This Ain’t Your Father’s Auto Dealership
For a century the retail pillar of the US Auto Industry has been its dealerships. What started as mom-and-pop stand-alone outlets has grown into a sprawling network of 16,800 dealerships in the US today, which sell the vast majority of the 17M vehicles we purchase each year. But consolidation is coming to the auto dealership model, and how you’ll buy your next car may never be the same again.
As WSJ puts it, today’s auto dealers are faced with the decision to either get bigger or get out of the industry. As you can see in the image below, the top 50 dealer owner groups are gobbling up more and more freestanding dealerships. These aren’t just larger dealerships buying the little guys – they’re typically VC-backed investment firms such as Berkshire Hathaway, GPB Capital, etc.. They have the deep pockets to buy several dealerships in a market and operate consumer-facing retail brands like Van Tuyl, AutoNation, and CarMax. Their scale also affords the ability to combine back-end resources and run their dealerships more efficiently than stand-alones ever could.
Besides the competitive pressures coming from the bigger auto investors, individual dealerships are also facing a new profit squeeze. Thanks to the internet shoppers can easily price compare dealerships with one another. This has forced all dealers to lower their sticker prices and make less on each new car sold – the average dealer only clears 2.5% of the sale price compared to 4.7% a decade earlier. The lower profit margins on new cars has forced dealerships to rely on other divisions of their business, like parts & services, to make up the difference. But even trusty P&S is under assault by electric cars, which have fewer moving parts and therefore fewer things for dealership mechanics to repair.
Faced with all of these challenges more and more stand-alone family dealerships are cashing in their chips by selling out. This is creating an irreversible trend which will change the way we buy cars forever.