alan notes that the strategy is starting to show its weaknesses. Tesla, he explains, has been forced to drop the prices of its vehicles from luxury to near-mass market levels amidst its struggle to incentivize demand.
Plus, while direct-to-consumer models are often based on the idea that buyers are more interested in shopping online, current data still indicates that consumers overwhelmingly purchase at dealership showrooms. Alan believes these factors will work against Volkswagen as it tries to scale Scout Motors while also souring its relationship with dealers.
8. This year, the industry has seen 389 rooftops trade hands between U.S. dealers, down from 450 this time last year.
And yet the mergers and acquisitions sector is still on track to have its fourth-best year ever. The industry also saw record-high valuations (between $25 million to $26 million per store) in the first months of 2024. Alan attributes that to the historic earnings achieved by many retailers last year, which left buyers with an excess of cash.
Now that buyers have burned through some of that cash and are less willing to spend massive sums of money, valuations have since cooled to about $21 million. However, that’s still more than double what the average storefront traded for back in 2019.
9. M&A firms have started to look at the validity of artificial intelligence-powered dealership valuations.
Alan notes that there innumerable factors involved in the valuation process. However, there is no public database of transaction data, meaning that everything from how much a store sells for to the profits it was generating before being sold.
“A.I. models…must have a massive amount of data to feed to them so that they can crunch that data and come up with recommendations. And so if you don’t have any good data going in how will you get good data coming out?”
He adds that M&A firms have also demonstrated a high level of accuracy when setting valuations, and aren’t likely to start sharing their data or processes with tech firms, making it doubtful that a reliable A.I. model will emerge.
10. Alan expects the industry to continue consolidating throughout the rest of 2024 and into next year.
While dealership groups have slowed acquisitions now that profits are normalizing, lower valuations will make buyouts easier and likely drive demand for storefronts once the industry hits a plateau. Declining interest rates should also drive car sales forward, hopefully bringing volumes back in line with 2019 levels.
“We need to catch up a little bit, we had a [sales] deficit from 2020 through 2023…and so that’s put pressure on the used car market, it’s put a lot on consumers, there’s a lot of debt consumers have and there’s a lot of negative equity now.”
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