Pub. 57 2016-2017 Issue 2

39 WINTER 2016 Chart XIII Average Dealership Departmental Sales Growth Source: NADA Average Dealership Financial Profile and Kerrigan Advi- sors Analysis This growth will fuel profits for the foreseeable future, particularly when taking into account the significant rise in UIOs (“units in operation”) over the last seven years (see Chart XIV). Chart XIV US Units in Operation in Millions Source: IHS Automotive Economies of Scale and Scope Drive Consolidation In the initial chapter of auto retail’s consolidation, bigger did not usually result in better. Rather, the early consolidators found there were few economies of scale to be had and the economies of scope were nebulous at best. Fast forward 20 years and auto retail’s economies of both scale and scope are alive and well. Chart XV is the clearest example. The average auto dealership, according to NADA, spends 17% more on SG&A (selling, general & administrative expenses) than the average public dealership group. Today, larger dealership groups have a significant cost advantage over smaller groups. Larger groups are gaining an increasing cost advantage as a result of the industry’s shift in technology utilization. Technology now drives a dealership’s operation, from ad- vertising to customer and employee management. The larger the group, the less the group pays per dealership, per car sold, per customer, and per employee on these expenses. In a recent Kerrigan Advisors transaction, the dealership group selling to a larger dealership group was surprised to learn that they were paying as much as double the price paid by the buyer for the same services. Those post-transaction savings dropped directly to the bottom line. Chart XV SG&A (Sales, General and Administrative Expenses) as a Percentage of Gross Profit YTD 2016 Source: NADA Average Dealership Financial Profile and SEC filings for the 6 Public Dealership Groups 73% 86% Average Public Dealership Average Private Dealership “Parts and service was the highlight of the quarter. We were able to offset the declines in our new and used business with strong growth in parts and service.” David Hult, CFO, Asbury Automotive Group – 3rd Quarter Earnings Call 225 240 255 270 285 2013 2014 2015 2016 2017E 2018E 2019E 2020E 3.9% 8.3% 0% 5% 10% 15% 2013 2014 2015 2016 YTD New Vehicles Sales Fixed Operations