đź”® Latest trends of car dealerships: who will survive and who will thrive?
Plus, how to get the best deal from no-haggle dealerships
🔒️ If you’re not a Premium Subscriber yet: Join 1,200+ others to get full access to this issue — and every issue.
Today’s topics:
đź”® Future trends of car dealerships: who will thrive vs survive?
🏷️ Shoppers Corner: get the best deal from no-haggle dealerships
📝 Will Carvana survive, what’s next for auto lenders, pros/cons of credit unions 🔑
Reading time: about 3 min
Was this email forwarded to you? Subscribe here to get real-time insights from the dealership floor.
đź”® Latest trends of car dealerships: who will survive and who will thrive?
Kerrigan Advisors, a mergers and acquisitions advisor that specializes in representing buyers and sellers of car dealerships, just released their latest Blue Sky report. In addition to analyzing the auto dealership buy/sell market and providing valuation guidance, the report touches on other interesting trends in the industry. I read the report and want to share a few observations with you…
Dealerships are expecting continued strong demand in new vehicle sales, fueled by improved inventory availability and increased incentives from manufacturers. The current seasonally adjusted annual rate (in simple words, the expected monthly vehicle sales multiplied by 12 to arrive at an annual rate) is expected to be at about 14.5 million units, a big jump from 10.7 million in 2022. This means that even with gross profit per unit will inevitably decline, dealerships will be able to make up for a decline through increased volume.
Despite higher interest rates and the looming economic slowdown, the pent-up demand of 6.2 million units leads to an expectation of strong sales in 2023.
Annual Retail New Vehicle Sales, In Millions
The report also highlights another positive tailwind for dealerships that I tweeted about recently: fixed operations (aka service department) will continue its solid growth due to an increase in miles driven, people keeping their vehicles longer, and the improved availability of parts.
In the used cars land, dealerships expect prices to settle at a higher average price point due to the structural shortage of used cars, especially late-model ones. Limited supply and the rising demand for affordable cars will help used car dealerships deal with economic uncertainties of 2023.
Here’s what’s happening in the dealership buy/sell activity. Private dealerships stepped up their acquisition game after sitting on the sidelines in 2021 when most acquisitions were done by public dealership groups deploying their cash.
In the meantime, public dealership groups focused on the acquisition of their own stock due to their valuations falling in 2022 due to declining Wall Street valuations. In addition, public dealership groups used cash to strengthen their competitive advantage by investing in improving their business operations, integrating F&I, investing in technology, infrastructure, and related businesses.
As a side note, it is interesting to highlight the unique oddity of the auto retail industry: public auto retail companies are trading at a lower valuation than private companies. This happens because 94% of dealerships are owned by private companies, and that’s why public market volatility does not affect the valuations of privately owned dealerships.
Another highlight from Kerrigan Advisor’s report is that dealership buyers became more selective by putting more emphasis on brand, location, and sales volume. Naturally, dealerships in high-growth and business-friendly markets like Florida and Texas are in high demand.
However, because of the pandemic, there were some unexpected shifts in market share. For example, Toyota, Lexus, and Honda which have been suffering from supply chain interruptions and chip shortages saw their market share decline, while Cadillac’s and Chevrolet’s market share increased in 2022.
Change in Market Share by Franchise, 2022 vs. 2021
So why are dealership buyers shifting toward import franchises from domestics? This may seem counterintuitive, but Kerrigan’s report provides an explanation: domestic inventories have been increasing but without the corresponding increase in sales. That’s why buyers are more interested in less risky luxury imports, especially the ones that have somewhat limited supply and thus can charge a premium.
It is also important to note that dealerships, like other businesses, are valued by an expectation of future earnings. Traditionally, the last three years of a business's earnings are used to evaluate future profitability. However, market players are realizing that record profits of the last few years are a once-in-a-lifetime event and are not a reliable indicator of future profitability. So some buyers are now pricing dealerships based on projected future profit margins, normalizing for stabilizing market conditions and retaining operational efficiencies. Wall Street is using a similar approach for valuing public companies.
The report also touches on the trend of OEMs trying to push the boundaries of franchise regulations, trying to more aggressively manage their networks. It remains to be seen how the transition to electric vehicles and wider adoption of the Tesla-like direct-to-consumer model will affect franchise values.
Toyota is the most desirable non-luxury franchise, followed by Subaru, Honda, Hyundai, and Kia. Buyer demand is the lowest for VW and Mazda.
Among the luxury brands, Porsche and Lexus are the most desirable franchises, while Infinity and Lincoln are not so hot.
🏷️ Shoppers Corner: getting a better deal from no-haggle dealerships
Following on the topic from the previous newsletter, I got questions on whether there is a way to negotiate a better deal at a no-haggle dealership?
As I mentioned before, typically no-haggle dealerships are pricing their inventory aggressively by analyzing market trends, so that their listings appear attractive to shoppers.
These dealerships are using the no-haggle policy as their differentiator, promoting a pleasurable buying experience with price transparency.
While you cannot negotiate the purchase price of a vehicle, there are other components of a transaction that are negotiable, such as the value given for your trade in, price of extended warranties, maintenance contracts, accessories or additional services, financing rate (depending on your credit score, of course), and so on.
If you are buying a new car, you can qualify for various manufacturer incentives, such as student discount, supplier discount, competitive conquest discount, first responder, military, and so on. Do you research and make sure that all discounts that you qualify for have been applied to the selling price.
If you are buying a used car, you may ask the dealership to perform an upcoming maintenance or to address a flaw, such as fixing a scratch or cleaning the interior before signing the deal.
📝 I spoke with Chris Coleman, co-founder of WithClutch… 🔑
We covered the following topics:
The history of Carlypso, the first company founded by Chris that was acquired by Carvana
Transitioning to Carvana and the secret sauce to Carvana’s initial success
What the future looks like for auto lenders and what’s next
Why credit unions have not taken over the world?
What’s unique about WithClutch approach?
Will Carvana survive?
… and more juicy discussions
You can listen to the podcast for free or read the full transcript at the link below by upgrading to the premium version of the newsletter:
Subscribe to CarDealershipGuy Newsletter to read the rest.
Become a paying subscriber of CarDealershipGuy Newsletter to get access to this post and other subscriber-only content.
Already a paying subscriber? Sign In