Why The Industry Should Think Twice About Benefits of Dealer Consolidation

I recently read the second article within the past few weeks that talked about the rapid, unstoppable, and significant consolidation among auto dealerships.

Both articles impress upon the inevitable need to consolidate to survive or face failure, even if you are successful two-or three-generation owned auto dealership. The reasons for consolidation range from needing more economies of scale, to concerns that electric vehicles and share ride/subscription plans will completely change the business landscape. And this could very well be a positive if it results in stronger, more resilient companies with more competitive offerings and options for consumers. But, regardless of the reasons and outcomes, the message is that auto dealerships are looking at an inevitable trend of consolidation in the market because they aren’t able to provide customers what they need.

A few transactions have occurred recently, which indicates a trend but let’s put some data around this for more reasonable perspective. If you look the top five auto dealer groups: AutoNation, Penske, Group 1, Lithia, and Sonic, they combine for roughly 6% of annual new car sales according to Automotive News. Compare this to other industries, such as telecommunication where AT&T and Verizon combine for 70% of cell phone business; for the beverage industry, Coke, Pepsi, and Dr. Pepper have 86% of soft drink market, according to Statista. By comparison, car dealership market still looks wide open and competitive. This is good in the sense it gives options and competitive pricing to consumers.

But in another segment more tied to financing, Automotive News also reports that the top five auto dealer groups combined make up less than 3% of all used-car sales. Used-car financing is much more dependent on the services of finance companies to get consumers the vehicles they want. The top dealer groups tend to focus on factory relationships and the captive sources, and therefore focused more on the new car world.  There is nothing wrong with that, it’s what they are in business to do. This is a free market, so captives should feel free to direct most capital to move what the factory just built and wants to sell.  But take for example a view from the free-market standpoint, where those same top five dealer groups trade at an average Price/Earnings ratio of 8.  Compare this to smaller non-consolidated and independent dealer-focused stalwart of the financing industry, like Credit Acceptance, that trades at higher P/E of 13. If consolidation is a good thing to stay competitive, shouldn’t we see it reflected in the stock prices?

Another viewpoint — if we move on from Wall Street to Main Street — is that many consumers find more value and affordability in a used vehicle and that’s where the middle market and even smaller single point independent stores sometimes provide the most value at the margin.

Smaller stores also tend to be well connected in their communities, providing contributions to charities, service groups, and supporting positive economic development. And the keys to success are continuing high service levels for consumers, keeping relationships with financing sources, warranty companies, continually improving technology services like online search and scheduling for consumers, and simply running a good, profitable value producing operation. It’s actually what most car dealerships in the US are busy doing.  Maybe they’ll consolidate someday, but they are doing a pretty good job for the present.