The overlooked side of the car business

Hey, everyone — The other day, I was at a stoplight and had to do a double-take. All the cars around me were white, black, or some sort of gray.

Come to find out, 80% of new cars sold in 2024 were in grayscale colors—a 33% increase since 2004. Why? It’s cheaper for OEMs, plain and simple ... so I guess we better get used to it.

—CDG

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What's Fueling the Buy-Sell Frenzy?

Every day, I talk shop with dealers and vendors around the country (and sometimes world), and a common theme often comes up is acquisition strategy. 

It makes sense – M&A (mergers and acquisitions) is one of the easiest ways for dealer groups or automotive tech companies to grow. 

From my perspective, there are several meaningful trends that indicate the M&A market will stay revved up through summer and likely beyond. 

Let me break down why. 

Big picture: It's been a rollercoaster for dealership profits over the past few years. Since their peak in 2022, profitability has taken a hit, although it is still higher than 2019 levels.

At a glance: The average publicly owned auto dealership earned $5 million in adjusted pre-tax income in the 12 months ending Q1 2024, a 26% drop from the $6.7 million recorded at the end of 2022. (Remember, the publics are only a bellwether and there’s always room for variation.)

Yet, despite this decline, M&A activity has soared. In Q1 2024 alone, 151 dealerships changed hands, the highest level of first-quarter buy-sell activity on record, according to Haig Partners.

I recently connected with Alan Haig, founder and president of Haig Partners and we discussed this very topic... Let’s break it down into several factors.

Healthy consumer demand for vehicles (for the most part) is likely making dealers more confident about acquisitions. Of course, some brands are struggling more than others due to high prices and oversupply.

There’s also a growing number of dealers looking to sell primarily because of future uncertainty and record profits from the past couple of years.

Speaking of record profits…dealers now have large cash reserves saved up from record profitability throughout 2020-2023, prompting some of them to double down on expansion.

This leaves dealers with an important question — Is it time to ride off into the sunset or grow an empire?

State of play:

• Dealership profits down 26% since 2022.

• Blue Sky values (the goodwill value of an automobile dealership beyond its hard assets) only declined 18%, from $23.1 million to $19 million in Q1 2024.

While dealership profits and valuations don’t have a 1:1 cause-and-effect relationship, they are a huge indicator of a store’s (or brand’s) worth.

Front-end gross profits (the profit made on the purchase price of the car not counting add-on products) on new and used vehicles are falling, while expenses, particularly floor plan costs, are rising.

• The average gross profit per vehicle retailed (PVR) for new cars for the publicly traded auto retail groups in Q1 2024 was $3,582, down 30% from Q1 2023 and 9% from Q4 2023.

Why? Elevated inventories are driving car prices down across certain brands.

Zoom in: Stellantis is (still) one of the worst offenders, with over 140 days' supply for most brands as of April 2024, according to Cox Automotive. 

Add it to the list of woes for the company, which includes:

• Too many expensive, high-trim models.

• High floor plan costs due to high interest rates.

• Increased MSPRs, crunching consumer affordability.

• The lack of incentives is further contributing to stagnant inventory.

Put it all together, and it was only a matter of time before Blue Sky multiples for the brand dropped. Acquiring a Stellantis dealership at this time is a gamble. Could be a good time to jump in...or not.

Yet, brands like Toyota, with a low days’ supply are fetching multiples of sometimes 10x or higher. This tracks — seems like every dealer I know is itching for a Toyota franchise.

This is especially true when you think about the dominance of large dealership groups, which puts pressure on dealers to find the most optimal brand to buy.

Zoom out: The top 150 groups now own a larger percentage of the industry's overall dealership count. The top 10 groups on the Automotive News 2024 list owned 9.3% of U.S. franchised dealerships. This was up from 8.9% the previous year. It was an all-time high since at least 2011.

Yet, some of the publics are staying on the sidelines, while privates are fueling M&A activity.

In recent years, public auto retailers focused on acquisitions when their stock prices were high, and dealerships were expensive. Now, with stock prices down but dealership values still high, they're taking a more balanced approach with both acquisitions and buybacks.

Inflated multiples are “not something that we're going to chase," Lithia Motors CEO Bryan DeBoer said on a Q1 2024 earnings call. “We're going to buy our shares back.”

On the private side, over the past six years, LaFontaine has added 21 retail locations in the past six years all around the state of Michigan. In doing so, the company has become the largest family-owned dealership group in the state.

LaFontaine said last fall that the acquisitions have allowed the company to operate more efficiently and control costs, making future growth easier.

Consolidation is producing big gains for some of the country’s top dealership groups. Adding new dealerships and networks lets these groups expand, helping them fill gaps in their offerings…and, importantly, cutting costs.

How? Consolidated dealerships can optimize staffing by sharing employees across locations, centralizing their accounting, and reducing or renegotiating vendor contracts.

But do those reduced costs translate to lower prices for consumers?

In some cases, car buyers can find more options in budget from a dealer group with a large network, but fewer dealer competitors often means less competitive pricing for consumers.

What’s next? With high buyer confidence, substantial cash on hand, and a growing number of sellers, I expect the M&A market to keep hitting big numbers. There are still plenty of dealers waiting in the wings to deploy their capital into expansion, and there are always deals lurking out there.

Private party sales have always been clunky and complicated. Traditional marketplaces leave it up to you to figure out how to close the sale.

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I believe in PrivateAuto so much that I invested in the company earlier this year.

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The leadership advantage in F&I: Here’s the vital playbook for getting the most out of your dealership’s F&I products, straight from Tony Wanderon, CEO of APCO Holdings/EasyCare. Tony and I discussed the current market landscape, why service claims for EVs are shocking, and the growing cyber threat for cars. Meet the visionary creating unusual profit opportunities in automotive.

CDG Market Update—brought to you by Edmunds: In this edition, Jessica Caldwell, Head of Insights at Edmunds, and Zac Kinch, General Manager of Bob Rohrman Toyota, share why car buyers are settling for less, navigating interest rates, and the power of social media marketing. Find out why the car biz is starting to look like 2008.

Pssst... Dealers: Don't miss out on this opportunity to elevate your dealership's visibility and sales performance. You can check out Edmunds Premier here, edmu.in/4bXcEIr.

Listen to the episodes here, and subscribe to the CDG Podcast on Apple, Spotify, or wherever else you get your podcasts. And thank you to Uber for Business, Cars Commerce, Auto Hauler Exchange, Private Auto, and CDK Global for making these episodes possible.

We’ve got tons of great jobs hitting the CDG Job Board right now. Here are some standouts for anyone looking for their next move.

• Want to come join the CDG Media rocket ship? I’m looking for a full-time executive assistant and a part-time graphic designer to join my team.

• Are you a salesperson at heart? OPENLANE has 10 roles for Market Sales Managers all over the country.

• This is a great opportunity for someone who wants to flex their sales skills: Tom Whiteside Chrysler Dodge Jeep Ram is hiring a sales rep in Mount Sterling, OH.

Looking to hire? Add your roles today—it’s 100% free.

• The original Kelley Blue Book publisher, Bob Kelley, passes away at age 96.

• Used car depreciation accelerated last week, marking the largest single-week decline since mid-January.

• General Motors promotes two ex-Apple executives to lead software team.

• Elon Musk ordered thousands of Nvidia-made AI chips destined for Tesla to be diverted to his social media company X.

Thanks for reading. See you on the next edition… or in 5 minutes on social media.

—Car Dealership Guy

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