Every year, the AutoTeam America Buy/Sell Summit and Dealer/CEO/CFO Forum at the National Automobile Dealers Association (NADA) Convention and Expo bring together many viewpoints on the state of the industry, including those of brokers, bankers, industry analysts, family funds, publicly traded dealer groups, private equity groups, attorneys, CPAs, and, of course, dealers.
At the 2018 forum, the general mood was one of guarded optimism. Although new vehicle sales volume appears to have peaked after several very strong years, most dealers seemed to believe that they are still in position to have a good year in 2018. At the same time, however, many dealers also are taking a serious look at their expense structure and other avenues of revenue to try to supplement and improve their businesses.
Looking out further into the future, the convention also featured presentations that focused on the long-term direction of the industry, providing some thought-provoking predictions about the possibility of dramatic changes in the fundamental dealership business model. Advances in technology – both in vehicles and in the ways customers purchase and interact with dealerships – have the potential to revolutionize how vehicles and transportation services in general are sold and delivered in the years ahead.
According to the NADA, the broadest measure of light vehicle sales activity, the seasonally adjusted annual rate (SAAR), declined slightly in 2017 to 17.1 million units, after peaking at 17.5 million in 2016. As one observer noted, however, the 2017 figures were somewhat inflated due to the extraordinary number of flood-damaged vehicles that had to be replaced in the wake of Hurricane Harvey in Houston and surrounding areas.
The consensus view among analysts at the convention seemed to settle on expectations of a SAAR in the range of 16.3 million to 16.7 million vehicles in 2018. Dealers generally regarded this as a healthy rate that is still capable of delivering another good year for most of them.
Many dealers reported they are finding some success in offsetting the growth compression in new vehicle sales by generating higher revenue and profitability from finance and insurance and fixed operations including service and parts. Nevertheless, strong consensus existed among many dealers on the continuing need to evaluate and control expenses. Many dealers reported making some improvement in this area in 2017.
Among the outside economic factors that are helping to sustain the industry are continued high levels of consumer confidence, relatively stable or slowly rising gasoline prices, and interest rates that are rising at a controlled, measured pace. Federal tax cuts and a generally robust stock market add further confidence and help maintain the momentum, although it must be remembered that these external trends can change relatively quickly and clearly are beyond the industry’s ability to control. Nevertheless, barring unforeseen jolts in these areas, industry analysts at the NADA convention generally foresaw a healthy – but gradually slowing – sales pace for the next several years.
Another factor – an unusually high number of vehicles coming off lease in the next few years – will affect the industry even more directly in the near term. The volume of lease returns – combined with higher new vehicle prices, gradually rising financing costs, and declining residual values – is likely to drive lease payments higher over the next few years. This development is likely to encourage lessees to move to smaller, less expensive models or toward purchasing used vehicles instead.
Dealership Transactions and Industry Consolidation
Although the total number of dealerships bought and sold in 2017 declined slightly from 2016, the consensus view among convention attendees was transaction activity will continue at a brisk pace in 2018. What’s more, it is likely to continue at that pace for the foreseeable future.
Industry reports indicate that 331 dealerships changed hands in 2017, down from 357 the year before. Looking beyond the year-to-year numbers, however, a more significant continuing trend can be seen in the long-term consolidation of the industry. Virtually all forum speakers and participants agreed that the trend toward ever-larger dealership groups will accelerate in the years to come.
While some debate might exist over the expected speed and magnitude of the industry consolidation, few would argue with the general direction of the predictions. The future of the industry is likely to be characterized by fewer but larger dealerships, which will be owned by fewer but larger dealership groups.
The Long View – a Changing Industry
In the near term, the simple fact that many investors are still very enthusiastic about the industry and still find it to be attractive is driving the industry consolidation trend. At this stage of the industry’s development, a growing number of public company, family fund, and private equity players are still entering the market.
In the long term, however, the consolidation of the industry is likely to be accelerated by additional factors – particularly several powerful technological and societal trends that could radically change the industry’s basic business model. In fact, some industry observers predict the basic dealership model could evolve rather quickly from a retail sales and service business into something that would be more accurately described as an integrated transportation service provider.
Unlike a conventional vehicle retailer, an integrated transportation service business allows customers to choose from a range of alternative transportation options such as ride-sharing and vehicle subscription services in addition to traditional vehicle purchases and leasing. In this scenario, cost per mile traveled becomes the differentiating factor that consumers use when choosing from among their transportation alternatives.
This fundamental change in the very nature of the industry is likely to be driven by advances in technology and the development of related service delivery models. Examples include:
- Ride-sharing services already have a strong following in urban markets, where conventional vehicle ownership and operating costs are higher.
- Autonomous or self-driving vehicles represent a technology that could broaden the market for transportation services by providing the traditional benefits of automobile ownership, such as independence and flexibility, to consumers who might otherwise not have access to them, including both underage and elderly passengers.
- Electric vehicles will become increasingly viable as advances in battery technology enable greater range and faster recharging capabilities.
- Subscription services is a business model that allows customers to change vehicles more frequently by pricing transportation services on a subscription basis. Several solutions are being tested in the market already, with the manufacturers themselves developing products that are based on the vehicle subscription model.
In the coming years, successful dealers will need to watch, evaluate, and prepare to respond to these envisioned changes in the industry, along with other as-yet-unforeseen developments. In the meantime, with a gradual slowing of new vehicle sales volumes, increased emphasis on controlling dealership expenses, and a continuing strong investor interest in well-managed dealerships, the next several years will be both challenging and potentially rewarding for dealers with a demonstrated record of success.
Author: Jodi Kippe
Jodi Kippe, CPA, is the managing partner of retail dealer services at Crowe Horwath LLP, one of the largest public accounting, consulting and technology firms. With more than 30 years of experience, she oversees service to dealerships across the country and manages the relationships for some of Crowe’s largest dealership groups.