Darryl Holter resisted letting go of his beloved Felix Chevrolet in Los Angeles.

 Jamie LaReau
  26th-Nov-2017

Dealer Darryl Holter considers himself a "nostalgic historian." It's why he kept Felix Chevrolet, one of the oldest dealerships in Los Angeles, when he sold his five other Downtown Los Angeles Auto Group stores to Lithia Motors Inc. in August.Yet Holter also envisions a future in which auto retailing is dominated by larger dealership groups. That's one of the reasons he sold the other stores.

"The price of cars, what we sell them for, has changed," said Holter. "More electric cars will negatively impact service and parts and autonomous cars could lead to subscription services and that will have an impact. It could transform our industry into basically being a delivery center for the manufacturer. Those things haven't happened yet, but it's out there."

Holter, 70, is not alone in his concerns. In recent months, buy-sell advisers say, the number of sellers coming to market has escalated, largely because of auto retailing's uncertain future.


Headline worries

About two months ago, the phones at buy-sell firm Kerrigan Advisors' offices in Irvine, Calif., started blowing up with calls from dealers wanting to sell their stores. Their biggest reason?

"As they read the headlines about the disruptions to their business model, knowing they will have to re-engineer how they make money, it is forcing dealers to look at their succession plan and question if it makes sense for the next generation to take on," Erin Kerrigan, the company's managing director, told Automotive News. "They're saying, 'I need to sell this business.' "

Many sellers are troubled by the notion that future consumers might use ride-hailing subscription services to summon autonomous vehicles to transport them in lieu of personal car ownership, Kerrigan said. They also worry that, as electric vehicles proliferate, dealers' highly profitable service business will wither.

Those changes and the possibility of new automakers selling vehicles outside franchised dealerships have dominated the conversations that buy-sell adviser Moshe Stopnitzky's team has had with dealers in the last 12 to 18 months, said Stopnitzky, president of Performance Brokerage Services Inc., in Irvine, Calif.

"We have experienced a dramatic increase in the number of sellers reaching out to us in contemplation of selling due to the uncertainties," Stopnitzky said.

Buy-sell adviser Alan Haig said only a small share of his client base is opting to sell for those reasons. But, the president of Haig Partners in Fort Lauderdale, Fla., added, "We do have one client now who said the sole reason he wants to sell his dealership is his concern about autonomous cars coming."

And the "noise" around this issue is "getting louder," Haig said.

"Automotive News published that editorial by Bob Lutz. The next day Cliff Banks [of The Banks Report] wrote a rebuttal to it. That conversation wasn't going on a year ago," said Haig. "You had the CEO of Ford, Mark Fields, lose his job because he wasn't thinking about the future. People's concerns about the future are so great, they're changing their management teams."


Size and survival

Dealers who own one or two stores are especially nervous, said Stopnitzky, for good reason.

"The medium to large groups naturally have more resources for retooling and absorbing the cost of adaptation necessary as the changes occur and, frankly, could be part of the change," Stopnitzky said. "However, the individual dealer who owns just one dealership is facing a higher risk as the disruption intensifies."

Haig said the pace of retailer consolidation, which has been fairly slow and steady in the past 20 years, might accelerate as dealers realize they must grow or risk being bypassed, seeing their dealership values diminish.

It will be especially hard for dealers with one to five stores to grow fast enough in the next 15 years to gain the critical mass needed to offer "transportation solutions" to the masses, Haig said. "So some of them, along with the consideration of their age and succession plans, will sell now due to the risk of technology," he said.

Kerrigan agreed, adding some dealers who don't want to grow their business to the scale needed to adopt a new retail model will sell. In her Blue Sky Report for the third quarter, she measured the benefits of economies of scale, as seen in lower relative costs at the large, publicly traded dealership groups. General overhead costs — known to accountants as sales, general and administrative expenses — consume 88 percent of gross profit at the average U.S. dealership, vs. only 75 percent at the average public group, she calculated.

"Economies of scale and scope will become even more important in a sales plateau where profit growth depends on operational efficiencies," Kerrigan wrote in the report.

Stopnitzky said he advises clients with one or two stores to consider selling now because "we believe that the values will only go down further, as the talk about disruption is accelerated."


Buyers bite

If sellers are jittery, some buyers are brave.

"What we're seeing today is a market equilibrium," said Kerrigan. "There are buyers coming to market, too. They see a chance to grow their business tremendously and benefit from some of these changes coming to market."

But Stopnitzky said the number of first-time buyers looking for a single dealership has decreased significantly and, "practically speaking, came to shrieking halt."

Haig said the "leading dealership" groups he talks to are still interested in buying stores, but "they are also aware of the risks to auto retail. Some of them are starting to make plans for the future by being not just a dealer, but a transportation provider." Whether that means owning a vehicle and leasing it on a weekly or monthly basis or managing a fleet, these dealers consider automotive retail as "evolving to more than just selling and servicing a vehicle. That's what I am hearing more of for the first time," said Haig.

The buy-sell advisers say there is no urgent need for most dealers to sell. Most dealerships are profitable, the market is stable, credit is still available and dealership values are holding steady. In addition, some dealers believe any changes are still far into the future. Those bowing out now are doing it as a "thoughtful decision" about family planning for the future, said Kerrigan.

Indeed, in Holter's case, he resisted letting go of his beloved Felix Chevrolet, which is 96 years old. Will the store survive future changes to auto retailing? He said, "It'll last long enough for the rest of my life."

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Domain: Afterhours
Category: Motor Sports
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